13 Years Later, Warren Buffett Still Says Derivatives Are ‘WMDs’

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13 Years Later, Warren Buffett Still Says Derivatives Are ‘WMDs’
By USA White House [Public domain], <a href="https://commons.wikimedia.org/wiki/File%3AWarren_Buffett_in_2010.jpg">via Wikimedia Commons</a>

Warren Buffett Still Says Derivatives Are ‘Weapons Of Mass Destruction’ via Tony Boyd, AFR

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Thirteen years after describing derivatives as "weapons of mass destruction" Warren Buffett has reaffirmed his view that they pose a threat to the global economy and financial markets.

In an interview with Chanticleer this week, Warren Buffett said that "at some point they are likely to cause big trouble".

"Derivatives, lend themselves to huge amounts of speculation," he said.

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"One thing about stocks is that with a settlement date of three business days from purchase you have a very short period of time between the commitment and when you settle up.

"That at least makes sure that things don't exist as a fallacy or exist on paper for years.

"When I took over the derivative operation at Gen Re which we inherited we had contracts that ran for 100 years before anybody settled up and in between people just kept marking the numbers down.

"So the amount of speculation in credit you can introduce into the system through derivatives is pretty extraordinary."

The total nominal amount of over-the-counter derivatives contracts outstanding in the world at December 2014 was $US630 trillion ($815 trillion), according to the latest statistics from the Bank for International Settlements in Switzerland. That is about eight times the size of estimated world gross domestic product of $US75 trillion.

The BIS statistics show that the bulk of the nominal value of OTC derivatives is from interest rate contracts totaling $US505 trillion.

Full article and video here

 

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