warren buffett derivatives weapons of mass destruction quote
"warren buffett derivatives weapons of mass destruction quote"
in the news warren buffett derivatives weapons of mass destruction quote? What this all about..... See below.
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Sentiment Trader has recently seen an interview with warren buffett, a man to be listened to we feel. 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, Buffett said that "at some point they are likely to cause big trouble".
"Derivatives, lend themselves to huge amounts of speculation," he said.
"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.
Warren Buffett said: "One thing about stocks is that with a settlement date of three business days from purchase you ...
Warren Buffett said: "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." AP
"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 totalling $US505 trillion.
Buffett says the trigger for derivatives trouble will be a disruption in financial markets which cannot be predicted.
"The problem arises when there is a discontinuity in the market for some reason or another.
"When the markets closed like it was for a few days after 9/11 or in World War I the market was closed for four or five months – anything that disrupts the continuity of the market when you have trillions of dollars of nominal amounts outstanding and no ability to settle up and who knows what happens when the market reopens," he said.
"That is a very dangerous situation.
"Clearing houses help but they don't solve the problem."
Buffett said he had not changed his view that derivatives are weapons of mass destruction but they still can serve a purpose.
"That does not mean they cannot be used intelligently. We use them in our utility operation in terms of hedging input costs, for some short term contracts, converting fixed to floating rates for fixed income investments and foreign exchange, they serve a useful purpose but do have that mass destruction potential.
"It's like the difference between a controlled fire and one that is uncontrolled.
"It's much more dangerous having instruments out that don't settle for years than it is to actually own equities outright where purchases have to be cleared in a couple of days."
Buffett said that if AIG, the huge US insurer rescued by the US government in 2008, "had never heard of derivatives they would have been a lot better off."
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