War of Words - Buffet vs. Greenspan


"Derivatives are financial weapons of mass destruction, …The dangers are now latent but they could be lethal…. Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands,…These people believe that derivatives act to stabilize the economy, facilitate trade and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies. The macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties, some of whom are linked in such a way that many of them could run into problems simultaneously and set off a cascade of defaults." - Warren Buffet, in a letter to shareholders of Berkshire Hathaway Inc.

"These increasingly complex financial instruments have especially contributed, particularly over the past couple of stressful years, to the development of a far more flexible, efficient and resilient financial system than existed just a quarter-century ago," - Alan Greenspan

The total value of all unregulated derivatives is estimated to be $127 trillion (million million).


By the end of the year the credit derivatives market is estimated to be over US$5 trillion (million million).



New York Fed President Timothy Geithner invited (i.e. ordered) 14 of the major participants in the credit-derivatives market to a meeting next month amid concern the $8.4 trillion industry is rife with unconfirmed trades. . Fed spokesman Peter Bakstansky declined to name the firms invited.

"The credit-derivatives market more than doubled in the past year, giving companies, investors and governments the ability to bet on or protect against changes in credit quality. A backlog of confirmed trades may undermine investor confidence" - E. Gerald Corrigan, managing director at Goldman Sachs Group Inc. and a former New York Fed president


Meredith Whitney an Oppenheimer & Co. analyst that there would be "unprecedented credit losses" for subprime mortgage lenders.



"The CDS is probably the most important instrument in finance. … What CDS (credit default swaps) did is lay-off all the risk of highly leveraged institutions - and that's what banks are, highly leveraged - on stable American and international institutions." - Alan Greenspan

In the first half of the year the notional amount outstanding of credit default swaps (CDS) grew by to US$26 trillion (million million). The annual growth rate of the CDS market is now 109%.

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