Monday, October 6, 2008
Buffet provides some good insight into the kinds of issues raised by derivatives in general and leve
What is especially troubling is that the potential profits from derivatives are magnified many times over through heavy, multi-tiered leveraging with no actual investment in an asset required, or even desired, making their appeal almost irresistible. Moreover, derivatives extract their value from fluctuations in the value of assets such as bundled mortgages and loans, stocks, bonds, currencies, interest rates, indexes and other assets which often are not themselves fixed or tangible. Derivatives have become, in every sense, bets on bets -- extracting value rather than preserving or enhancing value through real investments in the real economy. There can be no mistaking the fact that derivatives speculation requires a good deal of dancing with the devil.