Derivatives the new 'ticking bomb'

[RedEarth]

ARROYO GRANDE, Calif. (MarketWatch) -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.

"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.

Wall Street didn't listen to Buffett. Derivatives grew into a massive bubble, from about $100 trillion to $516 trillion by 2007. The new derivatives bubble was fueled by five key economic and political trends:
Sarbanes-Oxley increased corporate disclosures and government oversight
Federal Reserve's cheap money policies created the subprime-housing boom
War budgets burdened the U.S. Treasury and future entitlements programs
Trade deficits with China and others destroyed the value of the U.S. dollar
Oil and commodity rich nations demanding equity payments rather than debt

In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7bB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7d&print=true&dist=printTop

[kirby]

1. WTF?

"Sarbanes-Oxley increased corporate disclosures and government oversight"

They threw that chestnut into the article as being one of five 'key reasons' for the derivative bubble?

[Speck Tater]

2. Because it movitated banks to create a new black market

outside the reach of Sarbanes-Oxley.

[lonestarnot]

3. And in 2006 the report of M3 was discontinued.

[truedelphi]

4. Derivatives - the ultimate Ponzi scheme

ANd the Rich Ol' fat Cat is saying, (back in 2006) "And when the market starts to implode, heh, heh, here's the real beauty of it, Boys, we will simply blame the poor for signing up with those sub prime mortgages!"