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« Uncontrolled Growth | Main | The Young Join the Old »

May 24, 2008

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"Buffett also renewed his criticism of derivatives trading."

According to the WSJ:

"Billionaire insurance salesman Warren Buffett has been selling more derivatives recently.

This year, Berkshire Hathaway Inc., the Omaha, Neb., holding company headed by Mr. Buffett, has collected premiums of about $2.5 billion from selling insurance on stock indexes and bonds in the form of derivative contracts,...

...Mr. Buffett has long used derivatives as part of Berkshire's insurance business and has used them as investments opportunistically,..."

http://online.wsj.com/article/SB119422251636481981-email.html?apl=y&r=307908

Is there a disconnect here?

No disconnect.

Buffett has sold some very long-term (15 years) put options on market indices. These are European style, meaning he won't owe anything until the options expire, and then only if the indices are below a certain level. These put options are very simple contracts. The derivatives to which he's referring are, on the other hand, impenetrable. You'd need to read and comprehend 75,000 pages of various prospectuses just to understand one. There's no issue when the credit markets are hunky dory. These derivatives, however, have never been tested in an atmosphere like we're seeing today. As a prior article here went into, it was chaos behind the scenes during the Bear Stearns fiasco. There's no such chaos in the options markets. Buffett selling some puts is a non-event.

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