I missed this when it came out last month ... it's even more poignant given the economic developments of the past few weeks !
(snip)"The most toxic financial market innovations today that have polluted the financial system with risk, and helped keep the housing bubble alive, are:
- Credit derivatives
- Asset-backed securities
- Secondary-market syndicated loans
- Home-equity lines of credit
- Interest-only mortgages
- Negative-amortization mortgages
- Sub-prime mortgages and consumer loans
Warren Buffet weighed in with a less sanguine assessment of this class of derivatives in his annual letter to shareholders, March 2003. Note that Buffet gets right to the point. The purpose of these innovations is to make money for the people who sell them, not to help society:
“We view them as time bombs, both for the parties that deal in them and the economic system… Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values… Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses -- often huge in amount -- in their current earnings statements without so much as a penny changing hands."(snip)
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