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Buffet lashes out against derivatives Original Source Link: (May no longer be active)
http://story.news.yahoo.com/news?tmpl=story&u=/ft/20030304/bs_ft/1045511294434http://story.news.yahoo.com/news?tmpl=story&u=/ft/20030304/bs_ft/1045511294434
Yahoo! News Wed, Mar 05, 2003
Business - FT.com
Warren Buffett lashes out against derivatives
Mon Mar 3, 9:44 PM ET
By Andrew Hill in New York
Warren Buffett (news - web sites), the influential investor, warned derivatives were "financial weapons of mass destruction" and that they were "potentially lethal" to the economic system.
In his letter to shareholders of Berkshire Hathaway, Mr Buffett said he and Charlie Munger, the investment and insurance company's vice chairman, viewed derivatives and derivative trading as "time bombs".
"Charlie and I believe ... that the macro picture [for derivatives] is dangerous and getting more so," Mr Buffett wrote, because of the concentration of credit risk in the hands of relatively few derivatives dealers.
Advance extracts from his letter were published on Monday, with Mr Buffett's consent, on the website of Fortune magazine.
Mr Buffett - whose investment advice is closely followed by retail investors - also said Berkshire was "not inclined to add" to its equity holdings, which include stakes in American Express, Gillette and Coca-Cola.
"Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us," he wrote. "Occasionally, successful investing requires inactivity".
Potentially sensitive information, such as the table of Berkshire's investments and Mr Buffett's analysis of its performance last year, is being withheld until the full letter to shareholders appears on the company's website on Saturday. The full letter is also expected to contain Mr Buffett's latest views on corporate governance and the role of the audit committee.
But the publication of advance extracts represents a break with tradition. Fortune said on its website that Carol Loomis, a Fortune editor and friend of the investor, had "suggested to Buffett that he publish" extracts in the magazine. Berkshire Hathaway declined to comment further.
His diatribe against derivatives will be closely read by retail investors - and by specialists in the field - partly because it is based on direct experience. Berkshire has been winding down General Re Securities, a derivatives dealer that the company acquired with the General Re insurance business, but Mr Buffett said it would take "a great many years" to close the business. "The reinsurance and derivatives businesses are similar: like Hell, both are easy to enter and almost impossible to exit," he wrote.
The bankruptcy of Enron, the US energy trader, in December 2001 came after it began to emerge that it was using derivatives contracts to hide volatile assets and to inflate the value of new businesses.
"The parties to derivatives ... have enormous incentives to cheat in accounting for them," Mr Buffett wrote, because they can use "mark-to-market" rules that often allow the company itself to estimate the fair value of contracts.
Berkshire Hathaway's A shares - tightly held by enthusiastic followers of Mr Buffett's investing style - trade at about $63,400, down from a high of $78,300 last May.
In a separate extract, Mr Buffett also warned shareholders Berkshire expected to sustain "occasional large losses" in junk bonds, where it had committed $8.3bn by the end of 2002.
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