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The article criticizes Buffett because he 1) criticized derivatives and now holds "$63B" of them 2) is lobbying congress to "rid the bill of its ‘retrospectiv

The article criticizes Buffett because he 1) criticized derivatives and now holds "$63B" of them 2) is lobbying congress to "rid the bill of its ‘retrospective effect’ clause" that might effect his financials 3) backs GS/Blankfein and says they did nothing wrong While at first blush they should raise questions I don't think the author makes any substantive claims against Buffett's reputation. 1) He criticized derivatives because the way their reporting effects earnings and because their profits are partially based on the other side's credit worthyness. I believe a large portion of the derivatives he owns are put options he has sold on equity indices. So he's not exposed to credit worthyness of counterparties because he's already been paid. I'm not sure but probably the derivatives he criticized as too complex and potentially destructive were things like CDOs/CLOs and other financial engineering products. I think Buffett understands put options very well, so that statement doesn't apply here. 2) He's not opposed to having derivatives accounted for differently, only differently in retrospect as well. I think its reasonable to say "I like the new set of rules, but please don't penalize me for acting in accordance with the rules in the past." 3) He does have investments in GS and this probably does effect his judgement, but the author doesn't really try to prove GS did anything wrong, so his backing of them can't really be said to be wrong (yet, though I don't think it will prove to be wrong).

mattmaroon 16y ago
Right, there are derivatives and then there are derivatives. They're not by any stretch of the imagination all equally risky. I think he is taking some of Buffet's words out of context. It seems impossible that Buffet would say he doesn't understand derivatives. I understand them, and unlike him, I don't own companies that pretty much have to use them. For instance he owns Burlington Northern, a railroad (which he's had a stake in for a long time). Companies whose profits are reliant on fuel costs (railroads, trucking, airlines, retailers with their own distribution system, etc.) almost always use derivatives to hedge against rising oil prices. I'm guessing Buffet was speaking only about derivatives based on asset-backed securities in the consumer credit sector, which were relatively new and poorly understood and, as he pointed out, incredibly dangerous.

mattmaroon 16y ago

Right, there are derivatives and then there are derivatives. They're not by any stretch of the imagination all equally risky. I think he is taking some of Buffet's words out of context. It seems impossible that Buffet would say he doesn't understand derivatives. I understand them, and unlike him, I don't own companies that pretty much have to use them. For instance he owns Burlington Northern, a railroad (which he's had a stake in for a long time). Companies whose profits are reliant on fuel costs (railroads, trucking, airlines, retailers with their own distribution system, etc.) almost always use derivatives to hedge against rising oil prices. I'm guessing Buffet was speaking only about derivatives based on asset-backed securities in the consumer credit sector, which were relatively new and poorly understood and, as he pointed out, incredibly dangerous.