WEST PALM BEACH, FL (HEDGECO.NET) – Billionaire Warren Buffet has issued a warning about dangers of derivatives instruments. According to him, derivative instruments could pose a huge problem withinthe next ten years. Mr. Buffet was speaking to shareholders at the annual meeting of investors in his Berkshire Hathaway Inc.<\/p>\n
Mr. Buffet used an example of Freddie Mac, a mortgage lender to illustrate his point, arguing that despite intelligent board members, and such institution being chartered by the U.S.Congress, the mortgage lender has not understood the concept of derivatives. Part of the reason stems from the complex nature of derivatives.<\/p>\n
Buffet, explaining the difficulties encountered by Freddie Mac with regard to understanding derivatives said, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdWith an auditor present, they managed to misstate earnings by $6 billion, a lot of mischief can happen with derivatives.\u00c3\u00af\u00c2\u00bf\u00c2\u00bd Buffet added.<\/p>\n
He also charged that even CEO\u00c3\u00af\u00c2\u00bf\u00c2\u00bds of many corporations have not understood derivatives as well. Citing some of the CEO\u00c3\u00af\u00c2\u00bf\u00c2\u00bds he knows, Buffet said, they too can\u00c3\u00af\u00c2\u00bf\u00c2\u00bdt figure out such instruments. He also stated, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdI know the people that run these companies and they don’t have their minds around what is happening.\u00c3\u00af\u00c2\u00bf\u00c2\u00bd<\/p>\n
These misunderstandings, according to him would lead to major problems within the next 10 years. Buffet also stated, \u00c3\u00af\u00c2\u00bf\u00c2\u00bdSome time in the next 10 years, you will have a huge problem that will either be caused by or accentuated by people’s activities in derivatives,\u00c3\u00af\u00c2\u00bf\u00c2\u00bd he said. It is unclear why Buffet spoke out against derivatives, but his Berkshire Hathaway still maintains some derivatives portfolio according to published reports.<\/p>\n
Paul Oranika
Editor-in-Chief
HedgeCo.Net
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