An article from 2003, to which we should probably have paid attention, here
Thanks to Shashank for sharing this with me. I decided to put it on my blog since it is so relevant even half a decade later, maybe more so. What amazes me is that something so obviously catastrophic was beyond the comprehension of so many highly educated and highly paid "experts" for 5 years. Begs the question, what is it that they actually do besides smoking pot at B-schools?
An excerpt for those too lazy to click through to the BBC site :-)
Buffett warns on investment 'time bomb'
Tuesday, 4 March, 2003
The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk. But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system.
Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment. Some derivatives contracts, Mr Buffett says, appear to have been devised by "madmen". He warns that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998.
Derivatives also pose a dangerous incentive for false accounting, Mr Buffett says. The profits and losses from derivates deals are booked straight away, even though no actual money changes hand. In many cases the real costs hit companies only many years later.
This can result in nasty accounting errors. Some of them spring from "honest" optimism. But others are the result of "huge-scale fraud", and Mr Buffett points to the US energy market, which relied for most of its deals on derivatives trading and resulted in the collapse of Enron.read more
I am sure Buffet was not alone to anticipate the "many years later" cost impact, way back in 2003. If they continued to lure and loot the trusting public despite such warnings, they must be judged similar to war criminals now. While many of us may lose money, jobs, homes and even Internet access (ouch!), the mad-men (in Buffet's words) responsible for the man-made destruction continue to sip their Pina Coladas hiding in their yachts near Cayman Islands...
On a related note, please avoid spreading and acting on rumours regarding insolvency at ICICI Bank. I am not a fan of the bank and, in fact, stay far away from dealing with it. But I do know that such rumours are malicious and could trigger an unnecessary spiral of doom for a teetering economy. Stay sane and prudent. Work hard and spend more.
We'll be out of this mess, soon.