Warren Buffett - "financial weapons of mass destruction"

[WhiskeyGirl]

Buffett's "time bomb" goes off on Wall Street

By James B. Kelleher - Analysis

CHICAGO (Reuters) - On Main Street, insurance protects people from the effects of catastrophes.

But on Wall Street, specialized insurance known as a credit default swaps are turning a bad situation into a catastrophe.

When historians write about the current crisis, much of the blame will go to the slump in the housing and mortgage markets, which triggered the losses, layoffs and liquidations sweeping the financial industry.

But credit default swaps -- complex derivatives originally designed to protect banks from deadbeat borrowers -- are adding to the turmoil.

"This was supposedly a way to hedge risk," says Ellen Brown, the author of the book "Web of Debt."

"I'm sure their predictive models were right as far as the risk of the things they were insuring against. But what they didn't factor in was the risk that the sellers of this protection wouldn't pay ... That's what we're seeing now."

Brown is hardly alone in her criticism of the derivatives. Five years ago, billionaire investor Warren Buffett called them a "time bomb" and "financial weapons of mass destruction" and directed the insurance arm of his Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) to exit the business.

EASY MONEY

When the credit default market began back in the mid-1990s, the transactions were simpler, more transparent affairs. Not all the sellers were insurance companies like AIG -- most were not. But the protection buyer usually knew the protection seller.

As it grew -- according to the industry's trade group, the credit default market grew to $46 trillion by the first half of 2007 from $631 billion in 2000 -- all that changed.

An over-the-counter market grew up and some of the most active players became asset managers, including hedge fund managers, who bought and sold the policies like any other investment.

And in those deals, they sold protection as often as they bought it -- although they rarely set aside the reserves they would need if the obligation ever had to be paid.

In one notorious case, a small hedge fund agreed to insure UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), the Swiss banking giant, from losses related to defaults on $1.3 billion of subprime mortgages for an annual premium of about $2 million.

The trouble was, the hedge fund set up a subsidiary to stand behind the guarantee -- and capitalized it with just $4.6 million. As long as the loans performed, the fund made a killing, raking in an annualized return of nearly 44 percent.

But in the summer of 2007, as home owners began to default, things got ugly. UBS demanded the hedge fund put up additional collateral. The fund balked. UBS sued.

The dispute is hardly unique. Both Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) are involved in similar litigation with firms that promised to step up and act like insurers -- but were not actually insurers.

"Insurance companies have armies of actuaries and deep pools of policyholders and the financial wherewithal to pay claims," says Mike Barry, a spokesman at the Insurance Information Institute.

read more here -
http://www.reuters.com/article/newsOne/idUSN1837154020080918?pageNumber=1&virtualBrandChannel=0

When numerous Communist countries started to change years ago, someone suggested that the Cold War was dead, fighting was not needed, it was easier to ruin your enemy through economics.

Is that what's happening in the U.S. today?  Spend until the pig is finally lifeless?

I recall from the 80's, aggressive individuals referring to solid companies as "pigs" with a lot of "fat" to shed.  How many of those companies exist today?  How many of those jobs exist?  I think very few. 

Terrorists, from memory, have voiced "gutting the pig" in reference to their acts of violence against the U.S.

National debt is at an all time high.  Are the U.S. debts larger than any in South America?  What does the future hold?

National healthcare?  Who's paying the bill?  Who will give or loan the U.S. money to pay for U.S. citizens?

How is the U.S. going to pay when the next time bomb goes off? 

Where's the money going to come from?

How much would Alaska or perhaps Hawaii be worth on the open market?

[nonesuche]

WhiskeyGirl - I posted sometime ago that ruining the US fiscally would be far easier than going to war with us. I actually think that was the blatant attempt of the attack on 9/11, why else would they have chosen the World Trade Center as one of their major targets? Oil has just become the newest tool in that arsenal, also do any of you realize that the majority of our banking transactions occur offshore and have for at least five years or more? Do you realize how vulnerable that makes our financial network?

It is what it is, there is no denying it now. Imagine this too, countries like Iran and Russia and north Korea and Syria.....list could go on and on......all joined for one common cause. The glue that binds them, the desire to destroy the United States.

Al-Qaida was just the front man, their funding and their support is from many.

Warren Buffet's fortune is shrinking as the dollar devalues, so is Bill Gate's. Hope it's a wake up call that spurs increasing action by both.

[WhiskeyGirl]

I will bring this thread back from 2008.

Warren Buffet was warning back in 2003 that derivatives were time bombs?

A Fox presenter was going on and on this afternoon about 'derivatives' being insurance products.  NOT

In the past, you needed advanced licenses to sell derivatives, well above what is needed to sell insurance products.  Varies state to state...

There was an excellent article I read and posted some time ago about the difference between insurance and derivatives.

IIRC - insurance was to expensive for all these mortgage backed securities.  Insurance companies wanted too much money for the risks, or would not insure the 'risk' at any price.  Why?

Derivatives were more like gambling when you know you'll lose.  There was no risk, it was just a matter of time before the gambler lost.  A losing bet.  A financial casino.