Sunday, September 21, 2008

Time to Fight the Real War on Terror (BJ Lawson)

BJ Lawson on the real terrorists who have caused this continuing meltdown of the financial system:

The terrorists we must fight are not crouched in caves thousands of miles away.

The terrorists we must fight are threatening us with financial weapons of mass destruction that are destroying our economic system.

As described by Warren Buffet in his 2003 letter to Berkshire Hathaway shareholders, the financial industry has created new types of derivatives that he described as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

As summarized in this BBC article:

Contracts devised by ‘madmen’

“Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years” - Warren Buffett

“Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers … which can trigger serious systemic problems.” - Warren Buffett

Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment.

Derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets - in effect buy insurance against market movements -, but have quickly become a means of investment in their own right.

Outstanding derivatives contracts - excluding those traded on exchanges such as the International Petroleum Exchange - are worth close to $85 trillion, according to the International Swaps and Derivatives Association.

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.

Does any of this sound familiar? It should. We’re living it.

Read the rest

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