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Berkshire Weekend: Buffett, Munger on Derivatives

|Includes: Berkshire Hathaway Inc (BRK.A), BRK.B

Liz Claman of Fox Business Channel quotes or paraphrases the Berkshire chairman and vice chairman:

Question: What do you think Ben Graham would have said about derivatives?

Buffett: Probably what I said in 2002. Place added strains on fragile economic system. But if they were mispriced - he would act accordingly. In 1929 - Congress decided it was dangerous to let people borrow money against securities - said Fed should regulate how much people could borrow. And the Federal Reserve enacted margin requirements- they still exist. Shouldn’t be able to borrow more than 50% against your securities. But derivatives came along and made those rules a laughing stock. So derivatives became a way around regulation and leverage. Derivatives also meant that settlement dates got pushed out. They allow long settlement periods where security markets demand them in 3 days - there’s a reason. If you extend periods - there are more and more defaults. Ben Graham wouldn’t like a system that had used derivatives heavily - but would have been willing to buy one that was mispriced.

Munger:  I think there’s been a deeper problem in derivatives business. Derivative dealer is playing in same game with his clients with the advantage of being better and knowing what clients are doing. This is basically a dirty business. You’re really selling things to your clients who trust you that are bad for your clients.