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.
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.
Buffet, explaining the difficulties encountered by Freddie Mac with regard to understanding derivatives said, �With an auditor present, they managed to misstate earnings by $6 billion, a lot of mischief can happen with derivatives.� Buffet added.
He also charged that even CEO�s of many corporations have not understood derivatives as well. Citing some of the CEO�s he knows, Buffet said, they too can�t figure out such instruments. He also stated, �I know the people that run these companies and they don’t have their minds around what is happening.�
These misunderstandings, according to him would lead to major problems within the next 10 years. Buffet also stated, �Some 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,� he said. It is unclear why Buffet spoke out against derivatives, but his Berkshire Hathaway still maintains some derivatives portfolio according to published reports.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
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