Buffet Warns of Derivatives Fiasco in 2002:

Buffett and Gross warn: $516 trillion bubble is a disaster waiting to happen.

It's interesting to see how Warren Buffet felt about derivatives as early as 2002, significantly ahead of the 2008 meltdown in which derivatives played a major role.

"Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown.

"We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.

Source: WJS, March 10, 2008