The Greatest Capitalist versus the Geeks of Capitalism

As the enemies of capitalism declare the death of the greatest and most productive form of organisation that humanity has ever achieved, it seems appropriate to quote what Warren Buffet, the greatest capitalist of our age, warned about mortgage derivatives in his annual Berkshire Hathaway letter of 2002:

… derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive 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.

Six years after his warning those financial weapons of mass destruction have exploded. AIG, Bear Stearns and Lehmans were full of financial geeks, the highest paid mathematicians on the planet, completely lacking in sense. The pre-cursor Long Term Capital collapse showed that even nobel laureates can be idiots.

Derivatives have their place in the financial markets. They are great tools for hedging and re-distributing risk. However when the PhD wielding geeks started designing derivatives that even the Sage of Omaha could not understand, the boards of the investment banks should have asked what was happening down in the dealing rooms. That they didn’t is why they have now collapsed.

When the investment banks were owned by partners who had all their capital in the firm, the partners were keenly incentivised to control risk. When the investment banks became shareholder-owned global behomeths managed by annual bonus incentivised executives, that risk control was lost. Being fired is not as feared as being totally wiped out financially. That is a crucial difference.

Capitalism doesn’t need to be regulated for risk, it needs more capitalists like Warren Buffet who keenly feel the risk and reap the profits and losses that flow from that risk taking.




Tip offs: 0709 284 0531
team@Order-order.com

Quote of the Day

According to the Mail, when Tory MP Marcus Fysh called Venezuela a ‘socialist experiment gone wrong’ at PMQs, Jeremy Corbyn mouthed:

“What a complete w*nker.”

Sponsors

Guidogram: Sign up

Subscribe to the most succinct 7 days a week daily email read by thousands of Westminster insiders.
Snow Such Thing as Impartiality Snow Such Thing as Impartiality
Lefties Duped by ‘Why Socialism Works’ Lefties Duped by ‘Why Socialism Works’
Select Committees Runners and Riders Select Committees Runners and Riders
Meltdown After Nuclear Power Plant Holds Bikini Contest to Choose Interns Meltdown After Nuclear Power Plant Holds Bikini Contest to Choose Interns
DUP Deal Signed DUP Deal Signed
Watch: McDonnell on Grenfell ‘Murder’ Watch: McDonnell on Grenfell ‘Murder’
Sunday Shows Sunday Shows
The Economist’s Lack of Intelligence Unit The Economist’s Lack of Intelligence Unit
Happy Independence Day! Happy Independence Day!
Sun Cleared by Hospital Sun Cleared by Hospital
Exporters Order Books at 29 Year High Exporters Order Books at 29 Year High
Corbyn Refuses to Bow to The Queen Corbyn Refuses to Bow to The Queen
McDonnell Repeatedly Backed Far Left ‘Day of Rage’ Group McDonnell Repeatedly Backed Far Left ‘Day of Rage’ Group
“Soft” and “Hard” Brexit Terms Obsolete “Soft” and “Hard” Brexit Terms Obsolete
Hammond’s “Sound Money” Speech Sadly All Spin Hammond’s “Sound Money” Speech Sadly All Spin
Tommy Robinson Called British Muslims “Enemy Combatants” Tommy Robinson Called British Muslims “Enemy Combatants”
Corbyn Praised at London Hezbollah Rally Corbyn Praised at London Hezbollah Rally