“Charlie [Munger] and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.”
Warren Buffett’s views on derivatives will be put to the test when Wall Street opens for trading tonight our time.
The US Federal Reserve has finally bitten the bullet and, seemingly, allowed a Wall Street giant to fail. Lehman Brothers Holdings is expected to file for bankruptcy on Monday morning in the US and the liquidation of its $600bn balance sheet will begin in earnest.
That would be a tough ask in itself, but unwinding the trillions of dollars of derivatives that aren’t on the balance sheet runs the risk of financial Armageddon.
And it may not even be this week’s biggest problem. AIG, not that long ago the world’s largest insurer, spent a frantic weekend trying to raise capital. If it fails, its derivatives book will make Lehman seem a drop in the ocean.
Mad Monday and the week that follows are going to be something to remember.