Warren Buffett famously described derivatives bought speculatively as "financial weapons of mass destruction." In Berkshire Hathaway's annual report to shareholders in 2002, he said, "Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses -often huge in amount- in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)." The same report, however, also states that he uses derivatives to hedge, and that some of Berkshire Hathaway's subsidiaries have sold and currently sell derivatives with notional amounts in the tens of billions of dollars.$ 62 Trillion. Let's say that the CDS in question are now worth about 25% of the book value they held last month. That is a hell of a lot of mortgage paper.
How would any mortgage lender foreclose on that pile of rubbish now?
This seems to reiterate the serious questions I raised three years ago about forged documents being used by mortgage lenders and Wall Street banks. Think about it some more.
This Shi'ite is gonna get deeper and wider very quickly.
It is going to be worse than I thought. Much worse. Friends living in La La Town have gone through hell during the past 18 months. Their 401(k) programs were nearly wiped out because they had too much company stock. Over $ 1.5 million evaporated in the subprime crisis. They both last their high paying jobs. Now she has another job but he is still looking. Home values nearby dropped about 40% and are sill going down.
I do not have the heart to tell him what I really think. Somebody here said when there is a tsunami coming, you must head for the hills. My friends don't want to hear that type of advice. The want to stay in LA. Sad, but true.