Bill Tatro

For years, I greatly admired and was almost in awe regarding the success and strategies of Warren Buffett, a man who had a discipline and stuck to it. 

Not only did he make himself very wealthy, he also made a lot of money for many other people as well. 

Unfortunately, my admiration has been dramatically altered by his actions, commentary, and investment strategy of late. 

Several years ago, Buffett stated the death of the financial system would be brought about by the usage of derivatives. 

He never actually said he wouldn’t use them, however, he implied derivatives could be like “the Sword of Damocles,” just waiting to drop and fatally wounding the worldwide economy. 

In addition, Warren also conveyed his lack of understanding of derivatives, and keep in mind, his cardinal rule has always been “if he didn’t understand it, he didn’t invest in it,” a discipline that spared Buffett from the dot-com crash. 

Regrettably, like the big banks, hedge funds, and various other groups of financial institutions, Warren has succumbed.

In the municipal bond market alone, his company, Berkshire Hathaway, had as much as $16 billion at risk in derivatives at the end of the first quarter of this year. 

His rationale was that a “terrible problem” was coming in the next few years according to his testimony before the U.S. Financial Crisis Inquiry Commission in June 2010. 

That sounds like the same rationale Jamie Dimon used when he went to Capitol Hill.  “We’re just hedging,” Dimon implied.  “We don’t take risk without offsets,” he intimated. 

Derivatives, of course, were the brainchild of J.P. Morgan so it would have been very difficult for Dimon to badmouth this type of investment strategy, as Buffet so eloquently has done. 

However, both of these financial legends have come to the dark side by believing the derivative market is simply a hedge against a negative future. 

It is quite possible that when originally designed the derivative market was, in fact, the ultimate hedging instrument. 

Yet, sadly, like many other things in life that start out with the best of intentions, man has a way of bringing out the worst in a situation by hoping to reward themselves at the expense of others.

 Jamie Dimon has certainly found that to be true by the actions of the “Whale” in London and I’m very sure that Warren will experience much of the same. 

The uncontrolled derivative market is very much like the Old West. 

And like the Old West which has its quick-draw legends, so too does the trillion dollar derivative arena. 

Celebrities like Buffett and Dimon will, for a while, experience many notches on their guns, but sooner or later they all end up on Boot Hill. 

It’s just a matter of time.


Bill Tatro

Along with his 40-years of dedication in the financial services industry, Bill is the President and CEO of GPSforLife, has recently authored a highly successful book entitled 44th: A Presidential Conspiracy, publishes his dynamic monthly financial newsletter MacroProfit, and faithfully continues his third decade on the radio with It’s All About Money, which can be heard weekdays on Money Radio in Phoenix and in podcast form on his website (and on smartphone apps) published at billtatro.com weekdays at 5pm Eastern. Bill can be reached via email at bill@gpsforlife.com and on Twitter @tatroshow.