A primer

[zkzkz]

For anyone wondering what's going on in the financial world today, the best explanation I've seen comes from Warren Buffet... 6 years ago. He accurately described the problems we're seeing today in his 2002 Chairman's Letter (search for "Derivatives" on page 13). Seriously, these annual reports should be required reading for business schools

Comments

[stefuss]

http://www.youtube.com/watch?v=ALn0GBkM_5c

[dj_archduke]

it's not the derivaties per se that were dangerous.

it's the fact that a lot of them were otc, ie not
on listed markets, which made it impossible to
determine the total degree of exposure, assess
counterparty risk, etc.

this was specifically the case with credit default
swaps, and a lot of the fun more exotic stuff
used by hedge funds daily.

the public blames the investment banks, but really
a lot of private funds and hedge funds were the
demand behind these instruments, and now they're
taking the money and running.

[zkzkz]

Or the fact that nobody really has any clue what they're worth. Read the Buffet letters for that year and the next *4* years as they tried to sell off what they picked up when they bought that business. It was a pretty small exposure and it was before the "credit crunch" when people were still interested in buying them. And they still lost 100B every year. That despite the contracts being supposedly marked to market already. The reality is that "mark to market" is no better than a guess and as Buffet explains -- the guess is *always* high...