Warren Buffet did not have a good year. This fact about 2008 was detailed last week in a New York Times article and in a letter from Mr. Buffet to stockholders of his Berkshire Hathaway company. This letter offers plenty of plain-spoken criticism of the risk assessment failures in the financial sector to go around–‘beware of geeks bearing formulas."
But he reserves his harshest criticisms for derivatives–"weapons of mass destruction.". He not only cites the hazards of using risk analysis models to value these complexly structured investment products, but he points out something I haven’t seen mentioned before: derivatives create a "web of mutual dependence" among financial institutions that lingers for years.
About this web of dependence, he says, “Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease,” he wrote. “It’s not just whom you sleep with, but also whom they are sleeping with.”
I recommend Warren Buffet’s letter if only for its Olympian view of the exponential decline in the credit markets and his list of the intriguing entertainments he has planned for his shareholders at their annual meeting this May. His bad year makes for some good reading.