Buffett on Financial Derivatives

I was studying for my financial derivatives exam this morning and liked the following quote from Warren Buffett. He's talking about the financial derivatives business, but the quote applies to our current economic crisis (which derivatives helped fuel).

In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract--which may require a large payment decades later--you are usually stuck with it.

For more, read Buffett's 2003 letter to shareholders.

He also nailed the "daisy-chain" effect that led the crisis to its present magnitude:


A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.

Perhaps there's a reason he's called the Oracle of Omaha.