Is a Meltdown Cooking in Exotic Assets, Or Can Markets Handle the Next LTCM?
On the eve of Berkshire Hathaway’s annual meeting this weekend, it is worth remembering that, three years ago, Warren Buffett warned that the global financial system was held hostage to ticking “time bombs” and at risk of a “megacatastrophe.”
He was talking about financial derivatives: the options, swaps, forwards and more-exotic investment tools that have blossomed into a $270-trillion global market. He warned they had created a “daisy chain risk,” that one Long Term Capital Management-style pratfall would topple the whole global house of cards.
But the Oracle of Omaha’s crystal ball seems to have been cloudy — so far, at least. Three years since his warning, there have been no such meltdowns, and global financial markets have blissfully avoided systemic apocalypse. In fact, there are some deep thinkers — including former Federal Reserve Chairman Alan Greenspan — who, while acknowledging some potential pitfalls, believe derivatives are generally good medicine, helping investors share risk. We asked two outspoken Wall Street veterans, author Michael Panzner and money manager/blogger Roger Nusbaum, to explain their very different positions on this subject.
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