The CEO's Guide tp Derivatives

I found this while doing some research on this financial crisis. I was struck by the admission of many that they didn't really understand the risks that all those Credit Swaps, Securitized Instruments of Debt, or other derivatives posed to their companies. Or how illiquid they really were. In doing this research, I came upon Warren Buffet's 2002 Annual Report in which he said: "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." But, going even further back, I found this: The CEO's Guide to Derivatives. Note the date of publication. March, 1994! This was written before the tech bubble, the mortgage bubble, the "securitizing of mortgage debt," and all the credit swaps and fancy insurance (sic) schemes that were being traded. And, of course, do any of you remember Warren Buffet saying that he wasn't participating in the tech bubble because he didn't understand the business model of all those dot com's?

If you read the article, you will see that it argues that the correct use of derivatives (with their tremendous leverage) as instruments to reduce risk. Instead, it became ever more attractive as an investment vehicle. Instead of using them to reduce risk, they began using them to increase profits. That was the attraction of all that leverage. But, because they didn't understand the full risk that they were undertaking, they couldn't estimate the proper amount of capital reserves that they would require. After all, if you have a bundle of a thousand mortgages, all rated AAA by Moody's and Standard and Poore's, why bother to look at each individual mortgage and see what they were really made up of?

Greed and fierce competition for performance, blinded them to the risks. If you don't understand the risk, or how much you are undertaking, then the concept of risk management and risk aversion is meaningless. These "financial wizards" didn't have low risk aversion. They had a total ignorance of, a blindness to risk. If you don't see the precipice, or won't even admit to its presence, then what do you think the logical outcome will be?

Anyway, enough of this rant. Let's just say that I'm tired of these high-paid multimillionaires screwing up the markets, my retirement, the economy, indeed the entire country, and then walking away with their "Golden Parachutes."

For those who would like to look into this further, here are two links to Warren Buffet's prophetic words:
http://www.myprops.org/content/Warren-Buffett-On-Derivatives-derivatives-are-financial-weapons-of-mass-destruction-carrying-dangers-that-while-now-latent-are-potentially-lethal.-2002/
and:
http://ecofin.wordpress.com/2008/03/18/derivatives-the-sub-prime-mess-us-recession-bear-stearns-bailout-by-the-fedjpmchase/

And for those whose wounds aren't too deep (or maybe especially for those whose wounds are too deep) I refer you to Bird and Fortune and their excellent spoof of the entire mess:
Credit Crunch
Sub Prime Crisis
Financial Advisor