Prem Watsa, Chairman and CEO of Fairfax Financial, has made a bold bet on falling prices over the next decade according to an article in The Wall Street Journal. Fairfax Financial is an insurance company based in Canada which many have compared to Warren Buffett’s Berkshire Hathaway due to Mr. Watsa’s impressive long term track record. Fairfax posted very strong results in 2007 and 2008 due to large gains in equity hedges and credit default swaps that were taken based on Mr. Watsa’s correct reading of the economy ahead of the Great Recession. Read this article for more details.
Despite paying the largest penalty ever assessed against a financial firm by the Securities and Exchange Commission, Goldman Sachs is still an attractive target for government panels investigating the financial crisis. Goldman agreed to pay a $550 million settlement on July 15 in connection with the Abacus case in which the SEC alleged that Goldman failed to disclose key information regarding the portfolio selection process. Today, the Financial Times reported that Goldman is facing a separate inquiry by the Financial Crisis Inquiry Commission (FCIC) regarding the company’s use of derivatives.
In the CSPAN video shown below, former President Bill Clinton comments on the SEC charges against Goldman Sachs and provides a brief account of his views regarding the problems with the financial system. Mr. Clinton specifically cites John Bogle’s views regarding financial intermediation consuming a greater share of economic output. He also provides some good examples regarding the difference between hedging transactions in derivatives and speculation. Read this article for more information and to view the video.
In a warning that was largely ignored at the time but proven correct in subsequent years, Warren Buffett referred to derivatives as “financial weapons of mass destruction” in his 2002 letter to Berkshire Hathaway shareholders. Critics of Berkshire’s recent involvement in derivatives often like to point out the superficial inconsistency between Mr. Buffett’s earlier warnings and his willingness to enter into derivatives contracts in recent years. Today’s Wall Street Journal article regarding Berkshire Hathaway’s lobbying efforts related to the financial regulatory reform bill are already raising charges of hypocrisy. Let’s take a brief look at the facts and how the legislation may impact Berkshire Hathaway.
Carol Loomis has written a “must read” article on derivatives which appears in the July 6 issue of Fortune Magazine as well as online at Fortune.com. At a time when regulation of derivatives is a major focus in Washington, it is useful to step back and take a deeper look at the events of the past several years to understand the depth of the problem and the complexities awaiting those who would try to reduce the overall level of systemic risk inherent in these complex instruments. This article provides a few excepts and comments from the article along with my views on how investors can manage risks associated with derivatives.