Financial Derivatives are 'Weapons of Mass Destruction"
"WMD = Weapons Of Mass Destruction " !
This might be the reason why Warren Buffett sold all his shares of GS( Goldman Sachs) and reducing his holding in JP Morgan in recent portfolio rebalancing.
Warren Buffett still says derivatives are 'weapons of mass destruction' <source:Furtune.com>
But why is he increasing his stake in BA ( Bank Of America )? This video may give you some ideas or clues.
<Video Credit: C&K GO!>
Further reading :
stock market tanks. <source:cnn.com>
Equity derivatives desks at JPMorgan Chase and Goldman Sachs have thrived as a furious correction in U.S. stocks took hold in the past six days, according to people with knowledge of the situation. The desks sell options and futures to trading clients as protection against losses or to allow them to speculate on price movements."
Derivatives are a double-edged sword <source: dailypioneer.com>
Derivative trading relies heavily on "leverage" and it may post a "systemic" risk when everything suddenly collapses. One may still remember vividly the "MBO" Mortgage Back Securities saga during "subprime crisis " in 2009/08 where liquidity suddenly "halt" when nobody seems to trust each other or the so-called "counter-party risk" without knowing what is inside the underlying asset of these MBOs.
How about SG banks? a quick check on DBS's annual report indicates that the total derivative/asset value is around 0.03x as compared to 10-20 x of Big 4 US banks ( Goldman Sachs / JP Morgan / Bank Of America / City Bank). Of course, these are the so-called "too big to fail" type of financial institution where FED may come to the rescue if anything happens, but shareholders may need to bear some consequence in their portfolio value as any recure plan comes with "price ".
"Quote Of The Day "
"Derivatives, lend themselves to huge amounts of speculation," by Warren Buffett