More than five years ago, Warren Buffet, one of the world’s most successful and wealthiest businessmen, warned in the annual letter to shareholders of Berkshire Hathaway on the rapidly growing trade in derrivative as a “time bomb” that could harm entire economic system. This was one of the all-time grimest verdicts ever made on the global economy.
Mid last week, Warran Buffet announced in a media briefing he considers pumping USD 5 billion into Goldman Sachs, in an effort to enhance trust in financial markets.
This public statement led to a debate among American analysts on if we will witness the “pass-out of derrivatives that Warren Buffet called “financial weapons of mass destruction”.
The status of US market has all chances in becoming a financial soap opera, if we cannot control our reactions and to have a thorough assessment on crisis’ backgrounds, without making a drama out of it” said Doru Lionachescu, the main partner of Capital Partners, who estimates we will not witness any fade-out of a financial product that emerged as a response to clients’ needs. “We will probably see a resizing or risks that derrivative instruments entail, that is all – human nature is not fundamentally changing” Lionachescu stressed.
Romanian-based banks have implemented derrivatives in their protfolios, instruments designed to shield against unfavorable evolutions of currency exchange rate or interest.
Derrivatives, time-boms for financial market?
Named by billionaire Warren Buffet as true time-bombs, derrivatives are trading term-contracts of other primary financial instrumets such as stocks and bonds.
“We are certainly not trying to reduce the negative effect of derrivative financial instruments, that sprung out as hedging instruments/ protection against market risks (monetary, currency, commodities). We should ask exporters or importers,” stressed Ciprian Paltineanu, head of UniCredit CA IB Romania.
According to Ciprian Paltineanu, the problems rise when derrivatives are used for speculative activities, with major lever effects, without an in-depth knowledge of products and without being aware of potential risks.
“Educating business environment and balanced investment policy, approached without greed and craving hopes of fast enrichment will solve this problem in time. I hope the actual status will stir economic players to aknowledge the advantages and disadvantages of derrivatives and to avoid toxic transactions,” said head of UniCredit CA IB Romania, department of UniCredit Markets & Investment banking, finance and investment banking division of financial group UniCredit.
Mihai Sfintescu, investment manager at 3TS Capital Partners, considers unlikely for derrivatives to vanish, as they are designed to cover the risk as well, for example monetary or equity derrivatives will be less affected. “I do agree with Warren Buffet on credit derrivatives. Credit derrivatives had become higly complexe, so that nobody could understand anymore, not even the rating agencies that raced in giving ratings that now seem ridiculous,” said Sfintescu, who forecasts a major shrinkage of credit derrivatives market that may even dissapear for a while, as people don’t have “long-term memory”.
Matei Paun, owner of BAC Investment, says no financial instrument can dissapear, as they go through different stages: innovation, excessive use, collapse, and after a period, they can find a useful role in the financial system.
Translated and adapted by Camelia Oancea.
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