by Kevin D. Freeman, CFA
Warren Buffett describes credit derivatives as “financial weapons of mass destruction.” George Soros identifies credit default swaps and unlimited short selling as instruments used to carry out the bear raid on Lehman Brothers that triggered the 2008 financial meltdown. Hedge fund billionaire Leon Cooperman insists that short selling should be restrained by reinstating the uptick rule and that limits should be placed on credit default swaps and high-frequency trading before it’s too late. John Mauldin, a best-selling author and online commentator for over a million readers, calls credit default swaps a continuing crisis and an incipient debacle. Jim Cramer of CNBC fame labels credit default swaps, high-frequency trading, and leveraged ETFs “dastardly devices.” Marc Cuban, another billionaire investor, equates high-frequency trading and leveraged ETFs with financial hacking, arguing that they have ruined the market.
These individuals—experts in financial markets from across the political spectrum—have each argued that many of today’s financial instruments are extremely dangerous. All seemingly agree with Mr. Buffett that they represent financial WMDs. There should be no doubt that these financial WMDs played a significant if not defining role in the near Armageddon of 2008-09 that wiped $50 trillion of global wealth from the planet’s balance sheet. Yet, three years later, we have done virtually nothing to understand let alone disarm them.
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