1994: Would you comment on the use of derivatives?

AUDIENCE MEMBER: My name is Michael Mullen (PH) from Omaha.

Would you comment on the use of derivatives? I noticed that Dell computer stock was off 2 1/2 points Friday with the loss of derivatives.

WARREN BUFFETT: Question is about derivatives. We have in this room the author of the best thing you can read on that. There was an article in Fortune about a month ago or so by Carol Loomis on derivatives, and far and away it’s the best article that has been written.

We also have some people in the room that do business in derivatives from Salomon.

And it’s a very broad subject. It — as we said last year, I think someone asked what might be the big financial story of the ’90s and we said we obviously don’t know, but that if we had to pick a topic that it could well be derivatives because they lend themselves to the use of unusual amounts of leverage and they’re sometimes not completely understood by the people involved.

And any time you combine ignorance and borrowed money — (laughter) — you can get some pretty interesting consequences. (Laughter)

Particularly when the numbers get vague. And you’ve seen that, of course, recently with the recent Procter and Gamble announcement.

Now, I don’t know the details of the P&G derivatives, but I understand, at least from press reports, that what started out as interest rate swaps ended up with P&G writing puts on large quantities of U.S. and, I think, one other country’s bonds. And any time you go from selling soap to writing puts on bonds, you’ve made a big jump. (Laughter)

And it — the ability to borrow enormous amounts of money combined with a chance to get either very rich or very poor very quickly, has historically been a recipe for trouble at some point.

Derivatives are not going to go away. They serve useful purposes and all that, but I’m just saying that it has that potential. We’ve seen a little bit of that.

I can’t think of anything that we’ve done that would — can you think of anything we do that approaches derivatives, Charlie? Directly?

CHARLIE MUNGER: No. (Laughter)

WARREN BUFFETT: I may have to cut him off if he talks too long. (Laughter)

Is there anything you would like to add to your already extensive remarks? (Laughter)

CHARLIE MUNGER: No. (Laughter)

WARREN BUFFETT: OK.