Lehman Brothers and Saddam Hussein
In 2002, Warren Buffett called derivatives, “Financial weapons of mass destruction.”
It turns out that Lehman Brothers had actual weapons of mass destruction on their self-destructive balance sheet: They went long, and took physical delivery of 500,000 pounds of uranium yellowcake. Click here for the story. The quantity is “slightly” less than the amount needed to make one nuclear bomb, according to Gennady Pshakin, a Russian nonproliferation expert.
In contrast, Saddam Hussein’s stockpile had 550 metric tons of yellowcake. (This helps explain why Dick Fuld was pilloried, whereas Saddam was hanged.)
Question:What is a derivative security backed by an actual weapon of mass destruction?
Answer: A CDO-Squared.
[Disclosure: Rocky just checked the Fed’s website. Yellowcake is NOT acceptable collateral under the TALF program. However, if one holds a vial of enriched uranium for a few hours, no margin “haircuts” will be required either.]