Taking on Dastardly Devices

 | Nov 14, 2011 | 10:49 AM EST
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Whenever you criticize arcane instruments like credit default swaps, where you bet against countries and companies, or high-frequency trading and double and triple ETFs, you immediately here from their creators that you don't know what you are talking about.

That's how they argue. They basically say "You are stupid, we are not. We know more than you."

That's why I felt this morning's interviews with Warren Buffett, the Oracle of Omaha, and Mark Cuban, the owner of the Dallas Mavericks who has made a fortune in stocks, two of the smartest billionaires in this country, were so eye-opening.

Buffett said point blank he doesn't like an instrument where you can bet against an entity and then create your own consequences. He mentioned, specifically, about hiring 100 actors to queue up outside a bank after you bought credit default swaps on the bank and how self-fulfilling that can be. He said point blank that such an instrument is antisocial and shouldn't be allowed.

Mark Cuban wowed me today when he said point blank that high frequency trading, including the leveraged EFTs out there could easily take down the stock market because there is no perfect software. He said that the impact of machines going awry has kept the vast majority of his capital away from the stock market because the market is basically too fragile to handle the potential damage that high-frequency trading could wreak to everyday prices. He equated high-frequency trading to nothing less than hacking and said it had no place in the capital markets, which are meant to raise capital for companies and save money for individuals. He pretty much said that these hackers have wrecked the market and there is no place for them.

These are two men who, to me, represent the most sophisticated investors in the world right now. They have the ability to analyze and the staff to teach them about the hazards of these products. They did not mince words. They made sure that the purveyors of these instruments heard their charges. They clearly want the authorities to stop these abuses and they don't see anything good about them.

To me, it's about time sophisticated people speak up about these travesties. If they don't, the government won't act until it is too late. Not all financial innovation, as we learned about CDOs in a just-completed era, is worthwhile. It's okay to roll back financial innovation if that innovation wrecks the playing field for all.

That's what these instruments do. Bravo to Cuban and Buffett for telling the truth about these dastardly devices and warning us about the potential doomsday that they can create all by their very own.

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