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I am an investor in Berkshire Hathaway “A” shares, but Mr. Buffett would have no way of knowing that since I hold shares in brokerage accounts. Perhaps Mr. Buffett had a bone to pick with me, but I had warned about the risk of credit derivatives and the hidden leverage they created. I was so persistent in exposing the flaws in the financial system that BusinessWeek called me the “Cassandra of credit derivatives.”2 But most journalists overlooked a much more important derivatives quote in Mr. Buffett’s 2002 shareholder letter. Berkshire Hathaway invests in multinational businesses with a variety of complex operations, and that means that investments have to be hedged or entered into in ways that create tax or accounting advantages. Mr. Buffett had also written:“I sometimes engage in large-scale derivatives transactions.”3 Yet I dithered and had not responded to his letter.

In 1998, Berkshire Hathaway acquired General Reinsurance. Warren Buffett initially called it his “problem child,”4 and its General Reinsurance (Gen Re) Securities unit was its problem sibling. Even before the acquisition, both Warren Buffett and Berkshire Hathaway vice-chairman Charlie Munger realized that the value of Gen Re Securities derivatives transactions was overstated and vainly tried to sell it. Some of the contracts were for 20-year maturities, and the operation would take years to wind down. Furthermore, the models valuing the derivatives give poor approximations of the true mark-to-market value—the price at which the derivative can be bought and sold in the market—of some of Gen Re Securities’ esoteric derivatives contracts. There was no real market. Instead, the derivatives contracts were priced or marked based on model valuations known as mark to model. Buffett wrote that in extreme cases, it was a “mark to myth.”5

In his 2002 letter to Berkshire Hathaway shareholders, Buffett wrote that it sometimes seemed “madmen”6 imagined new derivatives contracts. His pique was prompted by the multiyear-long hangover of losses from derivatives, chiefly credit derivatives, in the GenRe Securities unit. It showed a loss of $173 million, partly due to restating faulty, but standard, derivatives accounting from earlier years. The loss inspired Buffett to call derivatives “financial weapons of mass destruction.”7 His viral sound bite quickly circled the globe. After reading Buffett’s quote in the financial press, one investment banker joked that my book on credit derivatives is “the manual on how to blow up the world.”

Warren Buffett’s letter to me arrived in June 2005, a hectic month. One of my clients was a law firm representing a large money center bank as plaintiff in a securities fraud case involving another large money center bank. The defendants’ lawyers had hired a former chairman of the U.S. Securities and Exchange Commission (SEC) as their expert witness. Earlier, I had written both my expert opinion report and a report rebutting the former SEC chairman’s point of view. I prepared to give a two-day-long deposition to discuss my opinion in the case in which hundreds of millions of dollars had been lost.The defendants had read my work, knew they faced serious trouble, and subsequently changed their strategy. In fact, they sent their most experienced litigator to depose me.

I put Buffett’s letter in my purse to remind myself to respond to it. The morning of the deposition’s first day, I saw the letter and felt a glow of confidence. I am not a superstitious person, but I couldn’t help thinking of the letter as an auspicious sign. I put it in my pending correspondence file and forgot about it again.

The deposition came and went, and the plaintiff ’s lawyers were delighted.“Everyone gets bloody in a battle, but you slaughtered them.” The defendants’ arguments fell apart in the face of the facts, and the case never went to trial. Shortly thereafter, the defendants came to a settlement agreement to the plaintiff’s satisfaction.

At the end of June, I reviewed my correspondence file and read the letter again. Client business would