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It was going to take billions of profits before General Re groveled its way back into Buffett’s good graces. Its derivatives business would have little to do with that, either way. The same was not true for the global economy. By a “low but not insignificant probability,” Buffett said, sooner or later—he didn’t know when—“derivatives could lead to a major problem.” Munger was more blunt. “I’ll be amazed,” he said, “if we don’t have some kind of significant blowup in the next five to ten years.” While many safeguards had been put in place to protect investors in stock and bond markets, derivatives were lightly regulated and subject to minimal disclosure. Since the early 1980s, “deregulation” had turned the markets into the financial equivalent of a rugby scrum. The theory was that the market’s forces were self-policing. (And yet, the Fed did seem to intervene at times when trouble cropped up.)

By “problem” and “blowup,” Buffett and Munger meant that a bubble was brewing in this witch’s cauldron of easy credit, lax regulation, and big paydays for the banks and their accomplices. They meant an unsnarlable traffic jam of claims from derivatives leading to financial-institution failures. Large losses at financial institutions could lead to a credit seizure—a global “run on the bank.” In a credit seizure, lenders become afraid to make even reasonable loans, and the resulting lack of financing sends the economy spiraling downward. Credit seizures had in the past tipped the economy over the edge into depressions. But “that’s not a prediction, it’s a warning,” said Buffett. They were giving a “mild wake-up call.”

“Many people argue,” wrote Buffett in 2003, “that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants.” On a micro level, Buffett wrote, these things often were true, but on a macro level, derivatives could someday cause midair collisions over Manhattan, London, Frankfurt, Hong Kong, and other parts of the globe. He and Munger believed that derivatives should be regulated, more disclosure should be required, they should be traded through a central clearinghouse, and the Federal Reserve should act as a central banker to the major investment banks, not just the commercial banks. Federal Reserve Chairman Alan Greenspan, however, defended the unregulated market and made sport of Buffett’s wariness.10 Buffett’s “financial weapons of mass destruction” was quoted everywhere, often paired with a question about whether he was overreacting.11

Even as early as 2002, however, the beginnings of mass destruction could be seen in the mobile-home industry. Stung by bad loans, lenders were cutting off funding or raising interest rates to prohibitive levels. Clayton was not Buffett’s first foray into the mobile-home business. In late 2002, Oakwood Homes, a mobile-home manufacturer, and Conseco—a “subprime” lender that made loans to people without good enough credit ratings to get a cheaper loan—went bankrupt. Buffett knew that the first sign of a deflating credit bubble is when the bankruptcy wolf cuts a weak sheep out of the pack. He lent some money to Oakwood and made a bid on Conseco Finance, the lending arm of Conseco.12 Cerberus Capital and two other private equity firms, which had been bidding on the property, topped his offer to buy Conseco Finance out of bankruptcy for $1.37 billion. Because they had to outbid him, Buffett’s involvement had cost Cerberus, by some accounts, as much as $200 million, a fact the firm would not forget.

Buffett then joined two other funds to finance Oakwood through its bankruptcy in a deal that would make him Oakwood’s largest shareholder once the mess unraveled—and that, incidentally, would help Oakwood in paying back its loans.13

Not long after, a group of college students from the University