Berkshire Hathaway 2003 Annual Meeting Audience Question # 46

Warren is not bothered that he has a lot of personal securities sitting with a very large stock exchange firm

Warren Buffett:

Number 7.

Audience Member:

Good afternoon. This is… I’m Paul Butterfield from Clarksville, Maryland.

You wrote in the annual report about the dangers… the systemic dangers… of derivatives and the growth in derivatives.

An example would be a six-sigma event that would cause domino effect and dangers to the solvency and operations of, maybe, financial institutions and other firms, possibly including brokerage firms.

Would this… do you think this recommends to an individual investor that we might consider not holding stocks in street name?

Warren Buffett:

Charlie, how do you… they addressed that, somewhat.

There were some domino effects in the very early ’70s in Wall Street. I think, certainly, the failures of some brokerage firms, in part, led to failures of others.

It wasn’t a classic domino situation, and of course we had domino effects in banks if you go back a hundred years in this country.
Anytime you have financial institutions that interrelate in many ways, and have big receivables and payables, balances with everything, you’ve always got the danger of domino effects.

And that’s a factor in the insurance business. It’s a factor in banking business. I think it’d be less in the brokerage business.

I would think, if you owned securities in a cash account with any large stock exchange firm, you know, it wouldn’t worry me.

We’ve got lots of… I’ve got lots of personal securities, you know, sitting with a very large stock exchange firm, and that does not bother me. But I mean, obviously, there have been little firms that have been fly-by-night types.

And I don’t even know all the rules on margin accounts. But if somebody has got the right to repledge your securities and they get in trouble themselves, I don’t know any more what the SIPC… there’s a SIPC protection, but I’m…

Charlie Munger:

It’s not unlimited. You’re liable.

Warren Buffett:

Yeah, I think that’s true.

And no, I would think twice between having all my securities rehypothecated by somebody else.

A cash account. I think the cash accounts are segregated, aren’t they, Charlie?

Charlie Munger:

Yes.

Warren Buffett:

Yeah.

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