Many investors know of the folly of corporate hedging - how corporate insurance, derivatives, and other forms of hedging merely mean risk averse executives divert cash flow from more productive uses.

We've argued that this sort of hedging represents a critical disconnect between the risk appetite of diversified investors and the risk averse behavior of corporate management. You can find our critique of corporate risk management in the "Risk Activism" appendix to our white paper on activist investing.

Turns out that Warren Buffett agrees with us. The Financial Crisis Inquiry Commission (FCIC) interviewed him for their investigation of the financial market blow-up in 2008. His wide-ranging remarks included something of a backtrack on his famous "weapons of mass destruction" jibe at derivatives (see p. 7-8 of the interview transcript).

He also addresses corporate hedging (edited, with links and emphasis added):

Well, when we buy the Burlington Northern, they're hedging diesel fuel. Now what I tell them is I wouldn't do it if I were them but it's entirely up to them. I mean, diesel fuel's a big cost for them and they've got pass-through costs to [customers] and [customers] don't have pass-throughs so they're [the] exposed partly. ...I tell them if they really don't want diesel fuel on the market we'll just close up the railroad and then all trade diesel fuel all day... And if they don't know it, they're going to be out the frictional costs over time. The reason many of them do it is that they want, the public companies, they want to smooth earnings. And I'm not saying there's anything wrong with that...[T]hey're going to lose as much on the diesel fuel contracts over time as they make but they can protect themselves just like Coca-Cola does on foreign exchange and they make a big thing of this... Anheuser-Busch was just talking about it in Business Week... It's a common practice. It's overdone in my view, but it is the response to the fact that the market doesn't like...that diesel fuel could affect the earnings of Burlington...up and down in some quarter when really over time they're not going to...save any money by doing it...

We especially like his comment about closing up the railroad and instead just trading diesel fuel. We disagree, though, with his "fact" that investors discount corporations with commodity variability, as the available evidence suggests maybe not.