For hundreds of years, the way to solve problems in the financial market was clear: Get Wall Street’s titans in one place and knock heads. It took only 24 brokers gathered under a buttonwood tree to form what became the New York Stock Exchange.  J. Pierpont Morgan locked several dozen bankers inside his famous library on Madison Avenue to solve the panic of 1907. And in 1998, New York Fed president William McDonough convened representatives from the biggest Wall Street firms, 14 of which then bailed out Long-Term Capital Management.

Less than a decade later, financial markets have become vastly more complex. And they are no longer in the hands of a select few. Markets are tied together in ways that regulators and even Wall Street professionals struggle to comprehend. Bonds are bound to stocks, which are tied to currencies around the world.

The binding threads are derivatives, and the brightest minds on Wall Street worry about how they work—especially as stock markets around the world hit a bump. The term derivatives describes an array of financial contracts whose value is deter­mined by, or derived from, an underlying asset such as a stock or currency. The deriva­tives market, one of the fastest-growing areas of finance, is estimated at $300 trillion. A subset of that—credit default swaps, which are derivatives based on com­panies’ creditworthiness—last year reached $26 trillion, twice the size of the U.S. economy.

In their most benign form, derivatives are probably the greatest financial innovation of the past 25 years. They have helped smooth currency and interest-rate fluctuations by allowing investors to protect themselves. But when it comes to the really big stuff—such as global market collapses—derivatives could turn from vaccine to contagion. Investors use them as a form of insurance, which may give a false sense of security. “A financial crisis is likely to be a global event, not a local event, and derivatives will probably help make that happen,” says Joe Brandon, C.E.O. of General Re, a reinsurer owned by Berkshire Hathaway.

Brandon has grown intimately familiar with the perils of derivatives during a grand five-year experiment conducted on orders from his boss, Warren Buffett, to close Gen Re’s derivatives business.

Gen Re got into derivatives dealing in 1990 and became tied to global financial markets in ways it found difficult to predict. When Buffett bought the company in 1998, he quickly decided he wanted out. At Buffett’s behest, Brandon embarked on a task that lost Berkshire and Gen Re a cool $409 million before taxes. The experience led Buffett to write in his 2002 letter to Berkshire Hathaway shareholders what has become the most memorable line about the instruments: “Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

It may be one of the Oracle of Omaha’s pithiest pronouncements, but it’s also been one of the most ignored, as the derivatives markets have gone supernova. Even so, their vulnerability was reinforced this spring, when the market for mortgage securities, a type of derivative, seized up.

Yet investors remain oblivious at their peril. After all, two of the world’s smartest financial players, Buffett and Brandon, took lumps getting out of a modest derivatives business in some of the most placid waters financial markets have seen in years. Would J.P. Morgan Chase, Citigroup, or Goldman Sachs, all of which have vastly bigger derivatives businesses, have come out better?

Gen Re’s business was conservative. Yet it still lost money, with only a tiny percentage of trades piling up huge losses. Roughly 98 percent of its deals were fine. That suggests that when there are problems in a derivatives portfolio, they will be harder to discover, because of their rarity.

Much of Gen Re’s divestiture was conducted by Matt Nelson, a 42-year-old trader. He saw his role as a mix of chess grand master and private detective. He spent hours tracking down and persuading investors on the other side of the trades to work with him to get rid of the derivatives.