Buffet is suggesting that the current state of derivative markets may be like a pyramid scheme. Google "pyramid scheme" if you don't know what that is.

I do not know the souirce material, so I could be wrong, but I take it differently at first read. Rather than the strict sense of a pyramid scheme where there is nothing real behind the scheme, excpet increasing numbers of investors I suspect they refer to that large numbers rely, directly or indirectly, on a few. I would read "pyramiding " to mean that others rely on things that have gone before, or put in place before, in increasing numbers. He refers to "intertwining contracts and abilities to pay". I suspect the problem is that if one or afew go sour, fail in some wway, it affects the ability to pay of many others. This causes a cascade of failures, defaults, which increases. An increasing effect on the market in general, results from potentaiily small beginings. Just from the language, without economics insight. So may be wrong.