Have I heard this right? $600 TRILLION derivatives market?

[tmyers09]

I've heard this number on the various talking head shows the past few days.

Does all the money in the world even equal that amount? Where the fuck did that money come from? What makes all of the derivatives worth that much? It seems as if they are creating these things out of thin air and giving them value. Correct me if my understanding of this is wrong. It seems obscene.

[no_hypocrisy]

1. Is that amount due and owing or theoretical for a Doomsday Scenario?

[hobbit709]

2. The derivatives market is based on the old pyramid scam.

The original REAL property was sold 100 times over with only paper behind it. Sooner or late, there will be 100 people claiming that same piece of property.

[Ruby the Liberal]

3. Thats the number I have heard for years.

You are correct - they create them out of thin air and the price is based on supply and demand.

As "derivatives" their 'value' is loosely based on the underlying securities that they are "derived" from. Like credit default swaps (CDS) on sovereign debt. Someone holds the debt and unrelated parties place side bets (CDS) on whether or not it will fail.

That is how it grows so exponentially. If you were to bet for Greece defaulting with everyone you can find betting they don't, you get exponential money in play compared to the original value.

Why Warren Buffett called them "Financial Weapons of Mass Destruction".

[tmyers09]

4. And why the fuck are these things not tightly regulated/outright prohibited?

[Ruby the Liberal]

6. Because they aren't on markets

They are private side bets, like between you and I.

Then again, AIG (the bookie in the middle) sure showed us how quickly they can become taxpayer concerns.

Wall Street hasn't even slowed down their CDS activity, much less make it transparent.

[muriel_volestrangler]

5. It's more than the money in circulation around the world; probably a bit less than all assets

World stats: https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html
GDP per year: $70.29 trillion (2009 est.)
...
Stock of money:
$12.35 trillion (31 December 2007)

Stock of quasi money:
$27.31 trillion (31 December 2007)

Stock of domestic credit:
$69.9 trillion (31 December 2007)

Market value of publicly traded shares:
$64.99 trillion (31 December 2007)

cf total assets of the US: http://rutledgecapital.com/2009/05/24/total-assets-of-the-us-economy-188-trillion-134xgdp/
$188 Trillion

Very roughly, the US yearly GDP is one fifth of the world's GDP, so the total worth of all assets is probably more than $600 trillion; but not that much more.

[jmowreader]

7. They threw Max Bialystock in prison for a similar scheme

"How much of a play can you sell?"
'Max, you can only sell 100 percent of anything.'
"And how much of Springtime for Hitler did we sell?"
'Twenty-five thousand percent.'

In the 21st Century, not only would Max Bialystock have been able to legally sell Springtime for Hitler 250 times over, he would have been lauded as a financial genius for doing so. Here's how:

First, he would have found four little old ladies and sold them each 25 percent of the play. He would have then tranched their interest in the work, and sold that as asset-backed securities. After that, he would have sold credit default swaps against the ABS because he was doing a play about Hitler in the most-Jewish city in the United States. He would then take the CDS and ABS that were left over, tranched them all into one pool and sold collateralized debt obligations against the pool.

He woulda still had to contend with Hans Liebkind attempting to shoot him, but shit happens...