Derivatives: The $600 Trillion Time Bomb That's Set to Explode

[stockholmer]

http://moneymorning.com/2011/10/12/derivatives-the-600-trillion-time-bomb-thats-set-to-explode/


Do you want to know the real reason banks aren't lending and the PIIGS have control of the barnyard in Europe? It's because risk in the $600 trillion derivatives market isn't evening out. To the contrary, it's growing increasingly concentrated among a select few banks, especially here in the United States.

In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Comptroller. The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).

Derivatives played a crucial role in bringing down the global economy, so you would think that the world's top policymakers would have reined these things in by now - but they haven't. Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market. Think I'm exaggerating?

The notional value of the world's derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position's assets. This distinction is necessary because when you're talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments. The world's gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.


snip

[lib2DaBone]

1. The fuse is lit in Greece.. and the dynamite is burning in Europe.

Nationalize the Federal Reserve..take control of our money. Let "Too Big To Fail"... fail.

We can start over.. rebuild.

Oh, I forgot.. we have a POTUS and Congress that work for the FED.. not the taxpayers.

[Blaze Diem]

9. I'd like to Rec your post..Its so true its frightening

rec anyway

[Blaze Diem]

11. How did it get to this point? What do we do to correct it? Predictions?

Global catastrophy.

[DeSwiss]

2. K&R

[hermetic]

3. This is something

EVERYONE needs to know. K&R.

[Old and In the Way]

4. Better lance this boil or it will kill the patient.

[RadiationTherapy]

5. 600,000 million dollars.

Jeez.

[Hydra]

17. You missed some zeros

1,000 Thousand
1,000,000 Million
1,000,000,000 Billion
1,000,000,000,000 Trillion
600,000,000,000,000 Over half a Quadrillion

So 600 million million dollars that doesn't exist, and they want us to backstop for them. Awesome, huh?

They invent money and make us work for it to pay them back.

[unblock]

6. of course, much of that 600 trillion is offsetting, but why bother being accurate?

notice that they compare the NOTIONAL valuation of the derivative market to ACTUAL gdp. apples to oranges.

i'm sure there are some huge net exposures regardless; i'm not at all disputing the main point. if each of the 4 banks has a net exposure of $1.5 trillion, adding up to a mere 1% of the total notional value, that's still a staggering sum with potentially disastrous consequences.

but i still hate the obvious hyperbole, especially when it's completely unnecessary. and the statement that "there is literally not enough money on the planet to backstop... these things" is patently false because the article just pointed out that there was a market with a $600 trillion notional valuation! if half of it is hedging the other half completely, there's ZERO risk and ZERO net exposure. of course, in reality it's not a perfect hedge, but the net exposure is far lower than the notional amount.

[renate]

19. I still don't get it, but at least my heart started beating again

Thank you!

[Safetykitten]

7. Obligitory "so you want the massive bank failures?!!!"

[Whisp]

8. ouch. Watched Inside Job last night.

got re-scared all over again, and now I read this.

[Exilednight]

10. This was the problem with the bailouts. Instead of allowing too big to fail to fail, it

consolidated power to even smaller handful while squeezing out local and medium size banks.

[Ichingcarpenter]

12. The international banking cartel includes Saudi, European and American

they are tied together like whores at a French Whorehouse. They all have financial STDS now.

[WinkyDink]

13. They and their families seem to be living awfully well, with mega-yachts, e.g.

[Ichingcarpenter]

15. SYPHILIS AND GONORRHEA

attacks slowly

[amborin]

14. yep, what everyone said about the wall st "reforms"...don't even begin to govern derivatives, etc...

[AikidoSoul]

16. The link will NOT load the article. Other links on that site DO load.

Methinks that "somebody" does not want this story told :tinfoilhat: -- If the article is based on truth it would be impetus for billions of people to join the worldwide rebellion.

Has anybody been able to read the entire article?

[Ichingcarpenter]

18. Works here in Europe

maybe its your browser.

[hermetic]

20. Link worked for me

So I have another chance to kick, everyone should read and understand this.

[RegieRocker]

21. Long live the FED!!!

:sarcasm:

[sarcasmo]

22. Casino's are highly regulated, and it's time to regulate Wall Street the same way.

A Derivative is pretty much a bet, so let's treat it like one and regulate just like a Casino.

[Rex]

23. A global oligarchy.

This won't stand.