What's a derivative?
"derived" from underlying assets (homes, debt, etc). A lot of smart people have
tried to explain what these things are, but miss the forest for the trees. A
derivative is NOT an asset. It's, in reality, nothing, just an imaginary
security of no value that banks trade as a kind of "gentleman's bet" on the
value of future risk or securities.
Let's say you and I want to bet on whether our neighbor Joe
will default on his mortgage. Is the bet an asset? Does it have any real value?
Both counts register a definite "no."
That's the equivalent of a derivative.
It is total and complete lunacy to claim these items are
anything more than fiction (perpetuated by another fiction: that Wall Street is
able to value these things or price them accurately). But thanks to Wall
Street's lobbying power, they've become the centerpiece of the financial
The notional value of the derivative market is roughly $1.4
I realize that number sounds like something out of Looney
tunes, so I'll try to put it into perspective.
$1.4 Quadrillion is roughly:
- 40 TIMES THE WORLD'S STOCK MARKET.
- 10 TIMES the value of EVERY STOCK AND EVERY BOND ON THE
- 23 TIMES WORLD GDP.
As early as 1998, soon to be chairperson of the Commodity
Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan,
Bob Rubin, and Larry Summers (the three heads of economic policy) about
derivatives. She said she thought derivatives should be reined in and regulated
because they were getting too out of control. The response from Greenspan and
company was that if she pushed for regulation that the market would implode.
The most liberal estimate of the bailout costs ($24 trillion) is equal to
less than 2% of the derivatives market and very dangerous is that the vast bulk
of them (84%) are based on interest rates:
[this is why
'they' will sell their mother and father to keep the interest rates LOW and why
by doing this 'they' will create a hyperinflation which in turn will push up the
interest rates and destroy the financial system]
In 2008 the Credit
Default Swap (CDS) market (which is only 1/10th the size of the
interest rate-based derivative market) nearly destroyed the entire financial
system. One can only imagine what would happen if the interest rate-based
derivative market (which is ten times as large) suffered a similar Crisis.
The vast majority of derivative exposure involves only a small
handful of institutions: JP Morgan, Goldman Sachs, Bank of
America, Citibank, and HSBC. JP Morgan is holding double
the amount Goldman and Bank of America are holding. [An intelligent saver will
for obvious reasons stay away from these financial institutions.]. If 4% of
derivatives are "at risk" and 10% of those bets go bad, you've wiped out ALL
OF THESE BANKS' EQUITY and they go to ZERO.
We have unfortunately not seen the end of the cumulative
credit losses. OTC derivative problems are not going away. Rather
than being under control, the problems have just started!
The biggest danger yet to come are $ 62
trillion Credit Swaps....!
The BIS (Bank of International Settlements)
announced the biggest gain in derivatives ever since 1930. The total is
approximately $ 1,144 Quadrillion. Notional value becomes real value when
either counterparty to the OTC derivative goes bankrupt. The OTC derivative
house cannot be allowed to go broke. This means that whatever funds are
required to rescue failing international investment banks, banks and financial
entities will be provided. Bearing in mind that monetary inflation precedes
price inflation, there is little doubt we are about to see Hyperinflation...click
here for more
After the crash of 1920, the legislators issued
laws (Glass Steagel) forbidding banks to speculate on the Stock and Money
markets. Ever since they have found a way around this. As a result, what we
see today has become a lot WORSE.
Compared to the Credit Swaps, the Subprime looks like
a walk in the park?
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