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Derivatives: The Quadrillion Dollar Financial Casino Completely Dominated By The Big International Banks

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If you took an opinion poll and asked Americans what they considered the biggest threat to the world economy to be, how many of them do you think would give “derivatives” as an answer?  But the truth is that derivatives were at the heart of the financial crisis of 2007 and 2008, and whenever the next financial crisis happens derivatives will undoubtedly play a huge role once again.  So exactly what are “derivatives”?  Well, derivatives are basically financial instruments whose value depends upon or is derived from the price of something else.  A derivative has no underlying value of its own.  It is essentially a side bet.  Today, the world financial system has been turned into a giant casino where bets are made on just about anything you can possibly imagine, and the major Wall Street banks make a ton of money from it.  The system is largely unregulated (the new “Wall Street reform” law will only change this slightly) and it is totally dominated by the big international banks.

Nobody knows for certain how large the worldwide derivatives market is, but most estimates usually put the notional value of the worldwide derivatives market somewhere over a quadrillion dollars.  If that is accurate, that means that the worldwide derivatives market is 20 times larger than the GDP of the entire world.  It is hard to even conceive of 1,000,000,000,000,000 dollars.

Counting at one dollar per second, it would take you 32 million years to count to one quadrillion.

So who controls this unbelievably gigantic financial casino?

Would it surprise you to learn that it is the big international banks that control it?

The New York Times has just published an article entitled “A Secretive Banking Elite Rules Trading in Derivatives“.  Shockingly, the most important newspaper in the United States has exposed the steel-fisted control that the big Wall Street banks exert over the trading of derivatives.  Just consider the following excerpt from the article….

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Does that sound shady or what?

In fact, it wouldn’t be stretching things to say that these meetings sound very much like a “conspiracy”.

The New York Times even named several of the Wall Street banks involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.

Why does it seem like all financial roads eventually lead back to these monolithic financial institutions?

The highly touted “Wall Street reform” law that was recently passed will implement some very small changes in how derivatives are traded, but these giant Wall Street banks are pushing back hard against even those very small changes as the article in The New York Times noted….

“The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large,” said Darrell Duffie, a professor at the Graduate School of Business at Stanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. “It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldn’t be allowed in.”

So why should we be so concerned about all of this?

Well, because the truth is that derivatives could end up crashing the entire global financial system.

In fact, the danger that we face from derivatives is so great that Warren Buffet once referred to them as “financial weapons of mass destruction”.

In a previous article, I described how derivatives played a central role in almost collapsing insurance giant AIG during the recent financial crisis….

Most Americans don’t realize it, but derivatives played a major role in the financial crisis of 2007 and 2008.

Do you remember how AIG was constantly in the news for a while there?

Well, they weren’t in financial trouble because they had written a bunch of bad insurance policies.

What had happened is that a subsidiary of AIG had lost more than $18 billion on Credit Default Swaps (derivatives) it had written, and additional losses from derivatives were on the way which could have caused the complete collapse of the insurance giant.

So the U.S. government stepped in and bailed them out – all at U.S. taxpayer expense of course.

As the recent debate over Wall Street reform demonstrated, the sad reality is that the U.S. Congress is never going to step in and seriously regulate derivatives.

That means that a quadrillion dollar derivatives bubble is going to perpetually hang over the U.S. economy until the day that it inevitably bursts.

Once it does, there will not be enough money in the entire world to fix it.

Meanwhile, the big international banks will continue to run the largest casino that the world has ever seen.  Trillions of dollars will continue to spin around at an increasingly dizzying pace until the day when a disruption to the global economy comes along that is serious enough to crash the entire thing.

The worldwide derivatives market is based primarily on credit and it is approximately ten times larger than it was back in the late 90s.  There has never been anything quite like it in the history of the world.

So what in the world is going to happen when this thing implodes?  Are U.S. taxpayers going to be expected to pick up the pieces once again?  Is the Federal Reserve just going to zap tens of trillions or hundreds of trillions of dollars into existence to bail everyone out?

If you want one sign to watch for that will indicate when an economic collapse is really starting to happen, then watch the derivatives market.  When derivatives implode it will be time to duck and cover.  A really bad derivatives crash would essentially be similar to dropping a nuke on the entire global financial system.  Let us hope that it does not happen any time soon, but let us also be ready for when it does.

  • The Beast

    Wow….the whole casino is just too massive to grasp…

  • For every bet, there is a winner and a loser.
    If the usual suspects (Goldman, JP Morgan…) win most of the time, the question is: who loses most of the time?
    We know that, until 2008, AIG was the sucker.
    Who has replaced AIG since then?

    Click on my name to visit the new version of my blog.

  • Michael

    I have to say I’m more confused than ever. I thought derivatives were insurance policies, and that AIG went under because it insured a bunch of bad investments. Isn’t a hedge supposed to be a bet?
    Also, the Fed didn’t use taxpayer money to bail out Wall street, as our taxes didn’t go up. It created the $ as debt, which will likely be defaulted on.

  • mondobeyondo

    So I, Mr. Joe Common Citizen, decide to take a chance at the table, and I wager my bet… maybe I can finally win against the big boys at Chase, Bank of America, Barclays, etc. Yeah, feeling like a big shot now! Rolls Royce, here I come!

    Let’s see. I’ll wager a house, a car, a job, food, water, lights…

    A jack, a five and a four. Feeling pretty good now. In a few seconds, I’m gonna tell Wall Street to shove it. Think I’ll hold here, and let the banks play their hand.

    [the banks deal their hand]

    An ace and a jack?

    The bank takes my job, my house, my car, my lights, food, electricity… thank God not my kids!

    Dammit! The house always wins!!

  • David Robertson

    Derivatives are a development in the financial field from the futures markets based upon commodities. The latter are traded on regulated exchanges while the former are traded OTC by the major investment banks.

    Commodity futures markets serve a real economic purpose. Financial derivatives, even the financial futures markets, serve no economic purpose other than to increase the wealth of the major investment banks.

    It is inaccurate to say that these financial derivatives are based upon credit if you mean that one has to borrow in order to leverage against the underlying value of a contract.

    The underlying security is a debt instrument, such as a mortgage, but in order to bet on the movement in the price of the security one does not need to put up more than the required margin which could be just 1% or less of the underlying value of the security. There is no requirement to borrow the balance as one has to do in the stock market.

    Of course if the price moves against your position then you would have to come up with more margin. Usually one may post debt securities such as T-Bills as margin and therefore earn interest on them while making one’s bets on the price of the security.

    The critical consideration in these markets is their depth and liquidity. The major investment banks create this liquidity as market makers. It is within their power to freeze the markets at any time. They know who is holding what positions. This gives them the ability to target any firm they wish to bring down for any reason. No doubt this is the subject at these meetings in Mid-Manhattan.

    In other words these markets give the banking elites complete control over the world economy and they can take it down at any time they wish, as they have always done. Today their methods are more sophisticated but their objectives are the same.

  • William

    The cowards in the US Congress will do little to reign in these criminal banksters. The decline of America is well underway.

  • D Rumsfeld

    Quote ‘In fact, the danger that we face from derivatives is so great that Warren Buffet once referred to them as “financial weapons of mass destruction”

    Buffet said this and then went and bought some. I believe he lost a lot of money on his investment in derivatives.

  • Michael2

    In other words stock up on dry goods, guns/ammo, meds, gold/silver, alternative fire starting methods and American money to use as means to start your fires. Because it seems the crash of the dollar is inevitable and fire tinder is about all it will be worth after a crash happens.

    Wonder what date and time this “crisis” is set occur on?

    What these top players in the ivory tower that is so high their heads are in clouds, seem not see is they are destroying any sense of credibility and fairness they had left in a system they created. I think they are going to encounter great resistance trying to streamline every body on the planet into any further financial schemes they propose will be the “solutions” to economic disasters they created. Especially after people reawaken to the value of bartering and the use of gold and silver as legal tender.

    People will be repulsed by their credit cards and usury schemes, fiat money, giant central banks, outlaw oligarchic corporations and monopolies because it will be realized we don’t need them in order to live.

    Average Americans need to look in the mirror on this one too because it is from exploited labor if not outright slavery that we are dependent on when we go to Walmart, etc. to buy all those cheap and often toxic goods.

    I also think one day we will build massive piles of computers in the streets and burn them too just like we use to burn books!!

  • Michael2

    ps. If one were so inclined the ivory tower could also be seen as The Tower of Babylon 2 as it seems like the edifice they are trying to recreate is about on that level. Seems we all have to fall and suffer once again to the designs and schemes of “people” if in fact that is what they are, desiring all the wealth and power over people in the world.

  • Wyrdless

    This article is misleading:

    “”estimates usually put the notional value of the worldwide derivatives market somewhere over a quadrillion dollars.””

    It is IMPOSSIBLE for the notional value of every derivative to come due at the same time! So this quadrillion figure is meaningless. Well over 95% of derivatives expire worthless.

    The real problem is that AIG and other parties used margin to cover positions where they never had enough money to cover a margin call.

    Naked Puts and Naked Calls should be illegal and that regulation would stabilize the derivatives market by ensuring that every contract had an adequately funded counter party.

  • Tex

    What exactly would a derivatives crash look like? Where would we read about it? And what type of indicator does it have? Thanks!

  • Gary2

    Again-there is way too much wealth in way too few hands. This is a big reason we are in this mess of an economy. Wall street bonuses/corproate profits are at an all time high yet working people are hurting and tons are on food stamps. The top 1% has more wealth and income than the bottom 50%. Do you really want to live in a banana republic? Well guess what we are in one now. Consider this: While so many people are hurting I can hardly believe we are even discussing giving the rich another tax cut. If tax cuts for the rich did anything to help than by that logic they should pay zero taxes. I am sure even a tea bagger can see the absurdity of that line of thinking.

    This alone shows us we are in a banana republic.

    I am really serious, we need to tax the rich and corporations and spread the wealth. There is no onther way.

    It is my hope and belief that most folks will come around to my way of thinking when the evidence of the wealth being in too few hands and the negative consequences become apparent to even the most blind tea bagger.

  • zack

    So we’re just little rubber duckies afloat in the ocean of financial derivatives brought on by the banks. The question is – what should we do about it? There’s an effort underway right now to use these very same derivatives to bring down JP Morgan –

    We help Americans find jobs and prosperity in Asia. Visit for details.

  • Albert B Contreras

    Having read this article and now on a quest for more understanding about derivatives using Google and research tools like Copernic Pro; I would like to where in the news can I be informed about whats happening in the derivative markets? If this would help; I would be using the information as a indidivual user. Better , I know this at most is a educated guess , what signs I should look for for when the derivatives system will crash the US markets / economy ?? I have a bad feeling that is just may happen; Thanks for sending any information my way. Happy Holidays!!!

  • Another excellent article on the ‘Derivative Markets.” It’s only a matter of time when the EU will totally collapse and it will be a domino effect all through the world markets to the U.S. The middle class is drowning quickly and cannot hardly keep its head above water. The “Jesuits” have planned this very carefully and thoroughly to collapse the world markets!!! The evil forces behind these large banks is beyond reason!!! Their cup is quickly over flowing and their level of greed is unsurpassed!!! Wait until they stand before God Almighty for their titanic sins before mankind! Again, thank you for bringing people who want to know these valuable articles!!! This may be one of the last peaceful holidays here in 2010. 2011 will be the beginning of the end – start preparing NOW!!!!

  • silentonall

    The Bank for International Settlements in Europe acts as an umbrella for all the central banks world-wide. Anybody wanting to know how the derivatives market is doing today go here:

    Be forewarned though, BIS shows the statistics on the LOW estimated value of derivatives around 600 trillion. This article states somewhere over a quadrillion….which is correct. More precisely, 1.144 quadrillion dollars in turn is an AVERAGE between 600 trillion and 1.5 quadrillion.

  • Albert B Contreras

    With the latest posting on this website about the eroding confidence US Treasuries; This appears to have answer my inquiry about what signs to look for when the derivatives will crash the US economy; Still I like to to know if you have read the news posting I mentioned ? If so; Do you agree or disagree ? Thanks for sending any infortmation !

  • Based on the conduct of the Federal Reserve, it appears that the derivates bubble has already burst. There is not really a good way to monitor the derivatives market on a daily basis since most of these trades are not regulated. A better market to watch is the bond market. Right now treasuries are collapsing and municipal bonds are next in line.

  • David Robertson

    @ Robert Stout “The “Jesuits” have planned this very carefully and thoroughly to collapse the world markets!!!”

    Well maybe. Or it could be the “Jews” or the “Zionists” or the Illuminati” or the “Anglo-Saxon Establishment” or maybe a cabal of all of them.

    The fact is many believe that there is someone pulling the strings and they do all appear to have some kind of pact with each other. The evidence is fairly compelling that this is the case but if it is true then it is hard to see how any efforts to derail their plans might succeed.

    It is interesting that many who appear to subscribe to this conspiratorial view also believe that they or their group or maybe everyone together can do something about it. Why do you believe this is possible? Seriously, why?

    Personally I believe there is a solution but it is a purely spiritual solution not a carnal one. The only Power that can defeat the “prince of this world”, the “power of the air” who is behind all these events, is the One who created him in the first place and has given him just enough rope to hang himself.

    We really have nothing to fear since the rulers of this present darkness will find at the very time they believe they have won they will lose.

  • Greg Pinelli

    While it MAY be technically correct to say that ALL derivatives are not based upon debt many can be and are…credit is extended and then used to make purchases. In the case of Insurance companies EVERY dollar they use to bet on commodity price movements in order to squeeze out enough return to make payouts to their policy holders+some profit comes from what, in fact, are loans to those companies..made by those very policy holders.
    When derivatives collapse someone is left holding the bag..and it could well be someone who never even knew someone had placed a bet with their money.
    The REAL danger with these instruments comes with the speed at which they can implode…Consider this little scenario…China raises interest rates in the middle of a Thursday night (US time zone..pick one!)..commodity prices begin a freefall because they are essentially propped up on huge stilts by Chinese building speculation. By the time the NYSE opens Friday morning EVERY base commodity is limit down..with an entire weekend coming for every bagholder who’s dead in the water..Then come those with long physical contracts..and then the short sellers of the producers..and VOILA!..t’s over and we’re not even to Monday when it starts again in huge earnest.

  • The derivatives were side bets on bundles of home loans that were turned into stocks and sold on Wall Street. Since the home loans were bogus in the first place, given to non employed drug addicts with no hope of paying it back, and the banks not only were aware of this fact, but made bets that the loans would fail, my idea and my very first idea on the so called “derivatives crisis” was simple. “Just don’t pay the side bet”. Don’t pay off on the derivatives! So they lose, so what. The banks and insurance companies who sold the derivatives didn’t abide by any “insurance laws or rules”! The bets were just a scrap of paper and a handshake. Don’t pay it. Ahhhhhhhh!!!! But the whole point of this derivative scam is to have “taxpayers pay off their casino bets”….the banksters never had the money to begin with, now we have to pay it off, it’s bullshit.

  • Philip M.

    The Frank-Dodd bill is dominated by banks, because it allows only three carrybacks in residential properties:

    Frank-Dodd Limits on Seller Financing: Only Three Allowable Carrybacks in Residential Property

    We have the lowest interest rates in decades but still more Americans than ever before can’t neither buy nor refinance! This is totally senseless!

    I learned a lot from Robert T. Kiyosaki, but making money will be harder for most folks who start today:

    I hope the Dems get voted out quickly, 4 years of Senate control by the Democrats was enough!

  • David Robertson

    @Greg Pinelli

    The scenario you describe is probably the kind of situation that might be used by the major investment banks, who control the OTC markets in these financial derivatives, to collapse whichever corporation(s) or country(ies) they have targeted. OTC markets trade 24/7 everywhere in the world.

    The NYSE does not trade commodity futures. The COMEX, NYMEX or the NYBOT (ICE) are located in NY.

    In any event the critical factor is always liquidity. It is usual to arbitrage different markets if the timing is against you so market opening times are less important than you imagine. However if the market makers decide to freeze the markets, as they did with sub-prime derivatives, this removes liquidity and you are locked in with no way out.

    This will devastate those who have prices moving against them since leverage in these markets is so extreme. Do not forget that the market makers will take the position opposite to the punters so their profits will be enormous. As someone has mentioned, in these markets there is always one winner for every loser. It is a zero sum game. The only winner is the house, i.e. the market maker.

    The point you make about pooled funds (you mentioned insurance companies) is well taken and no doubt if they are targeted for failure then they will be on the losing side of the trades. Their losses will then make them insolvent under regulatory rules so all their clients will be hung our to dry.

    The most important thing to remember is that this is being done deliberately. The banking elites behind this global manipulation have done it before many times. This just happens to be their biggest lunge for the brass ring to date.

  • “Commodity futures markets serve a real economic purpose. Financial derivatives, even the financial futures markets, serve no economic purpose other than to increase the wealth of the major investment banks”

    David Robertson – Take a bow – quote of the day as far as I’m concerned.

    Hat’s off for once to Hestor at RBS because he came to exactly the same conclusion that the only purpose that the derivative traders provided was to provide themseleves with massive profits.

    Perhaps he’d earned some of his bonus after all!

    What the governments need to do is ban or severely regulate the derivatives market because it’s putting everyone’s savings and pensions at risk. They are now attacking sovereign debt, which brought MF Global crashing down when they called it wrong. It’s also one of the reasons lots of countries ratings are being downgraded because the same investment banks who sold these toxic assets know where – as Max Keiser says – “they know where the dead bodies are hidden!” – so they’re going after them.

    It’s totally immoral and unconscienable but in since when did an investment bank like GS & JPMC give a damn!

  • Jonathan Wilcox

    Does the creation of a derivative contract have a money-creation effect, as does the creation of a loan? I don’t think so, except perhaps marginally insofar as fees are generated which are paid by credit. That said, I have read that derivative contracts are sometimes pledged as security for loans made by shadow banks, which means that such loans are unregulated and unreported (in public); so, indirectly the existence of a derivative brings about the creation of off-the-public-books money. Not a very settling thought, because a default on the derivative contract would likely force any loan secured by the defaulted contract to become due: by this means, a potentially immense collapse of credit could be triggered by a derivatives collapse. In that case, no conceivable amount of quantitative easing (short of hyper-inflation) could replace the resulting of withdrawal of money from the world marketplace. It’s a depressing thought.

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