Most people have no idea that Wall Street has become a gigantic financial casino. The big Wall Street banks are making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end. The word "derivatives" sounds complicated and technical, but understanding them is really not that hard. A derivative is essentially a fancy way of saying that a bet has been made. Originally, these bets were designed to hedge risk, but today the derivatives market has mushroomed into a mountain of speculation unlike anything the world has ever seen before. Estimates of the notional value of the worldwide derivatives market go from $600 trillion all the way up to $1.5 quadrillion. Keep in mind that the GDP of the entire world is only somewhere in the neighborhood of $65 trillion. The danger to the global financial system posed by derivatives is so great that Warren Buffet once called them "financial weapons of mass destruction". For now, the financial powers that be are trying to keep the casino rolling, but it is inevitable that at some point this entire mess is going to come crashing down. When it does, we are going to be facing a derivatives crisis that really could destroy the entire global financial system.
Most people don't talk much about derivatives because they simply do not understand them.
Perhaps a couple of definitions would be helpful.
The following is how a recent Bloomberg article defined derivatives....
Derivatives are financial instruments used to hedge risks or for speculation. They’re derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in the weather or interest rates.
The key word there is "speculation". Today the folks down on Wall Street are speculating on just about anything that you can imagine.
The following is how Investopedia defines derivatives....
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
A derivative has no underlying value of its own. A derivative is essentially a side bet. Usually these side bets are highly leveraged.
At this point, making side bets has totally gotten out of control in the financial world. Side bets are being made on just about anything you can possibly imagine, and the major Wall Street banks are making a ton of money from it. This system is almost entirely unregulated and it is totally dominated by the big international banks.
Over the past couple of decades, the derivatives market has multiplied in size. Everything is going to be fine as long as the system stays in balance. But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix.
The amount of money that we are talking about is absolutely staggering. Graham Summers of Phoenix Capital Research estimates that the notional value of the global derivatives market is $1.4 quadrillion, and in an article for Seeking Alpha he tried to put that number into perspective....
If you add up the value of every stock on the planet, the entire market capitalization would be about $36 trillion. If you do the same process for bonds, you’d get a market capitalization of roughly $72 trillion.
The notional value of the derivative market is roughly $1.4 QUADRILLION.
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 & EVERY BOND ON THE PLANET.
-23 TIMES WORLD GDP.
It is hard to fathom how much money a quadrillion is.
If you started counting right now at one dollar per second, it would take 32 million years to count to one quadrillion dollars.
Yes, the boys and girls down on Wall Street have gotten completely and totally out of control.
In an excellent article that he did on derivatives, Webster Tarpley described the pivotal role that derivatives now play in the global financial system....
Far from being some arcane or marginal activity, financial derivatives have come to represent the principal business of the financier oligarchy in Wall Street, the City of London, Frankfurt, and other money centers. A concerted effort has been made by politicians and the news media to hide and camouflage the central role played by derivative speculation in the economic disasters of recent years. Journalists and public relations types have done everything possible to avoid even mentioning derivatives, coining phrases like “toxic assets,” “exotic instruments,” and – most notably – “troubled assets,” as in Troubled Assets Relief Program or TARP, aka the monstrous $800 billion bailout of Wall Street speculators which was enacted in October 2008 with the support of Bush, Henry Paulson, John McCain, Sarah Palin, and the Obama Democrats.
Most people do not realize this, but derivatives were at the center of the financial crisis of 2008.
They will almost certainly be at the center of the next financial crisis as well.
For many, alarm bells went off the other day when it was revealed that Bank of America has moved a big chunk of derivatives from its failing Merrill Lynch investment banking unit to its depository arm.
So what does that mean?
An article posted on The Daily Bail the other day explained that it means that U.S. taxpayers could end up holding the bag....
This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input.
So did you hear about this on the news?
Probably not.
Today, the notional value of all the derivatives held by Bank of America comes to approximately $75 trillion.
JPMorgan Chase is holding derivatives with a notional value of about $79 trillion.
It is hard to even conceive of such figures.
Right now, the banks with the most exposure to derivatives are JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup, Wells Fargo and HSBC Bank USA.
Morgan Stanley also has tremendous exposure to derivatives.
You may have noticed that these are some of the "too big to fail" banks.
The biggest U.S. banks continue to grow and they continue to get even more power.
Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets. Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.
These banks have gotten so big and so powerful that if they collapsed our entire financial system would implode.
You would have thought that we would have learned our lesson back in 2008 and would have done something about this, but instead we have allowed the "too big to bail" banks to become bigger than ever.
And they pretty much do whatever they want.
A while back, the New York Times published an article entitled "A Secretive Banking Elite Rules Trading in Derivatives". That article exposed the steel-fisted control that the "too big to fail" 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.
So what institutions are represented at these meetings?
Well, according to the New York Times, the following banks are involved: JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup.
Why do those same five names seem to keep popping up time after time?
Sadly, these five banks keep pouring money into the campaigns of politicians that supported the bailouts in 2008 and that they know will bail them out again when the next financial crisis strikes.
Those that defend the wild derivatives trading that is going on today claim that Wall Street has accounted for all of the risks and they assume that the issuing banks will always be able to cover all of the derivative contracts that they write.
But that is a faulty assumption. Just look at AIG back in 2008. When the housing market collapsed AIG was on the wrong end of a massive number of derivative contracts and it would have gone "bust" without gigantic bailouts from the federal government. If the bailouts of AIG had not happened, Goldman Sachs and a whole lot of other people would have been left standing there with a whole bunch of worthless paper.
It is inevitable that the same thing is going to happen again. Except next time it may be on a much grander scale.
When "the house" goes "bust", everybody loses. The governments of the world could step in and try to bail everyone out, but the reality is that when the derivatives market comes totally crashing down there won't be any government on earth with enough money to put it back together again.
A horrible derivatives crisis is coming.
It is only a matter of time.
Stay alert for any mention of the word "derivatives" or the term "derivatives crisis" in the news. When the derivatives crisis arrives, things will start falling apart very rapidly.
The Federal Reserve can print as much money as necessary to stabilize the world’s banking system.
Need $1 trillion? $20 trillion? $500 trillion? No problem. It’s even easier to create it electronically than it is to print it. Of course, it can reach the point where the dollar becomes instantly worthless but no system is perfect.
The Derivatives Crisis! Maybe of 2012! Consider this the revenge of God for what you did to Iran back in 1953 (and to others since). Rest assured that in choosing Crony Capitalism you followed your own filthy evil nature (just like the Fake-Christian “Family”) and you will deserve everything you get. “You Will Die By Your Own Evil Creation”.
Unles Mother Teresa is running these banks, the CEO’s, traders, etc.. will ALWAYS do the wrong thing for the country and will ALWAYS do the right thing to line their own pockets.
As much as I hate to admit it, there needs to be hugh regulatiosn on banks because again, selfishness, greed and power always prevails without restraints.
The answer is a simple one. Failure. Get rid of the FDIC, and make the bank CEO, COO, and President responsible out of their OWN pocket for bad business practices. No more FDIC, no more bailouts, and no more “free money” from the discount window at the FED.
This derivative movement by BofA to have the American Tax payers cover their bets should be considered an act of terror.
The “Too Big To Fails” are plotting to take America down just to protect their own personal needs.
How can we as American citizens stop this move by the banks?
How long can a system based on gambling trillions of dollars sustain? Throw the dice. That is your answer. And, oh yeah… let’s end the nonsensical distraction tactic of the conservative vs. liberal never ending debate. It is nonsense. It is pointless. It is a distraction. While we endlessly debate a small group of of very wealthy, very clever, very powerful people cart away our wealth. How long will we continue to occupy ourselves with nonsense?
I’m not sharp enought to figure out how to make money placing bets on bets, so I just keep going to the office.
I’m also not clairvoyant enough to see how all this will affect the U.S. economy let alone the world.
I’ve worked hard. I paid off my house this year. I paid off my car and my wifes car too.
I have saved some money, and tried to prepare for disasters like hurricanes, and floods. (both are possible here)
I doubt I’m prepared well enough for an economic collapse, but how can someone be prepasred for something of this magnitude?
If you haven’t, trust in Jesus Christ.
777
How to prepare
1. have gold and silver instead of all cash(10% is plenty of gold and silver)
2. Have at least a years worth of food stored up, and the ability to make a sustainable garden for the years after.
3. Have at least 2 weeks of water, and the ability to purify it
4. Have a means of protection
5. Have a “safe house” a location that is away from masses that you can flee to if things get out of control.
When I was 6, hundreds of dollars was a lot of money.
When I was 14 and had had a job for a while, thousand of dollars was a lot of money, but not hundreds anymore.
After a bit of life experience at 18, millions of dollars became a lot of money, but thousands weren’t anymore.
When I started studying politics in college, billions became a lot of money, but millions weren’t anymore.
When I graduated, trillions of dollars was a lot of money, but billions doesn’t seem like much.
Now I read this article and quadrillions becomes a lot of money and I wonder if they’ll let me put a pillow on the table before they bend me over it.
I wonder if Richard Branson will try to colonize Mars anytime soon. Because if so, I’m in.
“I wonder if they’ll let me put a pillow on the table before they bend me over it.”
LOL! Funny stuff. prolly not.
Our biggest threat is the big banks and the world’s leading nations have morphed into a single, very dangerous entity. A total financial collapse is the only remedy to “reset” these atrocities. However, when the big banks fail, the governments will follow. I guess that leads me to my concern of the OWS protests. How can they be against banks but for government? Banks & government have been manipulated by design in which they feed off of each other. Many people are concerned/fearful of a “New World Order”, but as nations still claim their independent sovereignty, the world’s intertwined, global financial system has already made that claim unsubstantiated. The NWO is here, now, conveniently disguised as the “global financial market”………
“How can they be against banks but for government?”
Because they have absolutely no idea what’s going on around them, and that’s the general design of the education system and the news media.
Wall Street Is Going To Collapse And This Will Be All It Takes To Lite The Powder Keg This Country Is Sitting On. The Politicans In This Country Continue To Turn A Deaf Ear To The Fact A Lot Of People Have Told Them Enough Is Enough,
It Seems For People To Get Their Attention, All Hell Is Going To Have To Break Out And The Consequences Will Have To Be Dire,Because All They Are Going To Do With The Protesters Is Sneer At Them And Laugh,And When IT Happens It Surely Will Not Be There Fault.Remember The Riots In Los Angles After The Rodney King Beating,Only This Will Be Ten Times Uglier.
where is the law?..where are the people to say stop.why are they getting away with this?im from fiji and my mind boggles at the figures of money that the elite hog.this is financial terrorism.
PBS Frontline did a program titled “The Warning”. If you can view this you will learn what this country is in for regarding derivatives.The woman who exposed or tried to was run right into the ground to cover it up. We are indeed in trouble.
I would be very interested in watching that.
Anyone have a link?
Michael
http://www.youtube.com/watch?v=H3HmV43Zs-M
Thank you!
Michael
-40 TIMES THE WORLD’S STOCK MARKET.
-10 TIMES the value of EVERY STOCK & EVERY BOND ON THE PLANET.
-23 TIMES WORLD GDP.
If it were in $1 bills, it would cover the WORLD with a layer of paper 1.24 inches.
THAT is $1.4Q in practical terms.
How much money you have in your pocket???
Excuse me… 1.24″ thick.
just what the ptb want.to collapse fdic so as to loot all depositors one trillion leveraged 100 to one….is 100 trillion…. to bad with 100 trillion entering the game, 1 trillion is worth only 10 billion…..? and your saving account of 20,000 is only worth 200 bucks. gotta wonder the kickback politiciams got for this..????
It’s not economy, it’s gambling.
It’s NOT gambling.
It’s a SURE THING – for them.
If only the odds in Las Vegas were as good.
When I play blackjack or craps there, I usually lose. The big boys “crap” all over us little people, and they win.
Forgive me Michael, I kept thinking you were misspelling national with notional. Never saw the word before, but for those who need to know as I did: http://www.thefreedictionary.com/notional
Anyway, obviously the word of the month has to be “Derivatives” I hope I don’t see that word in the lamestream media until after the winter, otherwise it’ll be a very hard season on all of us.
Blessings to you brother, hope all is well.
Let’s call a spade a spade. It’s the same with quantitative easing = money printing.
Derivatives = gambling.
Just fancy terminology.
David M
Yep. And when that happens, it won’t matter which party you are loyal to, all will be swept away in the tsunami that follows as the political factions are tied to the banks & vice versa.
economic ***********, when the *********** storm arrives you will be the first one on the chopping block..and no, I’m not talking about losing your job but more like your head. The new world order has no space for pea brained conspiracy nuts.
Derivatives are basically a Ponzi scheme.
It’s like selling earthquake insurance on a fault line. They gladly take the money for the premiums and spend it. However, in the event of a earthquake there is absolutely no way they could pay the actual claims. They are counting on being to big to fail and the government bailing them out again.
Wow, I wonder how the Dodd-Frank bill overlooked doing anything to regulate these dangerous financial instruments. What a bunch of corrupt politicians. The democrats and some republican politicians passed this act. Anyone who voted for this act should be voted out of office. They really sold us all out for the benefit of the big banks.
Bingo!
And just for that – you deserve a Social Security check for $000.00. The Treasury Secretary personally signed it!!
amerika used to make things now it makes things up. the rebuplicanterrorists have consistently supported selling bets on bets(financial make believe jobs) and support the outsourcing the good union jobs(manufacutring jobs) in the name of amerika and kapatalism and you buy these lies!! why do these hedge fund traders pay only 15% tax rate while u pay much more?? the rebuplicanterrorists consider you pesants and you are Google walmart pesant insurance!!!!
i dare uuuuuuu
CULT OF PERSONALITYhttp://www.youtube.com/watch?v=7xxgRUyzgs0 I EXPLOIT YOU STILL YOU LOVE ME I TELL YOU ONE PLUS ONE MAKES THREE!!!!
I normally agree with this website, but in this case, I find it impossible to believe that derivatives can and will bring down the banking system. The main reason is that when someone loses money, someone else makes money, it’s that simple. No, this absolutely can not happen.
Forrest:
If the “house” can’t pay, both sides lose.
Michael
The “house” should never need to pay, because derivatives are always one party petting against another party, and the broker in the middle just takes a fee. This is not the problem at all, but I’ll explain the real problem.
Party A makes a win, so they demand their money, Party B makes a loss and the loss is huge so they demand a government bailout, else they will collapse and take the system down with them. The government guys have no market experience but they get terrified that something bad might happen to their pensions so they hand over the bailout. In order to pay the bailout they sell government bonds which get bought up by Party A.
Now future taxpayers are in debt to Party A for a long, long time.
The fundamental problem is that this is a standover operation… banks threaten the government with financial instability and government is pissweak (and typically corrupt) so they buckle easily. Once the banks learn that this process works they keep going: rinse and repeat.
As more and more people understand that the system is rigged and the rule of law has broken down, they stop participating constructively and focus on their own personal survival. This accelerates towards systemic collapse. These people would use the democratic system to restore the rule of law if that were an option, but both parties are more interested in supporting big business than anything else. As it gets to the point where some sort of hardship becomes inevitable, each tribal group tries to blame the other side for causing the problem.
Tell those 2,500 elite mass murdering thieves to stick those dirivates up their arse. We don’t owe and we sure as Hell won’t pay.
Gotta love the capitalist system and deregulation. Not workin out too well is it?
From the Christian Science Monitor:
The standard of living for Americans has fallen longer and more steeply over the past three years than at any time since the US government began recording it five decades ago.
Bottom line: The average individual now has $1,315 less in disposable income than he or she did three years ago at the onset of the Great Recession – even though the recession ended, technically speaking, in mid-2009. [...]
“The pace of change has been incredibly rapid and incredibly tough on the less educated,” says Mr. Zandi, who calls this period the most difficult for American households since the 1930s. “If you don’t have the education and you don’t have the right skills, then you are getting creamed.”
Yes folks this is capitalism at its best working just as it is designed to. Time to rethink this disastrous unstable economic system that brings one recession and depression after another on a regular basis. Can’t argue the facts-capitalism is not stable, just look back at history.Every ten years or so another crash, each being worse than the last.
Gary2
Capitalism works. The 20th century was for the most part brought to us by capitalism. I can’t name any items that propelled mankind into the modern age coming from communism.
The above being said it’s the lack of regulations on capitalism that has caused the problem. Abandoning tariffs and replacing it with “Free Trade” with slave labor nations and de-regulation across the board specifically the demise of Glass-Stegall laid the groundwork for our fall.
I like computers, cutting edge medical procedures, cell phones and the like. I don’t like the financial fox left in charge of the chicken coop.
Bottom line: the average citizen of the US owes a share of their government debt equal to about $48k which is a lot more than most of them can afford.
Tel
The debt is constantly paid off with devalued currency and higher prices. Remember the ten cent coke, nickel candy bar and nice new $2700 car?
Michael-and you need to ask why there is an occupy wall street movement? You answered your own question in you above excellent post among other reasons.
Les Leopold has a good explanation in his latest book:
The Looting of America: How Wall Street’s Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It
http://www.amazon.com/Looting-America-Destroyed-Pensions-Prosperity/dp/1603582053/ref=sr_1_1?s=books&ie=UTF8&qid=1319171096&sr=1-1
Americans love it complicated. It is not enough to have the VIX to describe or measure volatility. The VIX, which has no value or substance, can be traded. That is worse than betting on a horse or a dog.
When the derivatives crisis hits, who do you want at the helm? Cain, Romney, Bachmann, Obama, none of the above?? Given the Balkanization of America, I think we are all going to be at our own helms soon.
The only way out is the tough way. Give me a nut cracker any day. I would rather go down swinging, than with a whimper.
They are basically placing bets that potentially no money in the world could pay out. The bailouts is frequently nothing more than 100% compensation of bet winners via obscured stories of helping out (bet loosers).
Or look in this way: with every mortgage “new money” is created, right? During the subprime debacle, Credit Default Swaps (CDS) on subprime bonds were abstractly considered as equivalent to new issues of subprime mortgages – the investor demand for them was that mad. This lead to the infamous synthetic CDO bonds, and perhaps quite a few CDS on them. So here is a hitch: the CDS was indeed equivalent to mortgage bonds, except in chronology. A mortgage contract “crates” new money first, and then come the regular payments. The CDS is an “insurance”: first come regular payments, and then – bah! – a full scale compensation. Where does money come for the compensation?! Some ad hoc bailout action, of course.
Some say that short sellers (for whom CDS is indispensable) add invaluable signals to the market. Well, if we would have more smart “investors” into the subprime bubble collapse, the TARP packages would had beenaccordingly many times larger!
I am watching all of this from South Africa. It is just a question of time before the whole crooked system collapses. We do have our own challenges, but I would not like to trade places with anyone in the USA. However, the coming collapse will affect all of us. At least one who sees what is coming, can take steps to prepare. Personally I think the age of working until retirement and sitting back thereafter has come and gone. So-called “sensible” investment planning has become meaningless. planning to survive the coming storm is more appropriate.
America seems to face many challenges:
-Corporations are outsourcing jobs overseas
because:(i) It is cheaper and (ii) There are
fewer laws and regulations to comply with.
-Without proper jobs the housing market can
never recover.
-The economic system is doomed to fail. Any
person with even a few brain cells can see
that to print money from nothing is just not
sustainable. Propaganda from the MSM can delay
things. However, as they say, you can fool
some of the people some of the time, but not
all of the people all of the time.
-I do not understand how any economist can have
the idea that you will ever be able to repay
your debt, whether personal or government
debt.
-We here drive mostly German or Japanese cars.
American cars do not have a very good
reputation in this part of the world.
Personally I do like your electronic gadgets,
manufactured in China!!!
-Personally, I am also sceptical about doing
business with people selling you
worthless “investments”, like CDS swaps,
derivates and so on. To bundle worthless
mortgages together, give it a AAA grading and
sell it to unsuspecting investors is just not
ethical. This damages your credibility in the
eyes of the world. People that were stung once
will not remain suckers.
-As the sole surviving superpower, everybody
used to be careful of dealing with the US.
After seeing the weaknesses of your forces
exposed in Iraq and Afghanistan, more enemies
may decide to challenge you in the
future.
-If the SHTF, there are enough weapons in
circulation in the US to make surviving there
interesting, to say the least.
Good luck to all the good folks out there.
I do appreciate sites like yours and all the work that goes into compiling the articles.
Thanks.
Gary, you are seriously uneducated. Be honest, are you still in high school? Capitalism is not the fault. Capitalism would have NEVER bailed out these guys, they would have failed, and other stronger companie without risky ventures would have stepped in. Gov’t interference is the cause of the ENTIRE problem. The housing bubble was caused by gov’t interference when mandating interest rates stay ARTIFICIAlLY low, and demanded banks give loans to unqualified borrowers or face penalties. NONE of that happens in a free market. We live in a fascist state.
http://mises.org/daily/5752/The-Fascist-Threat
I know you have NO desire to educate yourself. You have “learned” enough from the proapganda our state education system has given you to be dangerous, but you have perhjaps the most closed mind of any who come here. You fail to see the obvious in that this administration has received the most campaign dollars from Wall Street of any in US history. The administration is fuill of appointees right out of Goldman Sachs, yet you say wall Street is the problem. You have no earthly clue what the Federal Reserve is or does, and how intertwined all three are. You don;t WANT to know, after all, you are what Marx called a “useful idiot” there to be loud and do the bidding of those you protest.
More for the benefit of those with truly open minds:
http://mises.org/daily/5753/Occupied-by-Government
This one really highlights how utterly clueless the Sesame Streeters are about how an economy works:
http://mises.org/daily/5761/What-Radicalism
http://mises.org/daily/5773/In-Praise-of-the-Capitalist-1-Percent
“In the world of the protesters, means of production have the same essential status as consumers’ goods, which as a rule are of benefit only to their owners. It is because of this that those who share the mentality of the protesters typically depict capitalists as fat men, whose plates are heaped high with food, while the masses of wage earners must live near starvation. According to this mentality, the redistribution of wealth is a matter merely of taking from the overflowing plates of the capitalists and giving to the starving workers.
Contrary to such beliefs, in the modern world in which we actually live, the wealth of the capitalists is simply not in the form of consumers’ goods to any great extent. Not only is it overwhelmingly in the form of means of production, but those means of production are employed in the production of goods and services that are sold in the market. Totally unlike the conditions of self-sufficient farm families, the physical beneficiaries of the capitalists’ means of production are all the members of the general consuming public who buy the capitalists’ products.”
PERFECTLY states how short sighted, uneducated, and brainwashed the Gary’s of the world are. Like Marx said, useful idiots.
Michael, thanks so much for this informative article. Considering the complex nature of the subject, the article is clear and concise, yet remarkably comprehensive. Your intelligent readers left many excellent comments as well. Bless you, sir, and Godspeed in your efforts to alert American voters to impending catastrophe.
Thank you Sandy.
And I encourage people to go check out Sandy’s website….
http://www.sandystringfellow.com/index.html
Michael
I say there son, you listening to me son?, I say there, let us not throw the rich under the bus. We need them.
I say, save our rich folk, lower their taxes.
Holy coladeralized debt obligation Batman… how are we going to get out of this one…
So how does one prepare for the coming repeat crisis, especially if we have money in one of those “too big to fail” banks or Merrill Lynch ? (short of moving money to a credit union. Though doesn’t that just weaken banks further? A run on the banks?)
Maybe the whole damned thing needs to come to a spectacular collapse so we can all learn from scratch what really matters….after the survival of the fittest law cleans house, that is.
For us on the supply side of silver mining that have not been able to raise dollars to actually mine metals needed for solar energy because of silver ETFs — we know all about the dangers of Monopoly Money.
This is why more miners bite a paper dollar, of late and finding it isn’t real, are suggesting their wives take in laundry to pay for other commodities as fuel, and food, to replay loans in real silver dollars.
Best definition of a derivative: You’re at the track. Beezelbub & Bernanke-Bites are walking towards the gate. You bet your buddy which horse poops first. That’s a derivative of who wins the race. Ask Henry Paulson & Lloyd Blankfein what derivatives are.
I do not see how the events that will soon be upon Europe, Asia, and the United States financial system will save the global economy.
Europe is unable to find a real solution to their financial problems. I just read an interesting article about the Chinese bubble that may soon burst. As for the United States, we all know national debt is going up faster than a speeding bullet. It now stands at a record 14.9 trillion dollars when just two months ago it was 14.3 trillion dollars. Now throw in the derivatives and there can be no doubt that the global ecomomy will collapse.
Criticize derivatives at the risk of being labeled a communist or socialist – even after the derivatives explosion. That is if a nuclear one does not take place first.
If you think that’s a little too much, you unfortunately would be incorrect.
Buckle up.
Along with the implosion of all financial assets will be the discovery that there are more gold and silver contracts long than there is gold and silver to satisfy.
Better load up on PHYSICAL gold and silver before its too late.
http://gainesvillecoins.com
Buy now before its too late.
don’t forget about naked short selling. The crooks have sold everything under the sun, with no intention to deliver it.
Look it up -it’s everywhere.
Most Derivatives are harmless- options and futures since they expire. But CDO’s and CMO’s are a mix of good and bad debt. Now Europe has the same problem since debts are mixed like scrambled eggs and cant be unscrambled or un broken. Gold anyone?
Derivatives are not harmless. I remember another derivatives blow-up 25 years ago that wiped out whole municipalities and school systems. These people were told (translation: lied to) that derivatives were safe investments and were left in terrible debt which the taxpayers, as usual, had to pay for. I don’t think anyone went to jail back then either.
It is simple to overcome this issue, just force the banks into bankruptcy reorganization. This will allow the banks to continue to trade under their charter in a more controlled environment with the reintroduction of the Glass Steagall Act, and the derivative debt is cancelled. Like you or I, if we are bankrupt…all debt is cancelled and we move forward in a limited financial way for a period of time. In this case with the banks, all debts are cancelled but allowed to continue trading providing they operate under the Glass Steagall Act. NO Glass Steagall Act, next election, vote only for the Representative who supports this idea. Simple….ahhh…sorry for my ignorance…forgot…you are dealing with politicians who are easily bought off due to their own illusion of grandeur and self worth. Its time for a few guilty culprits to face jail.
who writes these articles?
Here’s an idea… everybody stop paying their mortgage and credit card bills and let the games begin.
Been saying that since 2008. I hope it catches on. Include taxes also.
You need to STARVE THE BEAST!
Great article. Only one thing missing. How do we protect ourselves from this monster? Gold, silver, food, ammo, and water are the obvious, but is there something that we can do with our retirement savings(some of us still have 25 years of planning to do) etc?
I never signed one of these contracts. Did you? It seems that we taxpayers should insist that our Congress critters refuse to backstop or prop up any derivative contract. Let the speculators alone suffer for their actions. They entered that market to ESCAPE THE NORMAL REGULATORY HURDLES REQUIRED IN CONVENTIONAL MARKETS. They should bear sole risk.
This is a criminal enterprise of the highest order. There can be only one resolution to the endless looting of our Treasury.
GOOGLE; CLASS ACTION LAWSUIT AGAINST THE FEDERAL RESERVE BANK..OR FOLLOW THE LINK BELOW TO THE PLAN;
http://www.zerohedge.com/print/365866
Easy solution…have a world finance ministers meeting and declare that all credit derivative products and those participating in them amount to terrorist acts being inflicted upon humanity.
Give a 30 period to disband them to all market participants. Then start smart bombing the holdouts.
The solution is very kiss! I can solve the problem beyond question! A simple solution? Sincerely, your mentor!!!
Sounds like another bailout for the “too big to fails” that we can’t live without!
I would like to recommend a book that tells you all about “The Quant’s” by Scott Patterson. The maths geniuses who brought down Wall Street, The frightening thing is that the Quants are still at it.The coming Deriviatives crisisis could happen any day soon.
Ladies & gentlemen, boys & girls, this is going to get bad – REALLY BAD! As we speak there is occurring a steady withdrawal by depositors from the “Too Big To Fail Banks”- a silent but deadly run on the banks.The world banking system is on the edge of dangerous precipice that is threatening international equities and bond markets. Investors and savers need to prepare for a financial avalanche by moving their wealth into gold and silver immediately. Please don’t delay as time is of the essence.
Understanding the puzzle of derivatives
The Commodity Futures market is one of the largest derivative trading arenas with many commodities; currencies; precious metals; and energy products listed – .
It all revolves around “Price” and “Time”. You will notice that on all traded contracts there are time periods listed noted by contract months going out up to three-years out.
Whatever the price is today (minute by minute as the contracts are traded) someone can buy or sell a contract with a 1% to 3% of the value of the contract in their account (buying or selling on margin)
Most from the public are psychologically conditioned that they have to buy first and then sell to make a profit. In derivatives that is 100% incorrect. You are making a “time” bet for higher or lower prices. If you think the value is going down, you sell a contract. If you think it is going up you buy a contract.
With the markets now primarily being traded electronically, when a buy or sell order is entered and at your price your fill usually is instant. This means you can jump in and out at your choice. If you choose it could be 10 minutes, an hour, a day, a week, or longer that you hold your position. The following is an example of the best profit in the shortest period I personally made:
It was back in 1981 and on on day when I was watching silver towards the close, it looked like it was very top heavy after moving up a few dollars over a couple of weeks. I said to myself: “I think it is going to collapse in the last few minutes before the close. It was 4-minutes to the close and I at that time having an account balance of about $32,000 slapped in two orders; (SELL) 35 DEC SILVERS at Market, and (BUY) 35 DEC SILVERS (Market on Close)
Well, got filled on the 35 sell orders in about 5 seconds and in the next 4-minutes silver collapsed by 42c where my Market on close orders were filled. No more 35 derivative orders held, just accounting of the instant CASH collected on the trade. Here is the accounting: 42c X 35 = $14.7 X $5,000 ($1 value of a silver contract move) = $73,500 + $32,000 (my account balance before the trade)= $106,500 (account balance after the trade) or not bad after a 4-minute derivatives trade. Now those that had the “other side” of the trade got burnt. The commissions I was paying at that time was about $15 per contract X 35 contracts traded = $525 that went to the House and exchange that “cleared” the trade.
Most commodity contracts have active participation in the front months but the further the time goes out participation dries up and thus no liquidity to trade those contracts.
For every contract being that it is a bet on “time” will reach its expiration and delivery day. When that happens all speculators are out and those wishing to take or make delivery stay in to the last day and then the exchanges match up the “real” buyers and sellers to each other on the outstanding contracts where physical delivery of the underling commodity is made.
Come that last day the volume of contracts held dries up to usually less that 1% of what it was a few days earlier (over 99% were speculators and less than 1% actually wanted to take or make delivery)
The 600 trillion notional value is: the value of all the bets.
EXAMPLE: on the commodity futures market has a $100,000 face value of the bet and the margin requirement to hold it over night is $2,500 and day trading margin can be $1,000. As of today the “Net” contract volume is at about 289,000 contracts. So based on notional face value that is 289,000 X $100,000 = $89 billion-dollars but the “margin deposits being used is substantially less.
So that 600 trillion is the “full contract value” of all contracts being traded. That 1.5 quadrillion is when you take into account both sides of the contract. For every buyer holding a contract there is a seller holding the other side. So when counting each side 600 X 600 = 1.2 quadrillion.
Here is the “Bottom Line”:
With 99% speculators, yes it is a casino. But “who” are the primary players that are liquidating tens of billion of dollars a day from the trading activity (remember when the trade is closed in 5-minutes or 5-months it is all a “cash” accounting for the winner’s and loser’s account balances)
Well, those from the general public that tries to play this game, they get their account balances decimated to the tune of 98% of those player that participated in very short periods of time. (bought on highs; sold on lows; got stopped out or force liquidated for not having the proper margin after being depleted from quick adverse market moves)
So who are that 2% factor that takes everyone’s money to the tune of over a few trillion dollars a year (some times in a month as happened at the end of 2008) ?
The answer may surprise you. Now the House and the Exchanges get a small cut from each side. There are a few magnates on the inside track that also make good money: But the “Primary” profiteer for several decades now are: Institutional Government Fund Management.
They in so many words all subscribe to the same News Services and consulting groups. They have the fund resources in trillion dollar collective totals managed from around the globe. They can act in loose concert and roll the markets up; down; sideways and do so as fast or as slow as they wish.
The end of 2008 showed how fast they could move the markets by exercising their multi-trillion dollar trading accounts and massive contract volume they can move in and out.
At the end of 2008 in a month and a half about 25 to 30 trillion-dollars was “sucked” right out of players accounts globally that were on the wrong sides of the trades. Now some government investment funds where they were on the outside track got burnt. The primary government institutional global accounts that “were” on the inside track made a killing of several trillion dollars.
Now here is the definition of arrogance:
Government (USA) global institutional funds now after having liquidating trillions out of the playing loser’s accounts at the end of 2008, (which caused massive defaults from the loser’s who ended up with severe deficit account balances)now uses a trillion here and a trillion there of taxpayer revenue to shore-up their own casino and friendly corporate interests.
Is there a “bubble” in the derivatives market?
As of 2009, Oh yes.. You can not suck so many trillions out of others accounts at the end of 2008 without destabilizing the playing field. Commodity futures contracts back then were settled after weeding out defaults so back to normal there. I note the definition of normal is those government institutional accounts rolling the market up and down, quick and slow; as they liquidate that 98% factions cash on the trades.
The danger lies in those “Mortgage Interest Rate Swaps” where there is a substantially reduced value of the underling commodity and in some cases the contract instrument traded had no underling commodity to back it up at all(real-estate home and commercial properties)
Here the balancing act is precarious to say the least. Offsetting those contract instruments to balance out with “real” underling value market to market is a nightmare for the players.
Those trillions in bailouts to the global banks and financial institutions have primarily gone to that end.
Are they getting closer to balancing the books? Yes..
Are they there yet? No, they are about 60% there and it will take more time to balance the remainder and the beat goes on..
Walter Burien – (CTA) Commodity Trading Advisor) 1978 – 1992 and commodity Futures Trader of 33 years.
Thanks for your enlightening explanations on the derivative markets. I had no idea the depth of government involvment in these areas. Therefore I expect if things get really dicey, The Rules will be changed- to benefit the rulers of course! Good luck to you, sir.
Why do the nations rage and the people’s plot in vain?
toibry.blog.com
Understanding the puzzle of derivativesThe Commodity Futures market is one of the largest derivative trading arenas with many commodities; currencies; precious metals; and energy products listed – Futures Market It all revolves around "Price" and "Time". You will notice that on all traded contracts there are time periods listed noted by contract months going out up to three-years out.Whatever the price is today (minute by minute as the contracts are traded) someone can buy or sell a contract with a 1% to 3% of the value of the contract in their account (buying or selling on margin)Most from the public are psychologically conditioned that they have to buy first and then sell to make a profit. In derivatives that is 100% incorrect. You are making a "time" bet for higher or lower prices. If you think the value is going down, you sell a contract. If you think it is going up you buy a contract. With the markets now primarily being traded electronically, when a buy or sell order is entered and at your price your fill usually is instant. This means you can jump in and out at your choice. If you choose it could be 10 minutes, an hour, a day, a week, or longer that you hold your position. The following is an example of the best profit in the shortest period I personally made:It was back in 1981 and on on day when I was watching silver towards the close, it looked like it was very top heavy after moving up a few dollars over a couple of weeks. I said to myself: "I think it is going to collapse in the last few minutes before the close. It was 4-minutes to the close and I at that time having an account balance of about $32,000 slapped in two orders; (SELL) 35 DEC SILVERS at Market, and (BUY) 35 DEC SILVERS (Market on Close)Well, got filled on the 35 sell orders in about 5 seconds and in the next 4-minutes silver collapsed by 42c where my Market on close orders were filled. No more 35 derivative orders held, just accounting of the instant CASH collected on the trade. Here is the accounting: 42c X 35 = $14.7 X $5,000 ($1 value of a silver contract move) = $73,500 + $32,000 (my account balance before the trade)= $106,500 (account balance after the trade) or not bad after a 4-minute derivatives trade. Now those that had the "other side" of the trade got burnt. The commissions I was paying at that time was about $15 per contract X 35 contracts traded = $525 that went to the House and exchange that "cleared" the trade.Most commodity contracts have active participation in the front months but the further the time goes out participation dries up and thus no liquidity to trade those contracts. For every contract being that it is a bet on "time" will reach its expiration and delivery day. When that happens all speculators are out and those wishing to take or make delivery stay in to the last day and then the exchanges match up the "real" buyers and sellers to each other on the outstanding contracts where physical delivery of the underling commodity is made. Come that last day the volume of contracts held dries up to usually less that 1% of what it was a few days earlier (over 99% were speculators and less than 1% actually wanted to take or make delivery) The 600 trillion notional value is: the value of all the bets.EXAMPLE: a 30 Year Bond on the commodity futures market has a $100,000 face value of the bet and the margin requirement to hold it over night is $2,500 and day trading margin can be $1,000. As of today the "Net" contract volume is at about 289,000 contracts. So based on notional face value that is 289,000 X $100,000 = $89 billion-dollars but the "margin deposits being used is substantially less.So that 600 trillion is the "full contract value" of all contracts being traded. That 1.5 quadrillion is when you take into account both sides of the contract. For every buyer holding a contract there is a seller holding the other side. So when counting each side 600 X 600 = 1.2 quadrillion.Here is the "Bottom Line":With 99% speculators, yes it is a casino. But "who" are the primary players that are liquidating tens of billion of dollars a day from the trading activity (remember when the trade is closed in 5-minutes or 5-months it is all a "cash" accounting for the winner’s and loser’s account balances)Well, those from the general public that tries to play this game, they get their account balances decimated to the tune of 98% of those player that participated in very short periods of time. (bought on highs; sold on lows; got stopped out or force liquidated for not having the proper margin after being depleted from quick adverse market moves) So who are that 2% factor that takes everyone’s money to the tune of over a few trillion dollars a year (some times in a month as happened at the end of 2008) ?The answer may surprise you. Now the House and the Exchanges get a small cut from each side. There are a few magnates on the inside track that also make good money: But the "Primary" profiteer for several decades now are: Institutional Government Fund Management. They in so many words all subscribe to the same News Services and consulting groups. They have the fund resources in trillion dollar collective totals managed from around the globe. They can act in loose concert and roll the markets up; down; sideways and do so as fast or as slow as they wish. The end of 2008 showed how fast they could move the markets by exercising their multi-trillion dollar trading accounts and massive contract volume they can move in and out. At the end of 2008 in a month and a half about 25 to 30 trillion-dollars was "sucked" right out of players accounts globally that were on the wrong sides of the trades. Now some government investment funds where they were on the outside track got burnt. The primary government institutional global accounts that "were" on the inside track made a killing of several trillion dollars.Now here is the definition of arrogance:Government (USA) global institutional funds now after having liquidating trillions out of the playing loser’s accounts at the end of 2008, (which caused massive defaults from the loser’s who ended up with severe deficit account balances)now uses a trillion here and a trillion there of taxpayer revenue to shore-up their own casino and friendly corporate interests.Is there a "bubble" in the derivatives market?As of 2009, Oh yes.. You can not suck so many trillions out of others accounts at the end of 2008 without destabilizing the playing field. Commodity futures contracts back then were settled after weeding out defaults so back to normal there. I note the definition of normal is those government institutional accounts rolling the market up and down, quick and slow; as they liquidate that 98% factions cash on the trades.The danger lies in those "Mortgage Interest Rate Swaps" where there is a substantially reduced value of the underling commodity and in some cases the contract instrument traded had no underling commodity to back it up at all(real-estate home and commercial properties)Here the balancing act is precarious to say the least. Offsetting those contract instruments to balance out with "real" underling value market to market is a nightmare for the players. Those trillions in bailouts to the global banks and financial institutions have primarily gone to that end. Are they getting closer to balancing the books? Yes..Are they there yet? No, they are about 60% there and it will take more time to balance the remainder and the beat goes on..Walter Burien – (CTA) Commodity Trading Advisor) 1978 – 1992 and commodity Futures Trader of 33 years.
http://CAFR1.com
Hi Walter,
What do you figure the odds are of the next crisis coming before the books are balanced enough to bail out the losers again?
One thing that always seems to be forgotten is that we the people have no standing with the us government! It is a little known fact that since FDR had no authority to confiscate gold under norman law he invoked the “TRADING WITH THE EMEMY ACT” left over from WW1 and thus by declaring US citizens the “ememy” he could impose ccomfiscation on them.The “TRADING WITH THE ENEMY ACT” has never been repealed nor has the declaration of US citizens as “the enemy”. we taxpayers are the enemy of the US and thus our protests are mmeaningless!
Awful and sad but true! We need to rid ourselves of our elected Emperor and his Nobility in congress!
The derivatives in my opinion, and others here may or may not be a threat. What is a real threat is the overvalued assets allowed on banks balance sheets, which just prolong the eventual re-evaluation.
The AIG “derivatives” were actually just mortgage insurance that any one could buy. They were not limited to the entities that made the loans. So all the financial powers and insiders bought insurance (derivatives) on these loans, knowing full well many if not most would defualt and they would collect full value on real estate loans that they had not even made.
This is why Greenspan, Paulson and the others allowed and encouraged ridicuously easy loan quaification and “liars loans” without any income verification. It was the biggest insurance fraud in world history. Would Jewish financiers and other like minded people commit insurance fraud? Is there a fat ass in America?