The Monstrous Resurgence of Financial Derivatives

OTC Derivatives

If you squint at my graphic from the Bank of International Settlements, which is denominated in billions, you can (barely) see that the amount outstanding in over-the-counter financial derivatives is on the order of…

Six hundred thousand billion dollars. more than six hundred trillion dollars, $600,000,000,000,000, which works out to $100,000 for every living human being.

It gets worse.

These stats from the Bank of International Settlements only include over-the-counter derivatives, and that’s only about half the market!

In the other main category of “listed derivatives,” there’s approximately the same amount of derivatives all over again, and that brings the grand total of financial derivatives on Planet Earth to slightly more than one QUADRILLION  dollars, and that’s about $200,000 for every living human being, but…

It gets worse, at least for us (potentially) very, very unlucky Americans, because we account for about one fourth of the global economy, with a GDP of $16 trillion out of a global GDP of about $65 trillion, and that means that our share is about one fourth of all those financial obligations, which is approximately $300,000,000,000,000, three hundred trillion dollars, or a little more than…

One million dollars for every living American.

And since all my figures only account for the most recent statistics available from BIS and other sources, and all those numbers were actually increasing when last reported, for example, from $547 trillion in December 2008 to $604 trillion in June 2009, the total amount of financial derivations today is almost certainly even more monstrous than what I described.


Note: Although “official sources” constantly deny that anyone will ever be forced to cover all these monstrous bets, it’s instructive to consider what actually occurred in Iceland, rather than trusting the opaque assurances of financial insiders.

After derivatives bankrupted three Icelandic banks in 2009, liability was assigned to the entire nation of Iceland, in the amount of about $18,000 for every citizen.

An equivalent disaster in the United States would amount to about $5.4 trillion, and since the credit of the United States is already fully extended, to say the least, an additional $5.4 trillion in federal debt could only be generated by a tsunami of “fiat currency” from the Federal Reserve, with approximately the same outcome as Weimar Germany attained when they tried to print their way out of monstrous debts, and 50,000,000 marks wouldn’t even buy you an egg.



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  1. And if you’re wondering who could possibly be responsible for the astonishing expansion of financial derrtivatives after the meltdown which destroyed our economy, the answer is…

    Probably nobody, because nobody was responsible for the astonishing expansion of financial derivatives before the meltdown.

    In testimony before the Financial Crisis Inquiry Commission yesterday, Alan Greenspan pretty much adopted the Shaggy defense: Interest rates? It wasn’t me. Deceptive lending practices? It wasn’t me. Unchecked excesses on Wall Street? It wasn’t me. They even got us to deregulate! It wasn’t me.

    Better culprits, according to Greenspan, included the fall of the Berlin Wall, Congress, developing economies, and systemic complexity. Left unanswered is what would’ve happened had Greenspan walked out and said that there’s a global savings glut powering a housing boom that’s being repackaged by a finance sector that has become too complicated to regulate and people should proceed with extreme caution and Federal Reserve regulators should adopt a more jaundiced eye.

    • Edger on April 9, 2010 at 11:49 pm

    The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going

    In late 2005, the booming U.S. housing market seemed to be slowing. The Federal Reserve had begun raising interest rates. Subprime mortgage company shares were falling. Investors began to balk at buying complex mortgage securities. The housing bubble, which had propelled a historic growth in home prices, seemed poised to deflate. And if it had, the great financial crisis of 2008, which produced the Great Recession of 2008-09, might have come sooner and been less severe.

    At just that moment, a few savvy financial engineers at a suburban Chicago hedge fund helped revive the Wall Street money machine, spawning billions of dollars of securities ultimately backed by home mortgages.

    When the crash came, nearly all of these securities became worthless, a loss of an estimated $40 billion paid by investors, the investment banks who helped bring them into the world, and, eventually, American taxpayers.

    Yet the hedge fund, named Magnetar for the super-magnetic field created by the last moments of a dying star, earned outsized returns in the year the financial crisis began.

    How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.

    According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

    Along the way, it did something to enhance the chances of that happening

    , according to several people with direct knowledge of the deals.

    Read it all here…

  2. I wish we would just ban activities/instruments that don’t serve a public purpose.  

    • David R on April 10, 2010 at 7:10 am

    Bear with me, it’s late and I’m experiencing sleep deprivation.

    I used to have a savings account with a bank (Union Planters, may they rot in hell).  Foolishly, I simply left my initial deposit in the savings account, and as I was a struggling graduate student at the time, I didn’t put any more money in.  After a while, the bank started charging me $5 a month for having an inactive account.  Now, as I understand it, a savings account is a good thing for a bank, because it is the money that is semi-permanently there, which allows them to make investments, offer loans, etc.  Savings accounts is a significant part of how banks earn money, or so I believe (I may well be wrong, especially these days when financial transactions are largely mass hallucinations or mutual frauds).  Essentially, I gave them my money, and then because I didn’t give them any more money, they started taking away the money I had given them.  This notion that I need to give them more money when they are, in fact, using my money for their own benefit to begin with, is largely an intellectual construct on their part, but one which they can enforce because they have laws and lawyers on their side, and I don’t.  But basically, it’s imaginary.  The need, the justification, for them to take away my money in the inactive savings account is a mental construct which is simply agreed upon and enforced by society, even though it has no basis in reality.  The bank wasn’t losing anything by holding on to my money, whether I added more to my savings or not, and had no good reason for taking any of that money away, but simply the power and desire to do so.

    So, back to the present time.  Most poor folks, like myself, have a job.  We work, we earn a paycheck, and we spend most of that paycheck on things like food, shelter, transportation, and entertainment.  All of which is tangible.  Most of us deal in tangible things.

    But this financial wizardry doesn’t seem to be based on tangible items.  It’s based on bets, and guesses, and outright lies.  Didn’t I read somewhere recently (like here, a few days ago) that the gold market is based on a quantity of purely imaginary gold reserves around a hundred times greater than the actual amount of physical gold?

    These quoted monetary amounts have no physical basis in reality, as far as I can tell.  They are basically imaginary constructs, tied to physical reality only in the fashion that homeopathic drugs are tied to concentrations of real chemicals (diluted several hundred-fold, at least).  It’s like a marshmellow peep, full of air.

    Why do we let this stuff affect the real world?  We’ve got a nation full of houses and buildings, perfectly good, that are going to ruin and waste because we put an imaginary price on them that is way out of line with reality.  Why not just move in?  

    Is there a way we can deflate the imaginary economy and then hit a reset button, assert rational prices for our goods and go about our business?

    Perhaps.  There’s something called a command economy.  Historically, it didn’t really work that well as a long-term economic system, but it might be a good method in a crisis to restore normalcy to a delusional economy.

    I dunno, whaddayou guys think?

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