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Global Derivatives Market Now Valued at $1.14 Quadrillion!

 July 24, 2008 01:40 PM
 


The Bank of International Settlements, which seems to be the only institution that tracks the derivatives market, has recently reported that global outstanding derivatives have reached 1.14 quadrillion dollars: $548 Trillion in listed credit derivatives plus $596 trillion in notional/OTC derivatives.

Yes, that is Quadrillion. One and 12 zeroes!

A Gold-Eagle article sheds some light on the mess:

Derivatives, as you may know, are essentially unregulated, high-risk credit bets. Unlike the earnest farmer who might employ a futures contract to hedge the price of the beans he's worked so hard to grow, many of today's institutions use futures, forwards, options, swaps, swaptions, caps, collars and floors—any kind of leverage device they can cook up—to bet the hell out of virtually anything.

[Related -Too-Big-To-Fail Q&A. Get The Facts.]

What drives derivatives, at their very roots (if you can somehow get back that far), are base assets that get leveraged to a demented degree. Martin Mayer writing for the Brookings Institute, said, "the receiver of the payments on these loans or securities has bought the securities for the duration of the swap on 95% margin, even though the law says nobody can buy securities without putting up half the price."

It takes one thousand Trillion to make a Quadrillion. And despite calls for more regulation from such mandarins of the finance world as George Soros, it seems that the value (and consequently the risk) of this ‘derivatives time-bomb' is exponentially increasing. As Bershire Hathaway's 2002 Annual Report stated:

[Related -Eurocurrency Volatility Index (EVZ) at Lowest Level Since March 2008, Diverges From VIX]

"Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system,"

That time bomb almost went off in March 2008 with the Bear Stearns debacle. The title of an article by noted analyst Ambrose Evans-Prichard—"Fed's rescue halted a derivatives Chernobyl"—says virtually everything you need to know.

According to the article, Bear Stearns held a jaw-dropping $13.4 trillion in derivatives, which is "greater than the U.S. national income." So where did it all go? Well, this time anyway, JP Morgan was encouraged to step in to add Bear's derivatives to its own $77 trillion portfolio, giving the financial giant a grand total of $90 trillion in spooky derivatives.

Which begs the question, why didn't we just let Bear Stearns—$13 trillion in derivatives and all—go belly up? Wouldn't that have taught the nation a lesson and given Wall Street a long-deserved wake-up call? "Twenty years ago the Fed would have let Bear Stearns go bust," said credit specialist Willian Sels. "Now it is too interlinked to fail."

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(13)
 
7/24/2008 9:23:33 PM
Quadrillion Errata by DJ
A Quadrillion has 15 zero's not 12
Rating: (6) (0)
7/25/2008 12:18:49 AM
Quadrillion by Don
it has 15 zeros!
Rating: (0) (0)
7/25/2008 12:19:11 AM
Quadrillion by Don
it has 15 zeros!
Rating: (0) (0)
7/28/2008 1:51:01 AM
Principal by Robert Brown
www.unifiedmarket.com
Rating: (0) (1)
7/24/2008 9:23:33 PM
Quadrillion Errata by DJ
A Quadrillion has 15 zero's not 12
Rating: (1) (0)
7/25/2008 12:18:49 AM
Quadrillion by Don
it has 15 zeros!
Rating: (0) (0)
7/25/2008 12:19:11 AM
Quadrillion by Don
it has 15 zeros!
Rating: (0) (0)
7/28/2008 1:51:01 AM
Principal by Robert Brown
www.unifiedmarket.com
Rating: (0) (0)
3/11/2009 8:49:23 AM
by Ed
....does he mean to say... 548/596 and 12 zeroes? maybe?
Rating: (0) (0)
3/11/2009 8:50:20 AM
by Ed
cuz 1 and 12 zeroes, is 1 trillion...

is English his 1st language? or 4th?
Rating: (0) (0)
3/14/2009 8:21:04 AM
Too Many Zeros by Elaine Supkis
As a currency is debased, zeros proliferate. Not only is the derivatives beast a creator of infinite zeros, the nature of our floating currency system tends to drift to zeros growing rapidly, too.  In 1907 dollars, the derivatives beast would diminish in size by about 90%.

In Zimbabwe, to buy a loaf of bread requires over 100 trillion ZD.  We have too many zeros and we now have a banking system that is ZIRP which is zero and all central banks are going to 0% while zeros are proliferating at the opposite end of the financial spectrum.  

The only way to stop this mad dynamic is to outlaw the derivatives market.
Rating: (0) (1)
3/14/2009 5:27:59 PM
by Dennis Wilson
The LAST thing we need is ANOTHER law!!

Abolition of existing rules and regulations should be the order of the day. Start by ABOLISHING the Federal Reserve and the legal tender "laws". This would ALLOW free market forms of money.
Rating: (1) (2)
3/15/2009 10:44:21 PM
The Last Thing We Need Is Another Law?!? by Ed-M
Dennis Wilson, you are sadly mistaken!  The reason why Wall Street is in so much trouble is, Congress substantially, nay, almost COMPLETELY de-regulated financial services firms (banks and investment houses), allowing them to essentially act like addicted gamblers at the Trump Casino! Or any of its competitors. Which means Wall Street became a gamblimg hall!!!! And we know how that panned out.

No, we must restore the sound regulations of the Great Depression (FDR part) and extend them across the globe! That, and ensuring that government and trade deficits balance out to zero over time.
Rating: (1) (1)

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