Bank of America has total credit risk in this sector to the tune 169 percent of its capital; Citibank, 216 percent; JPMorgan Chase, 323 percent; HSBC Bank USA, 475 percent; Goldman Sachs, a whopping 1,048 percent, or over TEN times its capital.

If we were back in early 2007 … before the collapse of Bear Stearns, Lehman Brothers and Merrill Lynch … before the implosion of Fannie Mae and Freddie Mac … or before the near-collapse of AIG and Citigroup … then, maybe, folks could get away with ignoring this sword of Damocles hanging over the financial markets.

If we were back in a bygone pre-Bernanke, pre-Geithner era … before TARP (Troubled Asset Relief Program), before PPIP (Public-Private Investment Program), before TALF (Term Asset-Backed Securities Loan Facility), before TLGP (Temporary Liquidity Guarantee Program), before CAP (Capital Assistance Program), before TIP (Targeted Investment Program), before HASP (Homeowners Affordability and Stability Plan), before CPFF (Commercial Paper Funding Facility), before AMLF (Asset-Backed Commercial Paper Money Market Fund Liquidity Facility), before MMIFF (Money Market Investor Funding Facility), or before the alphabet soup of all the other hastily-conceived government efforts to contain the giant elephant in the room … then … maybe we could make believe it’s not there.

Or if all of our nation’s top officials were mute about this monster still in our midst, perhaps that, too, would justify the current aura of bliss that has temporarily shrouded Washington and Wall Street.

But even that is no longer the case. Some officials are finally finding the courage to speak out, issuing some of the same warnings today that we issued years ago.

Global Vesuvius

Nearly three years ago, in our Safe Money Report of November 7, 2006, entitled "Global Vesuvius," Associate Editor Mike Larson and I wrote:

"Even as the Dow makes new highs, Wall Street and the world’s financial markets sit atop a gigantic mountain of derivatives — high-risk bets and debts that total a mind-boggling $285 trillion. That’s over six times the 2005 output of the entire world economy ($44.4 trillion) … 22 times the total value of the entire Standard & Poor’s 500 Index ($12.7 trillion) … and 25 times the entire U.S. federal and agency debt ($11.3 trillion).

"It’s a global Vesuvius that could erupt at almost any time, instantly throwing the world’s financial markets into turmoil … bankrupting major banks … sinking big-name insurance companies … scrambling the investments of hedge funds … overturning the portfolios of millions of average investors." (Page 1)

Now, in the thirty months that have ensued, each of these events has come to pass:

The world’s financial markets were thrown into turmoil.

The largest banks in the U.S., the U.K., Germany, and even Switzerland were bankrupted.

The world’s largest insurance company collapsed.

The investments of hedge funds were trashed; the portfolios of average investors, slashed in half.

But it’s not over. And the reasons are quite straightforward: The volcano is now far larger; its tectonic forces, more powerful.

In our 2006 "Global Vesuvius" issue (download the pdf), we identified five major threats:

Major threat #1. The sheer size of the derivatives market. At that time, the global market for derivatives was $285 trillion.

Now it’s $592 trillion. Its six-year compound rate of growth: A shocking 34.5 percent per year!

Major threat #2. The Lack of Transparency. We railed against over-the-counter (OTC) derivatives, representing 96 percent of all derivatives held by U.S. commercial banks. We warned about the lack of disclosure to investors, the lack of standard pricing and the fact that "two financial institutions can trade whatever the heck they want … and no one but the parties involved knows precisely what the contracts are, or what their value really is." (Page 3)

Now, in Senate Banking Testimony, SEC Chairman Mary Schapiro has admitted that

"OTC derivatives are largely excluded from the securities regulatory framework by the Commodity Futures Modernization Act of 2000. In a recent study on a type of securities-related OTC derivative known as a credit default swap, or CDS, the Government Accountability Office found that ‘comprehensive and consistent data on the overall market have not been readily available,’ that ‘authoritative information about the actual size of the CDS market is generally not available,’ and that regulators currently are unable ‘to monitor activities across the market.’"

Also before the Senate Banking Committee, Henry T.C.