The Quadrillion-Dollar Derivatives Bubble

Thinking about a quadrillion dollars is like trying to imagine how big the universe is. The $16 trillion national debt is staggering enough, but reading about a quadrillion-dollar bubble is beyond mind-blowing. While the media and Washington D.C. have our attention on the financial precipice allegedly ahead of us next year and the silly, fake “negotiations” that are going on, the biggest U.S. banks have been dealing with risky financial instruments called derivatives (specifically over-the-counter derivatives, a completely unregulated marketplace). Because these derivatives transactions can be done privately without going through an exchange, the total face value of the global derivatives market is estimated at upwards of $1.5 quadrillion. Compared to this derivatives bubble, the fiscal cliff is a mere crack in the pavement.

So what’s a derivative anyway? Here’s a simple definition taken from TheEconomicCollapseBlog:

 “A derivative is a legal bet on the future value or performance of something else. Just like you can go to Las Vegas and bet on who will win the football games this weekend, bankers on Wall Street make trillions of dollars of bets about how interest rates will perform in the future or about what credit instruments are likely to default. Wall Street has been transformed into a gigantic casino where people are betting on just about anything that you can imagine.”

 Bankers can even trade derivatives based on other derivatives. Here’s a list of the top 9 U.S. banks and their respective derivatives exposures:

Bank of New York Mellon – $1.375 trillion

  • State Street Bank – $1.390 trillion
  • Morgan Stanley – $1.722 trillion
  • Wells Fargo – $3.332 trillion
  • HSBC – $4.321 trillion
  • Goldman Sachs – $44.192 trillion
  • Bank of America – $50.135 trillion
  • Citibank – $52.102 trillion
  • JP Morgan Chase – $70.151 trillion

Collectively, that’s over $228 trillion. That’s just from these U.S. banks. Derivatives are traded all around the world. The Bank of International Settlements reported:

“Total notional amounts [notional means ‘face value’] outstanding of over-the-counter (OTC) derivatives rose by 18% in the first half of 2011, reaching $708 trillion by the end of June 2011.”

Keep in mind that the global GDP last year was $70 trillion. So, if these banks suffer a collapse, how will anybody or anything bail them out? If they were too big to fail 4 years ago, how much more will they be “too big to fail” when we’ll be dealing with hundreds of trillions of dollars or more instead of just measly billions? This is the financial Armageddon that the media and Washington should be talking about. The fiscal cliff is a complete distraction.