| The recipients of the massive bail-outs and buy-outs | | | | information regarding counterparties to the regulators. |
| administered by the USA government have all been | | | | With this shroud of anonymity around the derivatives |
| in the same sector of the USA economy: the financial | | | | market, investors, government agencies, and private |
| sector. Why is the financial sector the privileged | | | | agencies can not ascertain the risk assumed by |
| sector? The answer is simple and yet staggering. In a | | | | individual companies, banks, or the entire financial |
| word, it is derivatives. Warren Buffet described | | | | system. |
| derivatives as, "Weapons of Economic Destruction", | | | | The second reason why derivatives are so |
| and in the following paragraphs, I'll discuss briefly | | | | dangerous is their massive market size. The typical |
| what a derivative is and then place most of the | | | | volatility which affects this market ranges from 2% |
| attention on why they have become the "weapons | | | | to 5%, so on any given day, the losses from this |
| of economic destruction". | | | | one quadrillion USD market can approximate US$37 |
| What is a derivative? Per Wikipedia, derivatives are | | | | trillion dollars! The total market value of all equities on |
| "financial contracts, whose values are derived from | | | | the planet is about US$31 trillion, so derivatives have |
| the value of something else. The underlying value on | | | | the power to destroy all of the known world's |
| which a derivative is based can be an asset (e.g., | | | | equities in a single day. |
| commodities, stocks, residential mortgages, | | | | Now that we understand the magnitude and |
| commercial real estate, loans, bonds), a stock index, | | | | destructive power of the derivatives market, we can |
| weather conditions, or other items. A derivative | | | | likewise understand the reason why the financial |
| enables investors to take rather large positions (a.k.a. | | | | sector of the USA has received, in bail-out money |
| a gamble) in a given market for a relatively small | | | | from the USA government, more money in terms of |
| amount of capital, and with such leverage comes | | | | GDP than was given to pay for World War 1, the |
| substantial profit, if the gamble is correct, or loss, if | | | | Korean War, the Vietnam War, the Gulf War, and |
| the gamble is wrong. With a derivative, one investor | | | | Operation Iraqi Freedom COMBINED. The financial |
| wins and one investor loses. | | | | sector has become, as they say, "too big to fail", and |
| Why are derivatives "weapons of economic | | | | thus the reason why the financial sector has received |
| destruction"? The answer has two reasons, the first | | | | trillions of dollars worth of US tax payer funded |
| being their lack of transparency. Those who invest | | | | bail-out money. |
| through derivatives are not required to disclose | | | | |