The Coming Derivatives Crisis That Could Destroy The Entire Global Financial System

ilene's picture

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Doug Eberhardt's picture

I keep reading articles on Zero Hedge that talk about derivatives, but they never mention the growth in sub-investment grade derivatives maturing in the next 1-5 years. They were just over $4 trillion at the height of the 2008 financial crisis and stand at over $6 trillion today despite Frank and Dodd's Financial Reform Act of 2010 (putting those two clowns in charge of anything should have given you a clue).  

Who will be the counterparty to these sub-investment grade derivatives? People really have no clue as to what's going on with these banks. That and they think the people who got us into this mess to begin with are on their side now.

Here are a couple articles I wrote on what's going on;

Just the facts...what people do with their money is up to them, but at least be informed. Not all derivatives are bad, but "show me the counterparty!" Also, watch Kevin Spacey's new movie, "Margin Call."

twotraps's picture

actually I read that a women in france talked one of the broke-idiot kings to sell his right to taxes as an income stream to satisfy some debts......very early derivatives.  Need to look up her name.


What is anyone doing about it?  Land and gold?  If there is a new currency then how does pricing in gold work?  We are of course assuming there is not a whole bunch of New Economic Rules...I mean a New Paradigm of American Risk Sharing Entities (or ARSE for short) that will dictate how much of your old shit is worth in New Shit.

Cole Younger's picture

I keep hearing about the derivatives threat here and there. It appears that only a real default can trigger a derivatives event. I don't see a default happening when governments are willing to print and bail out to prevent it. A hyper-inflation scenario seems more realistic to occur or am I just not understanding the derivatives threat?

hyperbole2000's picture

European countries can not print money and inflate their way out of debt because each country does not have control over their currency (i.e. the Euro). Printing is not allowed under the Euro Treaty and would rquire redrafting the Treaty to enable such an outcome. Unanimous suport by parlamentary vote would be required. No likely to happen and if so not very quickly. The US and Britain who are overclocking their processor controlled money printing machines are looking over their shoulder at the Europe with their stone chisel and hammer money printing machine and telling them to hurry up. European banks and countries will default. CDS will be executed and counter parties will fail to deliver and the dominos will fall. More specifically, the 53 TRILLION in derivatives the BOA just transferred from their investment bank side to their government insured commercial bank side will evaporate the 1.3 TRILLION of Joe Public deposits. The government will not be able to raise the 1.3 TRILLION without Congressional approval. If they don't say goodbye BOA and and an acceleration in the dominoes. If they do say goodbye US credit worthiness and hello new fractual to ricochet thorough the markets to topple over dominoes we don't even know about. For example FED prints money with disregard to Congress leading to hyperinflation and a constitutional crisis.

Cole Younger's picture

I personaly have doubts the EU will allow defaults as it is suicide (I may be wrong). I beleive the Fed will bail out EU banks if need be.

BAC purposely transfered there derivatives so that congress is put between a rock and a hard place. They may have 1.3 trillion in deposits, but I doubt all of those deposits meet the insurance requirements. The 1.3 trillion number is beyond what the FDIC can accomodate and it will scare the shit out of congress, but in the end, we may be talking a couple hundred billion that is actually insured. Regardless of the amount, the money will still need to be printed...Correct?

The derivatives, if they should start to unwind could be a disaster, but I am just not feeling it when you consider government intervention. But what do I know?

Earl of Chiswick's picture

as a reminder from earlier this month Robert Shapiro of the IMF calls for the end of times

Youtube via BBC

and from The Economic Times

IMF adviser Robert Shapiro warns of collapse in global economy within weeks

and Ed Harrison's take


Cheeky Bastard's picture

It's obvious the author(s) do not understand how derivatives markets actually work, nor the changes that were implemented in bringing transparency and better risk management in 2009. While concern is valid, the article is so full or errors and faulty inference, not to say anything about the lack of understanding of most basic concepts, that is effectivly worhtless. This is merely recycling of well known data, but says nothing about 100s of procedures that fundamentally changed derivatives markets in 2009, making them more safer and transparent. 

DavidC's picture

Could you describe one or two of the changed procedures please?

And would these include BofA moving derivatives from its holding company to its retail arm where, if I understand correctly, the banks claim from FDIC would come BEFORE that of the retail depositors?

And, at an even more fundamental level, the banks marking to fiction rather than marking to market?



hyperbole2000's picture

If these are the same regulatory changes that allowed BOA to transfer 53 TRILLION in derivatives from their investment bank side to their government insured commercial bank side they are not worth the paper that they are written on.

Matto's picture

The original cheeky bastard? Long time no see.

Can you bring back cheeky's links? 0H needs your cultural input now more than ever.

Bagbalm's picture

This is a fairly good description - but as often happens the instructor knows important details that don't get revealed because 'everybody knows' in his mind.

Counter-party risk needs to be discussed. Traders tend to agree on general trends and make similar bets. If ALL those bets suddenly go bad the bookies can't cover, especially since they are betting with each other too, and unfortunately it is a global market. There is no out of town to slink off to and change your identity. The machine just freezes up when nobody can pay.

Marco's picture

"But once it gets out of balance we could witness a string of financial crashes that no government on earth will be able to fix."


Fix is a relative term ... they can't fix the financial system, but I think they can keep the real economy going. As Richard Sulik said :


"Of course, states have to protect the savings of their populations. But that's much cheaper than bailing banks out. And that, in turn, is much cheaper than bailing entire states out."

ptolemy_newit's picture

ok so many guns and the right to bare!



cranky-old-geezer's picture



No problemo, if all $75 trillion of BAC derivatives triggered, Bernanke could create $75 trillion of digital cash in 10 seconds and hand it to BAC to pay them all off.


pineyard's picture

In MY opinion .. the people behind above detailed fraudulent and CRIMINAL transactions whether it be Derivatives / ETFs ..U name it

should be TRIED and CONVICTED of TREASON to their COUNTRY and HUMANITY                .... in COURT

There is a possibility for a DEATH SENTENCE                                                               under that heading as far as I am aware                                                                   

 and THAT would be APPROPRIATE

Bear's picture

"making tens of billions of dollars a year in the derivatives market, and nobody in the financial community wants the party to end"

Who are the counter parties losing all this money ... others in the financial community ... "Party on Bill", Ted

AldousHuxley's picture

nope. it is the public who are paying for the loser's bets.

derivatives is a zero some game meaning wall st. cannot make money as industry. If they have a net gain, that means they took it outside of the game.....inflation refuel and bailouts.



Kina's picture

Hmm all those Congressmen over the years, taking money from the banks, and the promise of nice paying 'jobs' when they retire one day. Government for hire.

Kina's picture

Who invented these derivitives - the Whore Of Babylon. Who is now just a general bankster Whore?

FMR Bankster's picture

Here's the real problem. Let's say you are Jamie Dimon and your busy running a vast consumer/commercial bank. You have this strange little business that always delivers profit off in the corner. (Kind of like AIG Financial products)You have tried to run your business in a conservative way.(at least relative to your competitors)Now it's early 2009 and the sh*t hits the fan and your stock is collapsing and someone really explains how derivatives work. How these are not liquid markets and the traders have been putting their own marks on the trades to determine how much profit/bonus they made. And this has been going on for 20 years. And you have aquired a couple of other banks that did the same thing. And nothing ever gets settled, it just carries on to higher and higher values. Now you have $79 Trillion of exposure. What the hell do you do? Can't unwind it, as Pandit said you just have to keep dancing as long as the music plays.

Element's picture

... and accept that there are no chairs ... for anyone ... when the music stops ...

well, except for those who own stuff ... and can retain it in their possession ...

hence WWIII ... bet on that ... the banksters are

the few at the top know we're headed back to strategic warfare (where states are over-run and old borders obliterated for all time), and the ones with the most, and can defend it effectively, by destroying the other guy first, will get to call the shotz and be the new emperors.

The game never changed, we were just lulled into thinking it had, via making nothings look like somethings, and actual somethings look like complete nothings.

i.e. how the West [99%] was won ... by  t h e m ...

The great weakness of the West is that we BELIEVE that our imagination and creativity are all good ... when the inappropriate use of  imagination and creativity was the mechanism and avenue used to bring us completely undone.  T h e y  knew we would fall for their baloney because they spent the past few hundred years preparing our shallow pop-culture, and resulting shallow dumb and highly suggestable state of mind, to accept that nothings are somethings, and real things should be swapped for non-existent phantoms of that commonly derailed mental process.

They effectively did a '1984' on us, i.e. taught us that 4 was 5, because they said it was, and everyone 'knew' (and accepted) that nothing was really something.

If you disagreed, you were finished ... just like in the book.

It's part of the conditioning and 'education' which they made sure we were mentally soaked in all our lives.

'Freedom' is not political, or financial, or social, or a state of not being in physical servitude, it is actually the inner state of not being comprehensively screwed-around with like  t h a t ...  so that we would willingly give away real things for nothings ... and not even realise it, for all our lives!

Derivatives and their terminal damage are our own fault, because we allowed ourselves to be shackle to these mental absurdities that flow from  t h e i r  art of making nothing look like something.

The West fell for what is really a cheap parlour trick ... and lost it all.

The question now is, will we survive?

Well, we sure won't if we don't reject  T H E I R  parlour tricks ... and their MSM lie factories ... and associated political spectacle, dripping with pure absurdity.


This is the MATRIX ... the matrix is in fact all we ever knew ... go wake shit up! ...  t h o s e  at the top always knew what had real exchangeable, tradeable 'value', and what did not.  They even have us calling fractional reserve Fiat debts - ASSETS!

And have us treating REAL physical assets as NET liabilities.

Their only hope now is that we don't wake-up and actually free ourselves from all their mental and cultural Parlour tricks.

And they're fairly sure we won't make it that far, ... nor survive.

Imminent Crucible's picture

It wasn't Pandit who said, As long as the music is playing, you have to dance. It was his predecessor at Citi, the Con Artist Formerly Known As (Chuck) Prince.

Chuck Prince is currently serving six successive life terms in prison for fraud. No, that's not right. He was banned from the financial markets and his $150 million in compensation was seized. Uh, no, that's not right either. Chuck Prince is still working as a consultant for Citigroup.

That's because there is no one else who knows how to work the Citigroup scams like Chucky.

AldousHuxley's picture

there is a good reason why indian pandit was bribed into the office to take the fall. He was running  hedge fund at a massive loss when prince offered hundreds of millions to buy him out and put him in as CEO.


Smart guys know when the shit is about to hit the fan....especially when they are the ones who took a dump.

JustACitizen's picture

The beauty of derivatives and this mess that we call a financial system is that ultimately when the wheels come off we could be back to a virtual "stone age" in terms of business. International transactions nearly impossible to conduct..."0" trust in anything other than the people you know and hard currency - a true restoration of values - a certain physicality to everything...

It might be worth giving up a big chunk of my imaginary net worth to have the experience...

I don't think that the masters of the universe are prepared for the diminishment they would experience: "Hey, I own that!" "Prove it!" "I have the papers right here." "Papers huh? that's like law and order and such?" "yes it is" "Well, you're not using it right now - so howsabout I take care of it for you - any objections?" ummm...

Marco's picture

Anarchy seems unlikely to me, feudalism much more likely.

hivekiller's picture

Repent! The End is Near!

Darth..Putter's picture


The end is nigh.


Get biblical wit yo bad self

prophet's picture

G-20 TGI.


(and the financial elite = 751,000 families commanding $96.8T)

JW n FL's picture




Element's picture

your net worth has always been the exchangable or tradable value of what you physically possess.

that is the whole reason why wars of conquest are the historical norm.

the ones with stuff and who can defend it are the real rich ... the rest are all pretenders to wealth and big economy.

Marco's picture

Psychology has always been a huge component in the defence ... in the absence of successful propaganda in the justness of wealth inequality it has been nearly impossible to maintain high levels of it, that is why revolts and revolutions are the historical norm as well.


Although of course past feudal lords never had the added potential of electronic surveillance and weapons ... history doesn't have to always play out the same, technology can change things.

Element's picture

Hi Marco, I see from your spelling of 'defence' that you're an Aussie. You make a valid point there, the tech has certainly been stunningly successful, thus far, re their propaganda bath.

It's so devastating people don't even realise that the POP-Culture itself is the propaganda - so readily do people consume it's savoury stupors.

It's a pretty amazing tool, for covering your arses, because the first thing people have to do then, is to seriously question and reject it.

They think we won't, they are betting their lives that we won't, that we are fully addicted to their matrix, and so far they're close enough to right.

I tend to effortlessly see through it. Maybe it's like the suggestibility of hypnosis, where some are very resistant, but most are totally manipulable and suggestible and willing to submit at a deep level to control.

It confounded me for many years why people were so bamboozled by these absurd psychological Parlour tricks. I have said before, I see this as primarily a war of minds, and yes, they have been extremely effective at harnessing technology to their dumbfounding ends.

xcehn's picture

The banks are insolvent and the Euro is on the edge of collapse.  The destruction of the entire global financial system is not a possibility.  It's a FUCKING CERTAINTY for anyone with half a clue who can see what's in the rearview mirror. If only being in denial could somehow save us.

mfoste1's picture

nothing will stop this economy when the money supply is expanding at such a rapid rate

Elmer Fudd's picture

And this is all new news? 

vato poco's picture

I read the post, and the only thing I could think was "I've seen this story before. They're talking about Daiichi Fukushima." The banks and their governmental puppets trot out the exact same bullshit: "It would take a whole chain of once-in-a-lifetime events for anything to go wrong"; "And even if it DID, we can fix it because we have exotic degrees and can do non-integer equations and you can't"; "Why would us experts build a system that could end up hurting/killing us? Hmmm?"

Answer: 1) Because there's money in it and 2) Having been told how smart they are all their lives, eventually they start believing it.

Same results as Fukushima, in the end: ruined lives for anyone who ever had the misfortune to do business with them, or even be *near* 'em. Yeah, this'll end well.

DeadFred's picture

It works until it doesn't

hyperbole2000's picture

Derivatives provide a low cost tool for commercial operators to protect themselves from equity loss due to drop in prices of large inventory holdings. For example a wholesaler's crude oil in a tank, or a wholesaler's T-Bills in a account. Without the derivatives tool the commercial operators would have to raise their margin to cover the risk. The commercial needs the speculator to cover the other side of the trade (or action from a casino perspective). What is key to mantaining a link to supply-demand market based rationality is that the speculator needs the commercial who is risk adverse and does NOT take irrational speculative decisons counter productive to his main street business. This changed in 1999 with the Securities Modernization Act, a rider on rider on Clinton's last budget by senator Phill Graham, that allowed F&*^ING BANKS to be classified as commercials. The banks immediately started taking the speculator action that the legitimate commercials wouldn't touch with 10 foot pole; thus, severing the link to supply-demand market based rationality. And here we are today with the Main Street businesses formerly benefitting from derivatives being pummelled into oblivion by Wall Street. However, the slide into oblivion started in the 70's when derivatives were an insignificant CFTC regulated market trading pork bellies and ruttabaggas that started getting bigger with currency swap derivatives. The SEC regulated investment banks and FED regulated commercial banks took notice and wanted a piece of the action and got their paid-for henchmen in Congress to table a Bill to liquidate the CFTC and roll the derivatives market into their realm. The farmer based midwestern Congress members told the east coast Congress members to go f^&k themselves. As a comprimise the financial commodities (T=Bills, MBS, etc.) were cleaved off the CFTC regulator's realm and handed over to the realm of the FED and the SEC. That was the beginning of the end when regulation by the CFTC with decades of experience was handed over to wet behind the ears regulators who had been captured by the investment and commercial bankers half a century earlier. The 1999 Securities Modernization Act merely accelerated the terminal phase of the collapse like a 5th wave extension inside a 5th wave extension inside a 5th wave extension to infinity, ad nauseum. Perhaps we should thank Senator Phil Graham for ripping off the bandage faster to reveal the underlying puss of corruption and collusion in the banking system. Paraphrasing from Robert C. Newton's "Derivatives".

Marco's picture

So much started in the 70s ... wouldn't one perspective be that the derivatives ponzy had to be created as a sink for petro dollars so the oil supplying countries didn't start to wonder if maintaining the US trade deficit was all that good an idea?

Buck Johnson's picture

This is going to slam us like an earthquake.  These Deriviatives are a ticking time bomb and they know itj, they just thought they wouldn't be holding the bomb win it went off.  Don't worry, the US govt. is holding the bag.

hyperbole2000's picture

An ETF is just a bunch of circular daisy chaining derivative contracts.

Darth..Putter's picture

I think this is going to slam us like the KT even that the dinasaurs didn't make it through.

Cojock's picture

Sorry, Lady Ilene, but derivatives are the tail, not the dog.

The real shit about to hit the fan comes from ETFs, and the Dark Inventory

they are funding which caused the current commodity market bubbles which are about to collapse.

You read it here first.


Marco's picture

Accumulating dark inventory is otherwise known as cornering the market, and cornering the market doesn't generally work without derivatives. Price goes up as you accumulate the position and it goes down just as quickly as you try to offload it, only if you manage to put the market into a collective short squeeze like VW managed with Porsche can you succesfully corner the market.


Which is not to say that knowing market flows doesn't allow you to benefit, but it just doesn't represent the same danger as derivatives. So there is say a 2x difference between reported and real copper inventory, well bully ... I've seen estimates of a 30-35x difference in notational value of copper derivatives and physical.

theabyss11's picture

Great article. Thanks for sharing with those of us who don't have a FT subscription.

hyperbole2000's picture

An ETF is just a bunch of circular daisy chaining derivative contracts.

adr's picture

What I tell people is that the global debt market, which is all the stock market really is, is like a casino where everyone keeps winning. The casino keeps producing chips which are supposed to represent real money. Everyone keeps betting because they keep winning, ever growing their pile of chips. They feel rich so they start ordering drinks and hookers spending what real money they have. The casino is happy to take the real money to enrich themselves because only they know that there is only $1 real dollar for every thousand dollars worth of chips. Every once and a while a couple people decide to cash out and the casino lets them. It makes the others think they can win more.

But then all of a sudden the power goes out and the games stop. Now everyone rushes to cash out and they will find out they will only get $1 for every thousand in chips. Right now the casino owner is trying to figure out how to get the power back on before everyone knows the truth.

apberusdisvet's picture

The elites know that they have run out of time.  Bringing forces back from Iraq?  Time for martial law, perhaps?

The biggest fear with derivatives, btw, is not the assumed zero sum effect, but that a bad domino will fall; collapsing everything interconnected.  But the PEs probably have a derivative for that as well.

chubbar's picture

I don't believe Oloser said he was bringing them back from Iraq. He said he was withdrawing them from Iraq, probably to be deployed into the next country he invades over there (Iran, Syria or Pakistan appear to be decent candidates).

augmister's picture

Ditto that thought... I have told my close friends that understand "the game" that the only way the troops come home is the positive sign of trouble at home.   Are the banksters and pols really wearing racing stripes in their panties?  OWS and widespread civil disobedience in a Presidential Election year?  1968 deja vu?