Massive Credit Derivatives Gambling and the Risk of Systemic Bank Failures: What You Need to Know
As the global fiat currency debt system reaches it logical conclusion, the term “derivatives” might not mean much to the everyday person.
However, these complex financial instruments play a pivotal role in the global fiat currency financial ecosystem, often acting as the invisible threads that could either weave stability or unravel chaos.
Wall Street has a history of blowing up things with derivatives. Merrill Lynch blew up Orange County, California with derivatives.
Some of the biggest trading houses on Wall Street blew up the giant insurer, AIG, with derivatives in 2008, forcing the U.S. government to take over AIG with a massive bailout.
Recent data from the Office of the Comptroller of the Currency reveals that five major bank holding companies—names like JPMorgan Chase, Bank of America, and Goldman Sachs—currently hold a staggering 83% of the $268 trillion in derivatives in the U.S. market.
The concentration of derivatives trading among a handful of major banks poses significant concern that has far-reaching consequences for all of us.
What are Derivatives?
Derivatives, in essence, are financial contracts whose value is derived from the performance of an underlying asset, index, or interest rate.
They can range from the relatively straightforward to the mind-bogglingly complex, and are used for a variety of purposes including hedging risk, speculation, and arbitrage.
While these instruments can be useful financial tools, their misuse or mismanagement poses a significant risk to the financial system at large.
Key Financial Facts About Banks and Derivatives Today
- Total Derivatives Held by Five Major Bank Holding Companies (2009): $277.57 trillion
- Percentage of All U.S. Derivatives Held by These Companies (2009): 95%
- Total Derivatives in the U.S. (2023): $268 trillion
- Total Derivatives Held by the Same Five Companies (2023): $223 trillion
- Percentage of All U.S. Derivatives Held by These Companies (2023): 83%
- Control of Credit Derivatives by These Companies: 96%
- Total Credit Derivatives Held by These Companies: $5.8 trillion out of $6 trillion
- Federal Reserve’s Cumulative Loans to Wall Street Banks (2007-2010): $16 trillion
A stark reminder of this risk came during the financial crisis of 2007-2010, widely regarded as the worst since the Great Depression.
The crisis spotlighted how derivatives, largely unregulated and concentrated in the hands of a few major banks, could exacerbate financial turmoil.
Despite subsequent regulatory efforts, such as the Dodd-Frank Act of 2010, intended to rein in the risky behaviors of these financial behemoths, concerns persist about the effectiveness of these regulations.
Recent data from the Office of the Comptroller of the Currency reveals that five major bank holding companies—names like JPMorgan Chase, Bank of America, and Goldman Sachs—currently hold a staggering 83% of the $268 trillion in derivatives in the U.S. market.
Even more alarming is their control of 96% of the most perilous form of derivatives: credit derivatives, amounting to $5.8 trillion.
For the everyday person, the implications are clear: the health of the global financial system is inextricably linked to the shadowy world of derivatives trading by major banks.
This concentration of high-risk financial activity in a handful of institutions not only poses a systemic risk but also magnifies the potential fallout from mismanagement or market downturns.
The Federal Reserve’s intervention during the last financial crisis, funneling $16 trillion in loans to support these banks, underscores the precariousness of this situation.
While such measures may provide temporary relief, they do not address the underlying issue: the colossal risk posed by the concentrated trading of derivatives.
Moreover, the counterparty risk—the question of who stands on the other side of these derivative trades—is a blind spot for the average investor.
With a web of connections linking banks to non-bank financial institutions, corporate entities, and beyond, the ripple effects of a derivatives crisis could touch nearly every corner of the global economy.
In response, federal regulators have proposed stricter capital rules for banks heavily engaged in derivatives trading. Yet, these proposals have met fierce resistance from the banking sector, casting doubt on their implementation and effectiveness.
For the everyday person, the implications are clear: the health of the global financial system is inextricably linked to the shadowy world of derivatives trading by major banks.
As these financial titans engage in casino gambling on the high wire of high-risk trading, unintended consequences of a domino collapse effect is a threat not just to themselves, but to the global financial system at large.
