What Are Derivatives And How Can They Hurt The U.S. Economy?

What Are Derivatives?

Banks And DerivativesMost of us are probably familiar with the word derivative, because it was a financial buzzword back in 2008 when AIG went down after a big derivative scandal that required government bailout money.  Today, I’m sorry to say that the derivative market is up and running and it is bigger and more destructive than ever before.  So what is a derivative exactly?  A derivative is essentially, Wall Street’s equivalent to Las Vegas.   Meaning, investors are putting investments that are basically a gamble.  A derivative is not an investment in anything real or tangible, such as investing in a stock of a company.  Rather, it is a legal bet on the future value or performance of something else.   In other words, it is risky, it is not well managed, and just like in Vegas…it’s usually not the gambler who comes out on top.

Who Is Placing Bets On Derivatives

It wouldn’t be a huge problem if the derivative market was primarily being utilized by small time investors, unfortunately the four largest financial institutions in this country, have the largest exposure to derivatives.  JP Morgan Chase, Citibank, Bank Of America, and Goldman Sachs make up 81% of current net credit exposures to derivatives.  These banks have a combined 4.6 trillion in assets, and their derivative exposure is 220 trillion!    Not to mention, there are other speculations that the derivative exposure in this country is anywhere from 600 trillion to 1.5 quadrillion.  That number is so massive it is mind boggling.  The annual GDP for the U.S. is only 70 trillion.  Imagine how impossible a recovery would be from another financial mess caused by the derivative market.

It’s Not If We Have Derivative Problems It’s When We Have Derivative Problems

Just like any gambler with an addiction to dangerous money games, it’s only a matter of time before the derivative exposure causes massive financial problems for the U.S. Warren Buffet Refers to derivatives as “financial weapons of mass destruction”.   For more information on derivatives and how to protect the assets you have, contact a redhawk advisor near you.


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