This article was written by Michael Snyder and original published at his Economic Collapse Blog.
Editor’s Note: There is no doubt that derivatives are ticking time bomb… so is the Federal Reserve’s grasp over the economy. The game is rigged, all the insiders know it, and most are just bracing themselves for another catastrophic global wave of destruction. By even the most conservative estimates, the scale of derivatives exposure is absolutely massive and more than enough to set off the world’s dominoes and capsize the ship, the life rafts and all living things in its wake.
You don’t have to trust the billionaires with their fingers in the pie to heed their warnings. There are monsters lurking in the deep, murky waters of global finance, and it is certainly not safe to go back in the water. Avoid what you can, hedge all bets, and hold close to real assets, ample cash and a plan for the barter and trade black and grey markets of the next after-event… which could well be lasting and total.
Warren Buffett: Derivatives Are Still Weapons Of Mass Destruction And ‘Are Likely To Cause Big Trouble’
by Michael Snyder
After all these years, the most famous investor in the world still believes that derivatives are financial weapons of mass destruction. And you know what? He is exactly right. The next great global financial collapse that so many are warning about is nearly upon us, and when it arrives derivatives are going to play a starring role. When many people hear the word “derivatives”, they tend to tune out because it is a word that sounds very complicated. And without a doubt, derivatives can be enormously complex. But what I try to do is to take complex subjects and break them down into simple terms. At their core, derivatives represent nothing more than a legalized form of gambling. A derivative is essentially a bet that something either will or will not happen in the future. Ultimately, someone will win money and someone will lose money. There are hundreds of trillions of dollars worth of these bets floating around out there, and one of these days this gigantic time bomb is going to go off and absolutely cripple the entire global financial system.
Back in 2002, legendary investor Warren Buffett shared the following thoughts about derivatives with shareholders of Berkshire Hathaway…
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so
far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Those words turned out to be quite prophetic. Derivatives have definitely multiplied in variety and number since that time, and it has become abundantly clear how toxic they are. Derivatives played a substantial role in the financial meltdown of 2008, but we still haven’t learned our lessons. Today, the derivatives bubble is even larger than it was just before the last financial crisis, and it could absolutely devastate the global financial system at any time.
During one recent interview, Buffett was asked if he is still convinced that derivatives are “weapons of mass destruction”. He told the interviewer that he believes that they are, and that “at some point they are likely to cause big trouble”…
Thirteen years after describing derivatives as “weapons of mass destruction” Warren Buffett has reaffirmed his view that they pose a threat to the global economy and financial markets.
In an interview with Chanticleer this week, Buffett said that “at some point they are likely to cause big trouble“.
“Derivatives, lend themselves to huge amounts of speculation,” he said.
Most of the time, the big banks that do most of the trading in these derivatives do very well. They use extremely sophisticated computer algorithms that help them come out on the winning end of these bets most of the time.
But when there is some sort of unforeseen event that suddenly causes a massive shift in the marketplace, that can cause tremendous problems. This is something that Buffett discussed during his recent interview…
“The problem arises when there is a discontinuity in the market for some reason or another.
“When the markets closed like it was for a few days after 9/11 or in World War I the market was closed for four or five months – anything that disrupts the continuity of the market when you have trillions of dollars of nominal amounts outstanding and no ability to settle up and who knows what happens when the market reopens,” he said.
So if the markets behave fairly calmly and predictably, the derivatives bubble probably will not burst.
But no balancing act of this nature ever lasts forever. Just remember what happened in 2008. Lehman Brothers collapsed and then the financial system virtually froze up. According to Forbes, at that time almost everyone was afraid to deal with the big banks because nobody was quite sure how much exposure they had to these risky derivatives…
Fast forward to the financial meltdown of 2008 and what do we see? America again was celebrating. The economy was booming. Everyone seemed to be getting wealthier, even though the warning signs were everywhere: too much borrowing, foolish investments, greedy banks, regulators asleep at the wheel, politicians eager to promote home-ownership for those who couldn’t afford it, and distinguished analysts openly predicting this could only end badly. And then, when Lehman Bros fell, the financial system froze and world economy almost collapsed. Why?
The root cause wasn’t just the reckless lending and the excessive risk taking. The problem at the core was a lack of transparency. After Lehman’s collapse, no one could understand any particular bank’s risks from derivative trading and so no bank wanted to lend to or trade with any other bank. Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode.
After the crisis, we were promised that something would be done about the “too big to fail” problem.
But instead, the problem of “too big to fail” is now larger than ever.
Since the last financial crisis, the four largest banks in the country have gotten approximately 40 percent larger. Today, the five largest banks account for approximately 42 percent of all loans in the United States, and the six largest banks account for approximately 67 percent of all assets in our financial system. Without those banks, we would not have much of an economy left at all.
Meanwhile, smaller banks have been going out of business or have been swallowed up by the big banks at a staggering rate. Incredibly, there are 1,400 fewer small banks in operation today than there were when the last financial crisis erupted.
So we cannot afford for these “too big to fail” banks to actually fail. Even the failure of a single one would cause a national financial nightmare. The “too big to fail” banks that I am talking about are JPMorgan Chase, Citibank, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo. When you total up the exposure to derivatives that all of them currently have, it comes to a grand total of more than 278 trillion dollars. But when you total up all of the assets of all six banks combined, it only comes to a grand total of about 9.8 trillion dollars. In other words, the “too big to fail” banks have exposure to derivatives that is more than 28 times the size of their total assets.
I have shared the following numbers with my readers before, but it is absolutely crucial that we all understand how exceedingly vulnerable our financial system really is. These numbers come directly from the OCC’s most recent quarterly report (see Table 2), and they reveal a recklessness that is almost beyond words…
JPMorgan Chase
Total Assets: $2,573,126,000,000 (about 2.6 trillion dollars)
Total Exposure To Derivatives: $63,600,246,000,000 (more than 63 trillion dollars)
Citibank
Total Assets: $1,842,530,000,000 (more than 1.8 trillion dollars)
Total Exposure To Derivatives: $59,951,603,000,000 (more than 59 trillion dollars)
Goldman Sachs
Total Assets: $856,301,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $57,312,558,000,000 (more than 57 trillion dollars)
Bank Of America
Total Assets: $2,106,796,000,000 (a little bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,224,084,000,000 (more than 54 trillion dollars)
Morgan Stanley
Total Assets: $801,382,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $38,546,879,000,000 (more than 38 trillion dollars)
Wells Fargo
Total Assets: $1,687,155,000,000 (about 1.7 trillion dollars)
Total Exposure To Derivatives: $5,302,422,000,000 (more than 5 trillion dollars)
Since the United States was first established, the U.S. government has run up a total debt of a bit more than 18 trillion dollars. It is the biggest mountain of debt in the history of the planet, and it has grown so large that it is literally impossible for us to pay it off at this point.
But the top five banks in the list above each have exposure to derivatives that is more than twice the size of the national debt, and several of them have exposure to derivatives that is more than three times the size of the national debt.
That is why I keep saying that there will not be enough money in the entire world to bail everyone out when this derivatives bubble finally implodes.
Warren Buffett is entirely correct about derivatives – they truly are weapons of mass destruction that could destroy the entire global financial system at any time.
So as we move into the second half of this year and beyond, you will want to watch for terms like “derivatives crisis” or “derivatives crash” in news reports. When derivatives start making front page news, that will be a really, really bad sign.
Our financial system has been transformed into the largest casino in the history of the planet. For the moment, the roulette wheels are still spinning and everyone is happy. But sooner or later, a “black swan event” will happen that nobody expected, and then all hell will break loose.
Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years.
Today, Michael is best known for his work as the publisher of The Economic Collapse Blog and The American Dream.
If you want to know what things in America are going to look like in a few years read his new book The Beginning of the End.
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Why should I care. I don’t own any stocksother than live stock. and I shure don’t have any money in the bank. As long as the sun rises and sets and the rain falls I will have enough to eat. Killed a opossum that was after my chickens. threw him away. the wife stated there was a time when we would of been happy to have that meat! We have come a long way since the1950,S
In China’s Stock Mkt, the do not allow the Shorting of Stocks. I agree, why shoukd anybody profit off of killing companies stocks or wishing for crashes, or causing crashes, by hedge funds. The US stock exchange is corrupt as it gets.
Also 70% of Greek Mortgages are in default. Yummy.
@ Old Guy
You are the exception sir, us city dwellers are in a world of hurt when the HEB is out of food.
No one gets out of this world alive. Just remember, the man is not in control of ‘dittle’
“Naked I came from my mother’s womb, and naked I will depart. The Lord gave and the Lord has taken away; may the name of the Lord be praised.”
“He catches the wise in their craftiness, and the schemes of the wily are swept away.”
Yeah… the problem with that is how you go out.
Damnable thing about “now”… it always feels like NOW. So when you’re going out… poorly… at that moment it’s not going to feel all philosophical, it’s going to feel like “now”. A really sh*tty “now”.
Only for those with no HOPE.
Liberals are weapons of mass destruction. They’ve done more damage to this country than any tactical nuke could ever do.
Liberals AND psychopaths and sociopaths. Most people don’t realize (all combined) that’s one-third of the population.
The Greeks might as well face it. Their cushy pensions and pubic sector high-paying do-nothing jobs will face steep cuts one way or the other. The German banksters might as well face it. Tyey’re never getting their money back, and short of an invasion, not getting the deed to Greece. The Greeks will keep leading the Germans on till the Krouts figure out they’ve been had.
Ok let it happen they keep telling us it coming, and there is nothing we can do. I’m not concerned. Like I have said hundreds of times. I’M AS CONTRY BOY AND I WILL SURVIVE!
When it does come down, the EBTers will be the one that suffer the most. The plastic just won’t work, and they have nothing else to fall back on. Then watch the Cities burn!
Sgt.
Hmmm I suspect the EBT’ers will be taken care of even while the middle class starves. They are still a large voting block that are bought and paid for with tax dollars.
Progressives would trade national security in exchange for these peoples vote.
Progressives don’t want their voter base in FEMA camps, they want their political enemies there first.
I hear some preppers say “let’s get it on” we are armed and ready! I hope they have several dozen pair of work gloves in their preps, because between the rare moments of abject terror where they might need their guns and ammo, there will be endless days and weeks of brutal hard work to stay alive. A really big bottle of Ibuprofen in our preps will help with the sore muscles.
I’m also of the mind that economic events may happen quickly, other events may unfold in slow motion. Problem sectors of the economy and society will be crushed for years, the overall problem could take decades to unwind.
ITS OVER! No voter base. No votes. No election. It’s over. They will kill each other and you if your close. I. Read a comment earlier today. Some guy was asking Dave Hodges to write a report about how things will be after the economic collapse and how to barter. ITS GOING TO BE KILL OR BE KILLED!
We will have to separate ourselves from the city dwellers. Hou TX is 25% white 25% black and 50% brown, but not a lot of prep. The burbs are mostly white, my bug out is 110 mile, not sure thats far enough???
Let it happen so Buffet and his billionaire buddies do a rope dance along with their families and loved ones. Enough of these warning from the pigs.
School looked to PUNISH anti-common core kids
California school backtracks on Common Core opt-out punishment
“A California high school where a majority of juniors opted out of Common Core testing has backed off of plans to ban the students from using the school’s parking lot and from taking part in senior class activities after parents and education groups raised a fuss.”
“Under state law, students are permitted to opt out of the test…”
“It is alarming that a principal would attempt to condition important benefits — such as parking passes and participation in senior activities — on the surrender of educational rights,” Matthew McReynolds, senior staff attorney for the (Pacific Justice) institute, told FoxNews.com. “None of our rights are safe if a government official can punish us for exercising those rights.”
http://www.foxnews.com/us/2015/06/24/california-school-backtracks-on-common-core-opt-out-punishment/
Sarge…Standing next to an explosion is not a good thing. You can be prepped up the yazoo and still suffer collateral damage.
We might make it through, but none of us well be totally unscathed.
NO”
I agree, but my question is what can we do to stop it? The only thing I can think of is (using your term) stay way from the explosion.
We all are going to get hit with collateral damage. The further the way we are the less we will get hit with.
Thanks for the come back.
Sgt.
NOBODY…..While I agree with you as far as all of us would be impacted to some extend but Sarge’s attitude is specific to being able to survive. I do think such attitude is what made our country great and as it was diminished by design over decades we are facing the current sick society and degraded Godless culture. I look at it this way….we are in war and war has casualties else the enemies will win and this why. Buffet had a talent for investment and made billions forming an empire but did you know that as multi nationals corporations that he invested in are destroying America and the Americans? If not do a Google search on Buffet’s investments at IBM. He is making ROI but IBM is laying off the talented Americans and shipping their jobs to India. Walt Disney world in Orlando doing the same along with Edison power plan in CA and many others. Yes our jobs are being exported to low wage slave labors in 3rd world countries. So I see this as a war and we need to fight back against these billionaire pigs before being destroyed without even fighting back. This was Sarge’s message and attitude and I do share the same sentiment.
Nobody, you are right, nobody will be unscathed, buy bullets, beans and bullion.
Can you hear the thunder? There’s a storm coming….
Or a nuclear war.
I live at ground zero, if it happens in my life time (doubtful) the best part is it will be over in a flash.
Oh, boy. Another warning.
I’ll give you a warning, sling. Take a look at the last year of the war of northern aggression. The Rebs were out of everything. A piece of bread and a thin slice of meat per day if they were lucky and there weren’t no meat, just a little corn for boiling. They were down to skin and bones and barefoot in the sleet and freezing rain at the trenches in Richmond.
An individual needs two pounds of food per day, or about seven hundred pounds per year, and that food must be stable, i.e., not subject to freezing, or spoiling and it must provide all the nutrients we need. Add a large bottle of multiple vitamins.
How in hell do you hide silos? But silos full of corn and wheat would be a good start and you’ll have enough for your fire team.
If you’re in the trenches, lots of luck and that’s my warning.
Semper Fi
Write off all debt from these things.
If somebody gets in your way… that’s what tanks are for.
See? That was easy. And that’s how it’s been done for the past 10,000 years or so.
My thought, too. Simply declare all credit default swaps null and void. Maybe make CDS holders prove that they’d actually owned the bonds they were insuring before paying off. (Remember that this was a market so wildly unregulated that I could go in and buy a CDS contract on bonds I didn’t own. (Like buying a fire insurance policy on your neighbor’s house.)
There’s precedent – in the GM “managed bankruptcy” they stiffed the bond-holders, who according to black letter law should have been paid off first.
Guys…I am on board with sarge, just stating that we are all in for a heap of it when this goes down. I could literally stay home for at least 2 years and “survive”.
BUT…The best laid plans…
There is always that aw shit moment.
Ya wanna hear GOD laugh…Come up with a plan!
‘gag’
Warren Buffett making ANY comment about 911 is enough to make blood run cold.
Google ‘Buffett 911′ if you think you can stomach it.
“You can’t say that us power-mad dicks didn’t warn you that we were gonna’ do it”… yes, thanks so much for that.
Don’t be too hard on Warren. He & I graduated side by side from Woodrow Wilson H.S., Washington DC,Class of ’47 (His dad was a member of the U.S. House from Nebraska at the time)and Warren was a good kid, good student and well-liked by all. He wrote in my yearbook that his “ambition was to become a stockbroker.”
Well… he sorta made it…in a way. He was also the star of the Golf Team. Another classmate attended class reunion a few yrs ago & told me he was still the same, likable, unpretentious guy.
Warren is 84, he won’t be with us much longer.
Naked he came and naked he shall leave. Don’t loss a lot of sleep trying to get rich.
“Derivatives, lend themselves to huge amounts of speculation,”
That’s like saying Insurance policies lend themselves to speculation. It’s nonsense. What allows the Wall Street gamblers to trade derivatives recklessly is the Federal Reserve and their cronies at the SEC. Derivatives are simple bets, insurance policies that pay off in accordance to the risk taken. When the Fed fuels stock market valuations to sky high levels with money printing, and the SEC allows the big banks to make those bets with your money, at a fraction of the risk (yes it’s equivalent to saying they more bets than your money in their vault can cover), the result is not very hard to predict. It’s a gravy train full of cash, supported by trillions of dollars of debt, hedged by the power of the state to make you pay for it. End the Fed.
Don’t the banks use derivatives to bet both ways? They use them to mitigate risk. In total, they cancel each other out. The last time around, the insurer of last resort greedily bet that everything would go one and couldn’t cover the bets. It was supposedly “too big to fail” (it would fail the wrong people), so the government took it over and guaranteed those contracts with money that didn’t exist. If we had allowed the markets to work fairly, we would be much better off now.
Derivatives are part of the plethora of financial instruments and products designed to mitigate risk. It is why you place a bet on something happening in the future. For example, a farmer says that he will sell his corn for X in 2020. If the price is lower, then he is going to be able to make more money than other farmers. If it is higher, then he will make less but at least he knows what the price will be and can plan around that. The ability to plan over several years mitigates risk and allows a person to have a more stable financial plan. That was the original idea behind derivatives. It has been exploited by douche bags to bet on everything under the sun and build a mountain of debt to topple the world economy when the order gets given.
One of the most dangerous people in global economics has to be Gordon Brown. He has consistently pushed the endless bank bailouts, QE and was a big advocate of the US following the UK’s policy failures.
I have yet to see a good defination of a derivative. I am told it is much like gambling and has no place in the world of finance.
“Derivatives” is a generic term for many types of financial contracts. Read and understand this page and you have the basics:
https://en.wikipedia.org/wiki/Derivative_(finance)
🙂