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Derivatives Panic Coming to Global Markets
James Bailey * Z3 News
OTC Derivatives Market Explosion
Prophetic minister John Paul Jackson saw news headlines from the future. The headlines revealed many coming events. One of the headlines said, “Derivatives Panic Hits Global Markets.”
WHAT ARE DERIVATIVES?
Derivatives are financial products or securities that derive their value from the value of an underlying asset. The most common underlying assets include stocks, bonds, commodities, interest rates, and currencies. Examples are interest rate swaps, options contracts, insurance contracts, futures contracts, credit default swaps, and structured debt contracts.
The derivatives market is ten times bigger than the annual GDP of the entire world! The Bank for International Settlements reported that the over-the-counter derivatives market amounted to about $638 trillion in 2012. Author Paul Wilmott, who has written several books on this topic, estimates the global derivatives market to be much larger, $1.2 quadrillion. By comparison, the annual Gross Domestic Product of the entire world is only $65 trillion, and the total value of the United States stock market is estimated at $23 trillion (Source: The Economist magazine).
The staggering size of the derivatives market explains why billionaire investor Warren Buffet has called them “weapons of financial mass destruction.” Derivatives can result in large losses because they use leverage, which allows investors to earn large profits or losses based on small changes in the price of the underlying asset. Leverage makes it possible to earn very large profits or losses from relatively small investments.
WHY DERIVATIVES ARE DANGEROUS
Derivatives pose a serious threat to the entire worldwide financial system because large losses coming from these leveraged investments could quickly become too large for financial institutions to cover. The failure of any financial institutions would be painful, but the failure of very large financial institutions, often referred to as “too big to fail”, could take down the entire world financial system. The collapse of any of these institutions could start a domino-like collapse of other institutions until the entire system is destroyed.
Amazingly, derivatives products are almost totally unregulated. One reason for that is they are so complex that lawmakers and judges have a hard time drawing boundaries around them. As a result, derivatives allow financial institutions to circumvent the political and judicial and regulatory systems. Derivatives allow financial institutions to rig the market with highly leveraged deals to rape and pillage equity markets with zero accountability.
After the 1929 stock market crash, the Banking Act of 1933 was passed to prevent financial institutions from operating commercial banks and investment banks under the same corporation. That act, also known as Glass-Steagall, successfully restrained the derivatives market until it was replaced by the Gramm-Leach-Bliley Act, which was signed into law by President Bill Clinton in 1999. The new act removed Glass-Steagall’s protective wall of separation between commercial and investment banking. Since then the over-the-counter (OTC) derivatives market exploded from about $30 trillion in 1999 to over $638 trillion in 2012 (Source: BIS.org). That is how we got to into the dangerous mess we are in today.
With an economic collapse coming this year, the dangers of the derivatives market pose a very real threat in the near future. This threat is not limited to the United States, but spans the global economy. One of the most highly leveraged financial institutions is Germany’s Deutche Bank. Their derivatives exposure is 96 times the value of their total assets. There is no way they could cover losses that large. However, many U.S. institutions are also highly leveraged and therefore at great risk. Consider the current derivatives exposure of some of the “too big to fail” financial institutions.
- Deutsche Bank – $55.6 trillion in derivatives exposure as of April 2013 backed by only $575 billion in assets. So their derivatives exposure is 96 times larger than their assets.
- JP Morgan – $72 trillion in derivatives exposure compared to only $2.3 trillion in total assets. Their derivatives exposure is 31 times larger than their assets.
- Goldman Sachs – $41 trillion in derivatives exposure compared to only $938 billion in total assets. Their derivatives exposure is 43 times larger than their assets.
- Citigroup Inc – $57 trillion in derivatives exposure compared to only $1.9 trillion in total assets. Their derivatives exposure is 30 times larger than their assets.
- Bank of America – $44 trillion in derivatives exposure compared to only $2.2 trillion in total assets. Their derivatives exposure is 20 times larger than their assets.
- Wells Fargo - $44 trillion in derivatives exposure compared to only $1.3 trillion in total assets. Their derivatives exposure is 33 times larger than their assets.
(Source: FDIC and SNL Financial for US institutions, Zerohedge.com for Deutsche Bank)
There is no way these institutions could cover the potential losses that could come from derivatives contracts. They just don’t have enough assets, which means an economic collapse could cause any or all of these institutions to fail. The failure of any of these “too big to fail” institutions could cause the entire global financial system to fail.
DERIVATIVES PANIC
A worldwide panic among investors could be triggered by lots of things, including rising interest rates, war, China unloading their holdings of U.S. treasuries, a major terrorist attack, a natural disaster, renewed trouble in European economies, or a meltdown of the Japanese economy. The threat of losses from derivatives could cause investors to panic, which would cause the crisis to accelerate, thus bringing upon them the very thing they hoped to avoid. Unfortunately, that is exactly what John Paul Jackson saw hitting global markets in the news headline from the future.
When the United States stock market crashed in October 1929 there was no such thing as derivatives and the national debt was only 16% of the annual GDP. In 2013 the national debt is over 100% of annual GDP. Both of these factors combined together could make the coming economic collapse far worse than the 1929 stock market crash.
Maybe that is why billionaire investors Warren Buffet and George Soros have both recently divested nearly all of their stock holdings. Could they possibly know something the rest of us don’t? Investors have good reasons to be concerned.
John Paul Jackson was not shown the timing of the news headlines he saw. However, others have seen a sudden economic collapse coming in 2013. For more details see the following posts:
- Economic Collapse Coming in October 2013
- The Bottom Will Drop Out of Our Economy and Banks Will Fail in 2013
- Worldwide Economic Shaking Coming in 2013
- Bank Shaking Predicted for 2013
Download or print a PDF file copy of this article.
Author: James Bailey
James Bailey writes blog articles about current events and how they relate to the truth of the scriptures. His vision is to broadcast the good news of Jesus Christ through blog sites and other media.
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This would have been a well written factually based article if the part about a psychic prophet was omitted. It makes it impossible to post a link to to help wake people up because of that one unnecessary point that discredits the rest of the article