SHORT STORY: Pick something of value, make bets on the future value of "something", add contract & you have a derivative.
Banks make massive profits on derivatives, and when the bubble bursts chances are the tax payer will end up with the bill.
This visualizes the total coverage for derivatives (notional). Similar to insurance company's total coverage for all cars.
LONG STORY: A derivative is a legal bet (contract) that derives its value from another asset, such as the future or current value of oil, government bonds or anything else. Ex- A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative.
Most large banks try to prevent smaller investors from gaining access to the derivative market on the basis of there being too much risk. Deriv. market has blown a galactic bubble, just like the real estate bubble or stock market bubble (that's going on right now). Since there is literally no economist in the world that knows exactly how the derivative money flows or how the system works, while derivatives are traded in microseconds by computers, we really don't know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough times, that will be catastrophic for the world financial system since the 9 largest banks shown below hold a total of $228.72 trillion in Derivatives - Approximately 3 times the entire world economy. No government in world has money for this bailout. Lets take a look at what banks have the biggest Derivative Exposures and what scandals they've been lately involved in. Derivative Data Source: ZeroHedge.
One Hundred Dollars
$100 - Most counterfeited money denomination in the world.
Keeps the world moving.
Ten Thousand Dollars
$10,000 - Enough for a great vacation or to buy a used car.
Approximately one year of work for the average human on earth.
$100,000,000 - Plenty to go around for everyone. Fits nicely on an ISO / Military standard sized pallet. $1 Million is the cash square on the floor.
1 Billion Dollars
$1,000,000,000 - This is how a billion dollars looks like.
10 pallets of $100 bills.
1 Trillion Dollars
$1,000,000,000,000 - When they throw around the word "Trillion" like it is nothing, this is the reality of $1 trillion dollars. The square of pallets to the right is $10 billion dollars. 100x that and you have the tower of $1 trillion that is 465 feet tall (142m).
In front of the 3500 people is the $100 Million pallet that they all have to work for 1 year to earn.
Look carefully to see a stack of $1 Million and the 35 average Americans required to earn that $1 Million in 1 year.
Bank of New York Mellon
BNY has a derivative exposure of $1.375 Trillion dollars.
Considered a too big to fail (TBTF) bank. It is currently facing (among others) lawsuits fraud and contract breach suits by a Los Angeles pension fund and New York pension funds, where BNY Mellon allegedly overcharged the funds on many millions of dollars and concealed it.
State Street Financial
State Street has a derivative exposure of $1.390 Trillion dollars.
Too big to fail (TBTF) bank. It has been charged by California Attorney General (among other) lawsuits for massive fraud on California's CalPERS and CalSTRS pension funds - similar to BNY (above).
Morgan Stanley
Morgan Stanley has a derivative exposure of $1.722 Trilion dollars.
Its a too big to fail (TBTF) bank. It recently settled a lawsuit for over-paying its employees while accepting the
tax payer funded bailout. Vice Chairman of Morgan Stanley had a license plate that said "2BG2FAIL" on his Porsche Cayenne Turbo. All this while $250 million of bailout money ended up in the hands of Waterfall TALF Opportunity, run by the Morgan Stanley's owners' wives-- Marry a banker for a $250M tax-payer cash injection.
The bank also got a SECRET $2.041 Trillion bailout from the Federal Reserve during the crisis, beyond the tax payer bailout.
Wells Fargo
Wells Fargo has a derivative exposure of $3.332 Trillion dollars.
Its a too big to fail (TBTF) bank. WF has been charged for its role in allegedly pursuing illegal foreclosures and deceptive loan servicing. Wells Fargo was just slapped with a $85 million fine by Federal Reserve for putting good credit borrowers into bad-credit rating (high rate) loans.
In March 2010, Wachovia (owned by Wells Fargo) paid $110 million fine for allowing transactions connected to drug smuggling and a $50 million fine for failing to monitor cash used to ship 22 tons of cocaine. It also failed to monitor $378.4 billion (that's $378400 millions dollars) worth of transactions to Mexican "casas de cambio" (think WesternUnion, anonymous cash transfer) usually linked to drug cartels. Beyond that, WF lets its' VIP employees live in foreclosed mansions. WF knows how to cash your legit check, then claim "fraud" and close your account. WF also re-orders your transactions to create more overdraft fees. Wells Fargo's Wachovia also got a SECRET $159 billion bailout from the Federal Reserve.
Wells Fargo paid NO taxes in 2008-2010 and had a tax rate of NEGATIVE 1.4% while making
$49 billion in profit during the same time.
HSBC
HSBC has a derivative exposure of $4.321 Trilion dollars.
HSBC is a Hong Kong based bank and its original name is
The Hongkong and Shanghai Banking Corporation Limited.
You will find HSBC working a lot with JP Morgan Chase.
Both HSBC and JP Morgan Chase have strong interest in gold & precious metals. HSBC and JP Morgan Chase are often involved together in financial scandals.
Lately HSBC has been sued for allegedly funneling more than $8.9 billion to the largest ponzi-scheme in history - Bernie Maddof's investment business.
HSBC (along w/ JP Morgan Chase) has been sued for alleged conspiracy suppressing the price of silver and gold, partially through precious metal DERIVATIVES and making billions of dollars on it. State of Hawaii is suing HSBC (and other banks) for deceptive credit card lending practices.
DZ Bank in Germany is suing HSBC (and JP Morgan) for deceptive (lying) practices when selling home-loan-backed securities.
HSBC is also under investigation for laundering billions of dollars.
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