The Looming Derivatives Tsunami in Mordor

Derivatives are just bets – a giant casino in which players hedge against a variety of changes in market conditions such as interest rates, exchange rates, defaults and more. But in recent times they have exploded into powerful vehicles for leveraged speculation – borrowing to gamble. As at a race track, players can bet although they have no interest in the underlying asset (the horse). This has allowed derivative bets to grow to many times the global GDP. If you don’t own the barn on which you are betting, the temptation is to burn down the barn to get the insurance. Currently, four banks own 88% of derivatives – JP Morgan, Goldman Sacks, City Bank and Bank of America. If one of those banks goes down the whole system can collapse.

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