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What Is a Derivative?

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posted on May, 4 2010 @ 05:49 AM

Originally posted by Mary Rose
I'm reading Web of Debt by Ellen Hodgson Brown, J.D. right now and have started a thread on her book. She will be speaking at a conference in May. I'm hoping her ideas will be discussed on the internet. I'm looking for solutions.

Ellen Brown has written a good article dated May 3, 2010 about derivatives entitled "Will Hollywood Go the Way of Enron? Derivatives Come to the Movies":

...The Cantor Exchange (CE) is based on a virtual trading platform called the Hollywood Stock Exchange (HSX), a web-based, multiplayer simulation in which players buy and sell “shares” of actors, directors, upcoming films, and film-related options. The difference is that where the HSX uses virtual money, CE will turn the game into a real casino using real dollars.

On April 21, Cantor Exchange reported that it had just received regulatory approval from the Commodity Futures Trading Commission (CFTC), which oversees futures exchanges. “This is a significant step forward in achieving our ultimate goal,” it said in a letter, “which is to launch a market in Domestic Box Office Receipt Contracts.”

Having “contracts” out on movies and movie stars, however, has an ominous ring; and the Motion Picture Association of America (MPAA) apparently doesn’t like the sound of it. The Cantor letter said that its tentative launch date of April 22 was being delayed because the MPAA and others “raised concerns about the economic purpose of this market and its usefulness as a hedging vehicle.”

The legitimate hedgers, the moviemakers and equity holders with a real financial interest to protect, don’t want it. But Cantor is pushing forward, because gambling is big business and there are vast sums of money to be made.

Critics are worried that the new exchange will turn Hollywood into another derivatives casino, vulnerable to insider trading. Even if traders aren’t hiding behind bushes waiting to trip up the stars, the exchange could create bizarre incentives for moviemakers to manipulate and distort the market for their own products, perhaps intentionally sabotaging movies they know are losers.

The Derivative Craze

A “derivative” market is one that is “derived” from an underlying asset, but participants don’t have to own the asset to play. Like gamblers at a race track, they can bet without owning a horse. Derivatives have now become a $605 trillion industry, about ten times the gross domestic product of all the countries of the world combined. This money is not contributing capital to businesses, helping the economy to grow. Rather, it is being diverted into wagers. Money is made by taking it from someone else.

Worse, half the wagers are negative: the players want the thing to fail. Warren Buffet called derivatives “financial weapons of mass destruction.” By massively short selling a stock or a currency, speculators can actually force the price down. Derivatives can be used to sabotage not only businesses but whole economies. Derivatives have been blamed for such economic disasters as the collapse of Japan’s stock market in 1987, the Asian crisis of 1998, and the recent collapse of Greece...

To me, the keywords in this article are:

"Derivatives have now become a $605 trillion industry, about ten times the gross domestic product of all the countries of the world combined. This money is not contributing capital to businesses, helping the economy to grow. Rather, it is being diverted into wagers. Money is made by taking it from someone else."

posted on May, 11 2010 @ 02:48 PM
In Chapter 20, "Hedge Funds and Derivatives" of her book Web of Debt, Ellen Brown states:

Derivatives are key investment tools of hedge funds. Derivatives are basically side bets that some underlying investment (a stock, commodity, market, etc.) will go up or down. They are not really "investments," because they don't involve the purchase of an asset. They are outside bets on what the asset will do. All derivatives are variations on futures trading, and all futures trading is inherently speculation or gambling. The more familiar types of derivatives include "puts" (betting the asset will go down) and "calls" (betting the asset will go up). Over 90 percent of derivatives held by banks today, however, are "over-the-counter" derivatives - investment devices specially tailored to financial institutions, often having exotic and complex features, not traded on standard exchanges. They are not regulated, are hard to trace, and are very hard to understand. Some critics say they are impossible to understand, because they were designed to be so complex and obscure as to mislead investors.

I've heard Max Keiser say they were designed to be confusing, as well.

posted on May, 11 2010 @ 03:02 PM

Originally posted by Mary Rose
In Chapter 20, "Hedge Funds and Derivatives" of her book Web of Debt...

Ellen goes on to say:

...the Commodities Futures Trading Commission (CFTC) was created in 1974 to regulate commodity futures and options markets and to protect market participants from price manipulation, abusive sales practices, and fraud. But . . . the speculators have managed to get around the rules. Derivative traders claim they are not dealing in "securities" or "futures" because nothing is being traded; and just to make sure, they induced Congress to empower the head of the CFTC to grant waivers to that effect, and they set up offshore hedge funds that remained small, unregistered and unregulated...

posted on May, 11 2010 @ 03:04 PM
If you are looking for the badest parts of these things and how they played into recent finaical problems around the world (TARP issues). I would suggest you start at AIG insurance. The first sign that sent shick ways through the industri (Ins & Securities) was in mid 2005. This is when they frist realized, that if not handled properly, the stocks and money markets will drop-if not fail.

No sense debating if they any impact (direct or not) on the current issues. They did. There is so much money tied up in these things by gov'ts and business that if they hadn't done TARP-the world financial markets would have failed. Again, no sense arguing it cause it won't be provable for sometime and I am not here to debate it-now.

If you look strictly at a book definition etc, all sounds too good to be true. that's because they are. Once the crooks and money grabbers got involved in the late 90's early 2000's- it was doomed.

This is why POTUS said in a speech about a month ago that the problem needs to be address, and soon, or more problems coming.

I wish I could get more into detail but I can't due to my work. Trust me, we aren't close to being out of this finanical mess.

So, when Bush and others said that AIG was too big to fail, they weren't kidding. AIG is the hingepin (at least as the USA is concerned)

posted on May, 12 2010 @ 07:21 AM
Webster Tarpley was a guest on Alex Jones' show on May 11, 2010 during hour 3. He talked about what happened on the afternoon of Thursday, May 6 to cause the 1000 point drop in the stock market. My understanding from listening to him is that there was a bet placed where $4 billion was at stake, the entity that would have to pay up the $4 billion began selling so they would be covered against this bet, and the situation snowballed.

Listen to this in the free audio archive for May 11, 2010, hour 3, between 24:30 and 29:43:

posted on May, 14 2010 @ 07:13 PM
Is a good source for info?

Here is an article by Kimberly Amadeo dated October 13, 2008 entitled " Role of Derivatives in Creating Mortgage Crisis":

A reader asks:

I have been reading that the reason for our economic downturn is the proliferation of "Derivatives" in the last decade. Can you explain to me exactly what is a derivative and how it works?

Derivatives are complicated financial products that derive their value by reference to an underlying asset or index. A good example of a derivative is a mortgage-backed security.

Here's how it works:

* A bank makes an interest-only loan to a homeowner.
* The bank then sells the mortgage to Fannie Mae. This gives the bank more funds to make new loans.
* Fannie Mae resells the mortgage in a package of other interest-only mortgages on the secondary market. This is a mortgage-backed security (MBS), which has a value that is derived by value of the mortgages in the bundle.
* Often the MBS is bought by a hedge fund, which then slices out portion of the MBS, let's say the second and third years of the interest-only loans, which is riskier since it is farther out, but also provides a higher interest payment. It uses sophisticated computer programs to figure out all this complexity. It then combines it with similar risk levels of other MBS and resells just that portion, called a tranche, to other hedge funds.
* All goes well until housing prices decline or interest rates reset and the mortgages start to default.

Since no one really understood what was in the MBS, no one knew what the true value of the MBS actually was. This uncertainty led to a shut-down of the secondary market, which now meant that the banks and hedge funds had lots of derivatives that were both declining in value and that they couldn't sell. When this happened, they stopped making new loans, which meant houses didn't sell, which only put more downward pressure on housing prices, which then caused more loans to default.

Soon, banks stopped lending to each other altogether, because they were afraid of receiving more defaulting derivatives as collateral. When this happened, they started hoarding cash to pay for their operations. Then they stopped lending to other businesses. That is what prompted the Bailout Bill, which is really the only solution to get these derivatives off of the books of banks so they can start making loans again.

It is not just mortgages that provide the underlying value for derivatives. Other types of loans and assets can, too. For example, if the underlying value is corporate debt, credit card debt or auto loans, then the derivative is called a Collateralized Debt Obligations. A type of CDO is Asset-backed Commercial Paper, which is debt that is due within a year. If it is insurance for debt, the derivative is called a Credit Default Swap.

Not only is this market extremely complicated and difficult to value, it is unregulated by the SEC. That means that there are no rules or oversights to help instill trust in the market participants. When one went bankrupt, like Lehman Brothers did, it started a panic among hedge funds and banks that the world's governments are still trying to fully resolve.

"That is what prompted the Bailout Bill, which is really the only solution to get these derivatives off of the books of banks so they can start making loans again."

Hmmmmm. Making loans to whom?

posted on May, 14 2010 @ 07:53 PM
A derivative is a contract deal based on the value/market of some other financial security/instrument.

It is NOT insurance. Insurance has capital requirements among other required stipulations.

These CDSs, CDOs are bets made secretly & privately in any dirty back alley on the planet.

2/3rds of a QUADRILLION [600+ Trillion] dollars of these are traded each year. Which is perhaps 20 times the entire planet's domestic product.

And because it is all done in secret it will inevitably bite the world economy on the backside, unexpectedly, even crashing the entire globe's economy if the Wall Street Wackos go too crazy.

First & foremost transparency is needed.
At least that way you can see when the tower of debt & obligation is tipping dangerously out of balance.

This would be aided greatly by requiring that they all be traded on [an] exchange(s). That way at least those with the initiative could in theory see how deeply who was indebted to who.

The other huge problem is the ratings agencies & insane theory where they didn't even bother to check a SINGLE mortgage out of thousands in a particular security to evaluate it, they just checked the price of the previous security.

If anyone had checked three mortgages out of the thousands they would have seen just how fraudulent &/or impossible these mortgages were in the first place.

But the Wall Street Wackos wanted subprimes, even from prime suitable mortgage borrowers, because they got higher interest rates. They didn't even think of the fact, the reason you get higher interest rates is due to higher risk. They had pretend ratings of triple A on complete garbage.

But the Wall Street Wackos didn't care, they just [like Goldman Sachs] peddled off the garbage upon unsuspecting customers while they were buying CDSs to short [bet they would crash] these same securities.

Why aren't these liars, fools & frauds swinging by a rope or at least in prison,
why are they being bailed out on your taxpayer backs?

I think the American people are autistic & pacified by empty corporate candied 'news-like' broadcasts on TV.

posted on May, 14 2010 @ 08:55 PM

Originally posted by slank
But the Wall Street Wackos didn't care, they just [like Goldman Sachs] peddled off the garbage upon unsuspecting customers while they were buying CDSs to short [bet they would crash] these same securities.

Is this against the law?

posted on May, 17 2010 @ 06:50 AM

Originally posted by slank
It is NOT insurance. Insurance has capital requirements among other required stipulations.

In Web of Debt by Ellen Brown, in the chapter called "Maintaining the Illusion," Ellen paraphrases Adrian Douglas from a June 2007 article in

While derivatives may appear to be complex instruments, Douglas says the concept is actually simple: they are insurance contracts against something happening, such as interest rates going up or the stock market going down. Unlike with ordinary insurance policies, however, these are not catastrophic risks that happen infrequently. They will happen eventually. And if a payout event is triggered, "unlike when a house burns down, there will not be just a handful of claims on any one day, payouts will be due in the trillions of dollars on the same day. It is the financial equivalent of a hurricane Katina hitting every US city on the same day!"

Ellen quotes Douglas:

Instead of stopping this idiotic sham business from growing to galactic proportions, all the authorities, and all the banks, and all the major financial institutions around the world have heralded it as the best thing since sliced bread. But now all these players are complicit in the crime. They are all on the hook. The stakes are now too high. They must manipulate the underlying assets on a daily basis to prevent triggering the payout of a major derivative event.

Derivatives are a bet against volatility. . . The DOW is not allowed to drop more than 200 points and it must rally the following day. Interest rates must not rise, if they do the FED must issue more of their now secret M3, ship it offshore to the Caribbean and pretend that an unknown foreign bank is buying US Treasuries like crazy. . .

Ellen concludes the chapter:

When the derivative buyers realized what was going on and quit paying premiums for insurance that didn't exist, said Douglas, "there would be "a whole new definition of volatility!" And that brings us back to the parasite's challenge. When the bubble collapses, the banking empire built on it must collapse as well . . .

What I'm concluding from my research on derivatives is that the buyer thinks it is insurance but it's not. And what follows from the sale of derivatives is massive fraud in the manipulation of markets.

Is market manipulation illegal?

I have to ask that question because things are so upside down. For example, the "Patriot Act" removes civil liberties guaranteed by the Bill or Rights. Perhaps Congress made market manipulation "legal"...

posted on May, 17 2010 @ 03:24 PM

Originally posted by Mary Rose
In Web of Debt by Ellen Brown...

I'm struck by another statement in this book, this one in the chapter entitled "Meltdown: The Secret Bankruptcy of the Banks," where Ellen quotes John Hoefle:

The U.S. banks - especially the derivatives giants . . . counting trillions of dollars of worthless IOUs - derivatives, overblown assets, and unpayable debts - on their books at face value, in order to appear solvent. In the late 1980s, the term "zombie" was used to refer to banks which manifested some mechanical signs of life but were in fact dead.

I've heard Webster Tarpley use that term "zombie bank." I didn't realize the term had been around since the late 1980s.

posted on May, 25 2010 @ 07:34 AM

Originally posted by Mary Rose
In Web of Debt by Ellen Brown . . .

In the Afterword of the book, written in February 2008:

The secret of the Wall Street wizards was out: the derivatives game was a confidence trick, and when confidence was lost, the trick no longer worked.

posted on May, 25 2010 @ 04:27 PM

Originally posted by Mary Rose

In Web of Debt by Ellen Brown . . .

In the Afterword of the book, written in February 2008:

Ellen also states:

. . . That the derivatives scam was indeed mainly about greed was confirmed by investment guru and trading insider Jim Cramer, in a televised episode on January 17, 2008. Mike Whitney, who transcribed the segment, wrote: "In Cramer's latest explosion, he details his own involvement in creating and selling 'structured products' which had never been stress-tested in a slumping market. No one knew how badly they would perform. Cramer admits that the motivation behind peddling this junk to gullible investors was simply greed. Here's his statement:


[We used to say] "The commissions on structured products are so huge, let's jam it." [Note "jam it" means foist it on the customer.] It's all about the 'commish'. The commission on structured product is gigantic. I could make a fortune 'jamming that crummy paper' but I had a degree of conscience -- what a shocker! We used to regulate people but they decided during the Reagan revolution that that was bad. So we don't regulate anyone anymore. But listen, the commission in structured product is so gigantic. . . First of all the customer has no idea what the product really is because it is invented. Second, you assume the customer is really stupid; like we used to say about the German bankers, 'The German banks are just Bozos. Throw them anything.' Or the Australians, 'Morons.' Or the Florida Fund [ha ha], "They're so stupid, let's give them Triple B" [junk grade]. Then we'd just laugh and laugh at the customers and jam them with the commission. . . . Remember, this is about commissions, about how much money you can make by jamming stupid customers. I've seen it all my life; you jam stupid customers."

[edit on 5/25/2010 by Mary Rose]

posted on May, 26 2010 @ 10:53 AM
Max Keiser: "The derivatives market is rife with counterfeiting; that's the key phrase - counterfeiting."

posted on Jun, 2 2010 @ 08:05 PM

Originally posted by GreenBicMan
There is no planned financial takedown.

Originally posted by Mary Rose
According to my research the international bankers who control this world behind the scenes want a central, one-world government. That means taking down the United States.

I have been looking for a good document or book to cite regarding this. Today I came across this link for the book Committee of 300 by Dr. John Coleman, which is often cited by researchers of the New World Order.

Starting on page 22, Dr. Coleman lists the plans of the globalists. Number 16 is "To cause a total collapse of the world's economies and engender total political chaos."

Dr. Coleman's website:

posted on Jun, 2 2010 @ 08:31 PM

Originally posted by GreenBicMan
What you understood in the OP is what these scam artist in the Senate would want you to believe. I know this because you use the word "bet" that was programmed into your subconscious from the soundbite you most likely heard Levin or some other moron talking about in that hearing several days ago.

The derivatives they are referring to are OTC derivatives. There are many types, but the most common ones are financial (Index Futures) and commodity derivatives. These are regulated by the CFTC. They serve many purposes.

Example 1)

I am a speculator, I believe the price of wheat to be going up.

Outcome 1)

I am adding liquidity in into the market for major hedgers

Outcome 2)

My added volume allows for price discovery in the marketplace.


So there are many results and many different viewpoint you can have. This is just an example of 1 and 2 real world outcomes/results of my actions.

Just go to investopedia or something to look things up if you are confused.

[edit on 1-5-2010 by GreenBicMan]

The types of derivates you list are often used by those holding or taking delivery of the underlying commodity, thus they are honest insurance in many cases.

The problem is that no one who owned the credit represented by the credit default swaps actually held the credit default swaps. It would make no sense to pay 5% a year to insure a bond paying 5% a year. Thus the only purpose of these vehicles was to allow people to place bets on the demise of the underlying company, mortgage tranche, etc. They were simply weapons of mass destruction created by those who had the power to make them pay off.

I am fed up with Wall Street defending their casino mentality. Once we return the markets back to being investment oriented, rather than speculative trading and hedging oriented, then we can once again have that money that's been tied up flow back into the economy.

posted on Jun, 4 2010 @ 07:25 AM

Originally posted by Mary Rose
I have been looking for a good document or book to cite regarding this. Today I came across this link for the book Committee of 300 by Dr. John Coleman, which is often cited by researchers of the New World Order.

I am impressed by and can really relate to the first paragraph of the Foreward to this book:

In my career as a professional intelligence officer, I had
many occasions to access highly classified documents, but during
service as a political science officer in the field in Angola, West
Africa, I had the opportunity to view a series of top secret
classified documents which were unusually explicit. What I saw
filled me with anger and resentment and launched me on a course
from which I have not deviated, namely to uncover what power it
is that controls and manages the British and United States

posted on Aug, 10 2010 @ 08:49 AM
Maybe someone can help me understand what Max Keiser is referring to in this video.

I understand that there is a huge problem with the global derivative gambling casino - and that this is the central cause for the global financial meltdown.

And I understand that unsound financial instruments are taken by investment bankers and packaged into new unsound financial instruments and sold, which is unethical.

But I don't understand what he says about investment bankers stealing money from "retail borrowers" in the first place. Is he simply talking about credit not being available for things like small businesses because . . . I can't finish the statement. Is that what he's saying, and what would the rest of the statement be?

posted on Aug, 10 2010 @ 11:15 AM
I recommend this Frontline video on the derivative market in the 90's. It's about 1 hour and well worth watching.

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

The Warning:

posted on Aug, 10 2010 @ 12:44 PM
reply to post by Mary Rose

Here's the full Keiser Report that this was taken from:

posted on Sep, 21 2010 @ 08:57 AM
That word "derivative" continues to be at the forefront as I follow the global financial meltdown and listen to commentary.

In this video of a regular Max Keiser program, Max states that the global banking system is in free-fall because they tried to jam $750 trillion worth of derivatives into a global economy that was only about $50 trillion in size:

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