A Brief History of Derivatives
(The Most Dangerous and Controversial Financial Instruments Ever Created)
The giant bubble forming in the global derivatives market (led by America’s big banks) bears frightening resemblance to the S&L crisis. In the 1980’s a lack of regulation and oversight, allowed America’s banks to trade dishonestly, hide losses and embezzle client and government funds. The same scenario is unfolding right now amongst the world’s global derivatives traders. America’s big banks, big corporations and mutual funds have turned into giant casinos...using unregulated over-the-counter and massively leveraged derivative bets as a new source of income…and as a way to disguise losses and dupe investors. The difference though to the S&L crisis is that when the derivatives bubble finally blows, the fall-out will be 100 times worse. The S&L crisis cost American taxpayers hundreds of billions of dollars and depressed the real estate market for years. But no pot will be big enough to bail out America this time.
1973 The Chicago Board Options Exchange opens…and trading in large-scale derivatives begins.
1983 President Reagan signed the 1982 Futures Trading Act for derivatives. This was a major feature in the disastrous Reagan-era deregulation of the U.S. economy.
1986 The notational value of derivatives balloons to $618 billion…
1987 The failure of the stock markets and the derivatives markets to operate in sync, causes the collapse of global stock markets (according to the Presidential Task Force on Market Mechanisms)…and the terrific force of derivatives is felt for the first time.
1988 The notational value of derivatives hits the $1 trillion mark.
1994 Global derivatives market exceeds $10 trillion mark…and the first series of major derivatives failures begins. (Metallgesellshaft loses $1.5 billion on oil futures, Procter & Gamble loses $157 million by trading derivatives, Orange County, California, publicly acknowledges a $1.5 billion loss due to its derivatives plays, bankrupting the county).
1995 Barings Bank goes bust because one rogue trader, Nick Leeson, loses $1.4 billion with derivatives bets on the Nikkei index that were shattered by the Kobe earthquake.
1995 Wisconsin's $6.7 billion State Investment Board Posts $95 Million Loss From Unauthorized Use of Derivatives.
1997 Under-regulated, derivative-based credit swap contracts causes the collapse of the Asian markets.
1998 The derivatives trading of a single hedge fund, Long Term Capital Management, almost causes the collapse of global stock markets. Fed organizes a $3.5 billion bailout.
2000 Global derivatives positions leaps to more than $95 trillion - even as the stock market crashes and the global economy goes into recession.
2001 Enron (without the public knowing it) had secretly transformed itself from an energy trader into an unregulated derivatives player, causing its eventual collapse.
2003 Fannie Mae lost $8.4 billion on its derivatives portfolio causing its stock to plummet.
2003 Buffett warns investors that the bubble in the derivatives market is a “mega-catastrophe waiting to happen.” His comments send ripples through global markets.
2006 Global derivatives market exceeds $500 trillion (more than 10 times the size of the entire global economy).



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