$1.144 Quadrillion – Total Size Of Derivatives Bubble

Buddy, can you spare 1.144 Quadrillion dollars? Based on one analysis, that’s the total size of the global derivatives market right now, equivalent to $190,000 for every person on the planet. (A derivative is an investment whose value comes from, or “derives,” from another investment, like stocks, credit, or home mortgages…) If you’d like to learn more about derivatives and become frightened by them, check this article out. For further comparison, here’s what the Sears Tower looks like, as dwarfed by a cube of 1 quadrillion pennies.

The Size of Derivatives Bubble = $190K Per Person on Planet [Silicon Valley Watcher via BoingBoing] (Photo: zenilorac)


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  1. B says:

    $190K per person? I’m rich!

    • Quaoar says:


      You are not rich, that is what you owe!!! All of this because of side bets, without a cent of equity, totally trillions upon trillions of dollars involving AIG and practically everyone else on the planet.

      This is like you and me going to Las Vegas and putting up $5 in cash and a lunch against a billion dollars of chips, without benefit of anything more than a small slip of paper stating the ‘contract’.

      Why the hell anyone on planet earth feels any responsibility for these side bets is beyond my comprehension, particularly since most investment banks and investment firms have no idea what their total exposures to losses are even at this date.

      These companies should be ‘allowed’ to file bankruptcy (equivalent to leaving the loaded pistol on the side table after “that quiet talk”).

      AIG “cannot fail” since AIG is the source of many of these unbacked side bets. The government is funneling money into AIG so that they can settle their side bets with other companies and pay their execs and managers their millions of dollars in bonuses.

      The better action would have been to let AIG go bankrupt, invalidating some 50 trillion dollars in side bets not backed by any equity whatsoever. Let it all go down on the excesses of the financial ‘wizards’ and the lack of interest on the part of the SEC. It would be cheaper for you and me altogether.

  2. Trai_Dep says:

    Not having read it – and admitting that CDOs and CDSs are obscenely bad – I’m leery of grand totals like this, since it also includes virtuous derivatives, such as futures contracts.
    That said, HOLY SH*T!!

  3. hypnotik_jello says:

    Ahahaha, we’re so screwed!

  4. Acolyte says:

    Sigh, any chance I can sell all that I own for something that I can trade with easily ie gold? Then move to a rural area and live off the land, maybe get some guns so I can take care of myself?

    Any chance I can get some like minded people and we can start our own community with our own currency and laws?

    Wait this sounds a eerily familiar. Back to work…..

    • Eyebrows McGee (now with double the baby!) says:

      @Acolyte: No, no, you want hammers and ammo! I’m a devotee of end-of-the-world websites (it’s a sickness, I can’t stop) and they all agree your shiney pretty gold will be worthless when Armageddon comes, but everyone will want hand tools and ammo!

  5. darthsodomizer says:

    get your shotguns

  6. B says:

    Wow, it’s 22 times the size of the world GDP. I think this means that more money was lost in the crash than exists.

  7. ojzitro says:

    While the number sounds frightening, it’s really a list of bets. Think of it like roulette; You can bet the exact number, odd or even, black or red, 1/2 board or 1/3 board, and the greens. Now just because each one of those bets exist, does not mean each is of value. Everyone of those can’t win in one ball, so some are by default valueless.

    ~ If you placed a $1 chip on every number on a roulette board 0, 00, 1-36, there would be 38 dollars on the board. This puts the casino responsible for paying out $1330 dollars (35-1 odds), but in reality, they’ll only pay $35. Odds lower on the “derivative” bets, but this article is counting every conceivable derivative bet as a winner, which is misleading. Just because the bet exists, dos not make it a real gain of loss.

    When companies like AIG executives leverage themselves by providing insurance on these bets, that is when the trouble starts. Or…if when people begin defaulting on derivatives, and credit markets freeze again.

    • TomSmitt says:


      They really aren’t gambling. The majority of those contracts are simply ways of trading a fixed payment for a floating payment. An equity swap for example, can be used to gain exposure to the return on an equity index in exchange for a fixed payment. This exposure is a hell of a lot safer and efficient than holding a basket of stocks plus the notional principal is not exchanged.

    • daveistrad says:

      @ojzitro: How is a naked CDS, which makes up an obscenely large percentage of these derivatives, not like gambling?

  8. TomSmitt says:

    Another case of an organization (ACTA) and the media not having a clue and twisting numbers to sensationalize an issue.

    The majority of these contracts don’t swap the notional principal. For example, the $393 trillion in rate swaps, the two parties will not swap $393 trillion but simply the interest payments. Essentially they trade a floating rate for a fixed rate. Generally, the parties will net the liability on a quarterly basis to reduce counter party credit risk and are quite safe.

    That being said, we do need some form of regulation for the swaps market e.g. a clearinghouse for certain types of contracts and require an insurable interest for CDS but the vast majority of swaps are very safe and promote efficiently functioning markets.

  9. ojzitro says:

    Also, Credit Default Swaps will begin trading on the CME and ICE exchanges soon.


    The big rub in this disaster is that money stopped trading hands, because no one felt like the counterparty would make good on their bet. These exchanges will in effect be guaranteeing the CDS derivatives, and hopefully start putting a value on a very complex trading instrument.

    Until this happens, this article is number crunching for the sake of doing math.

  10. Dethzilla says:

    And by Sears Tower you mean the Willis Building right?

  11. Urgleglurk says:

    Sorry, but after reading that, I need to go find some Rolaids while I can still afford to buy them…

  12. ojzitro says:

    @ Tom (reply link still not working)

    I hear you, and understand. I use the bet analogy, because it seems to be the go to analogy during this current recession. I do not understand all of the intricacies of derivatives, truth be told, I don’t think anyone has a grip on ALL of them, but I can smell a sensationalistic article a mile away.

    • TomSmitt says:


      Cool. The real problem underlying all of this is over leveraged consumers and banks with their capital base linked to real estate. Blaming generally derivatives is not the solution.

  13. ojzitro says:

    @ Tom

    People started to save all at once, which stalled our consumer based economic engine, and those banks are still in trouble because housing is yet to make a bottom.

    Bernanke on 60 minutes danced around the baking/housing connection by saying we need to help “save financial institutions”. To do that, they’d have to artificially prop up housing or keep pumping in money; “Gonna be a while, Grab a Snickers.”

  14. meechybee says:

    If I pony up $190,000, can I leave the planet?

  15. INsano says:

    Hooray for the Consumerist for, again, failing to tip your hat to this reader who sent you the tip about this story a week ago!

    Marketwatch…700 trillion elephant in the room…no? Ah.

  16. Traveshamockery says:

    That’s not a moon, it’s the global derivatives market!

  17. Dillenger69 says:

    Would the inverse of a derivatives bubble be an Integrals anti-bubble?

  18. kwsventures says:

    Some talking head on TV said derivatives were invented by the “best and brightest” we have to offer. That “best and brightest” goes back the JFK administration and guys like Robert McNamara that got us involved in the terrible Vietnam War. With that in mind, when I hear “best and brightest”, I always get a good laugh.

    • redkamel says:

      @kwsventures: once I saw a summary of how the derivatives and the loan selling worked, I realized it was a stupid idea and wondered how anyone could have thought it was good idea to on a massive scale. Sure, one or two derivatives, while sleazy, might work and make money. But basing the whole system on it? Retards. I ask my friends in finance every day how it could have been a good idea.

  19. Acolyte says:

    @ Eyebrows McGee (on Twitter: LPetelle)
    For some reason can’t reply directly. I too visit those sites but not as much as I used to but I must admit that as time goes by it gets tempting to give their “the end is nigh” cries some more attention.

    I think its time I log on and see what I can stock up on other than guns and tools.

  20. sk1d says:

    anyone know what the value of the underlying assets all these derivatives are based on?

    • daveistrad says:

      @sk1d: With regards to CDS contracts, specifically, which are valued at a notional amount of about $60 trillion, the last I heard the underlying assets were worth around $5 trillion.

      • ojzitro says:

        @daveistrad: Where did you hear that? From all i can read, the internal accountants can’t place numbers on these things.

        When the ICE and CME fire up the CDS exchanges, we’ll find out pretty quickly what these assets are valued at.

  21. MSUHitman says:

    Last week’s episode of Life on NBC dealt with this. Derivatives trader found dead in his apartment and it turns out he was getting his money for everything (including hiring escorts) by being a professional hitman, and he was eliminated by a female competitor because business in that area was also down.

  22. Con Seannery wants the azure F back! says:

    Obama can deficit spend our way out of it, don’t worry!

  23. Meathamper says:

    Isn’t the entire derivatives category a little to vague? I mean, it just sounds big, but you could really tighten the net on this one.

  24. Robert Boyd says:

    Hi. These kinds of numbers are interesting but don’t tell you much. The derivatives that caused the big problems with AIG are CDSs, but there are many other kinds of derivatives. The nominal value of a CDS is the entire value of the underlying bond. When you enter a CDS contract, you are either providing insurance against that bond defaulting in exchange for a fee every six months, or you are the buyer of the insurance. Now let’s say you have bought a bunch of AA rated bonds. You could enter into a CDS agreement that effectively would turn those AA rated bonds into AAA rated bonds by insuring them.

    The thing about nominal value is that it assumes that the underlying bond defaults 100%. In other words, bondholders receive nothing from the bond issuers, but get paid off 100% by the issuer of the CDS as insurance. But that very rarely happens in real life. If a bond defaults, the bondholders usually get some fraction of a dollar on the dollar (and if you have a CDS, your counterparty there will pay the rest). If you bought company XYZ’s corporate bond and a CDS on that bond, XYZ went bankrupt, you get $.75 on the dollar from XYZ and the CDS counterparty pays you $.25 on the dollar. There are CDSs on all kinds of bonds, not just super-risky hitherto-incorrectly-rated CDOs. The odds of ALL those bonds defaulting 100% (which would mean that someone would be on the hook for the nominal value of those bonds) is zero. Seriously, if that happened, it would accompany the collapse of civilization. The survivors would be more likely to have to worry about marauding cannibals than their 401K.

    A big scary number? Yes. Does it really mean anything in the real world? No.

  25. FrankenPC says:

    I was reading a commentary on Jon Stewart’s now famous attack on CNBC. The writer said attempting to understand how money moves in all the various markets is akin to understanding particle physics.

    I disagree…particle physics is way easier.

  26. Anonymous says:

    This is an egregious example of the media attempting to sensationalize an item of the current situation which is not really important at all…
    For a specific example lets say bank A buys $1MM of a credit default swap on company XYZ from bank B. Now yes, this would increase the net derivatives exposure by $1MM (this is to say nothing that the swap is not protection on a XYZ bond that bank A may or may not own).
    Now lets say bank A decides to cancel the swap (either after making or losing money on the transaction) so they sell an otherwise identical $1MM XYZ CDS back to bank B. These transactions should totally offset (in almost all cases) and the “notional outstanding” would be zero. However, as articles like this would lead you to believe, the net derivatives in the economy increased by $2MM due to the above transaction.

    I’m not sure where most financial writers learned their mathematics but 1+ -1 does not equal 2, it equals 0.

    (For those people in the know, I am fully aware that the contracts often do not offset completely due to strikes, maturities and counterparty risk, but this is a second-order concern to the main point that the “derivatives bubble” is a very misleading concept to the public).

  27. sk1d says:

    well if it’s only $5trillion, since the government has already spent more than this in bail out money, wouldn’t it have made more sense for them to guarantee the underlying assets….essentially trying to shore up the base rather than trying to prevent the top for falling over?

    where’s you get that number, i’d like read up on that?

  28. bishophicks says:

    That article is 5 months old and was written right when everything was going to pieces. I agree with what many are saying here that just because these contracts exist doesn’t mean they all have value. For example, some pay if interest rates go one way, some pay if rates go another, but rates can’t go up and down simultaneously, so they can’t all be worth something.

    That being said, credit default swaps need some serious investigation and regulation. There need to be some rules that state that “if your exposure is X, then your reserves must be Y” or something to that effect. If AIG was forced to have some level of reserves against the swaps they were writing, they would have had to stop at the point where the reserve requirements matched the total assets of the company and we wouldn’t be in this mess right now. Another thing that needs to be done is disallowing someone who is not an interested party in a potential credit default. There were more swaps written against the value of Lehman debt than there was Lehman debt. If I own $100 million in Lehman bonds than I should be able to insure against their default, but someone who writes a CDS for Lehman debt who a) doesn’t own any Lehman debt, b) wasn’t party to the issuing, selling or rating of that debt, and c) isn’t Lehman Brothers, is just making a bet and should take their clients’ money to a casino.

  29. parrotuya says:

    It is for this reason that bailouts won’t work. There are more “toxic assets” out there than can be covered by all the world’s economies combined. It’s coming.

    DOWn, baby, DOWn!