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Chapter 12: The Collapse!

leading derivatives experts, Paul Wilmott, who holds a
doctorate in applied mathematics from Oxford
University, the notional value of the derivatives market
is $1.2 quadrillion, making it more than five times the
world’s GDP. According to Statista, the world’s GDP
in 2014 was only $78.04 trillion. The unregulated
derivatives market contributed to the crash of 2008.

If participants in the derivatives market use their
own money, there may not be a problem. However, this
was not the case in 2008, and it is not the case today
because of excessive leverage.
Suppose you have authority over a large sum of
money, such as a retirement fund or the finances of a
country, such as Iceland. One day a salesperson from
Bear Stearns Investment Bank (Bear is now a part of JP
Morgan Chase Bank) walks into your office and asks if
you are interested in buying a bond. The security has a
triple-A rating and has a history of paying 25% return.
“Wow, that’s a great deal—what is it?” So he says,
“Hey, I’m busy—do you want this or not?” Bear
Stearns has an excellent reputation, and the security has
the highest credit rating, so you take the deal without
knowing the particulars. Few people knew what they
were buying in the derivatives market leading up to the
financial collapse because this was an over-the-counter-
market, an unregulated market.

Excessive leverage is the core problem with the
derivatives market. If the derivatives market were a
zero-sum game, meaning someone wins and someone
loses, the market would not pose a danger. However,
the excessive credit negates this market as a zero-sum
game.

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