You buy insurance on hour home and on your car don't you? What happens if there is a major earthquake in your city and your insurance company declares bankruptcy and doesn't pay? Your insurance was a derivative. It was a hedge against a financial loss.
Someone was saying conservatives should ban derivatives. But if you own 500 shares of stock and you sell a covered call option on it? We're suppose to ban that activity? A covered call is a derivative.
The government insures your savings account up to 100k so you won't have loss. We gonna ban that activity too?
.......If the whole financial system collapses.... it doesn’t matter ... we’re all screwed. I agree. But it doesn’t take derivatives to make that happen........
Moving on after the foregoing mutual agreement, and based upon 43 years of borrowing for large real estate projects, I am going to respectfully dis-agree with you that a “derivative” should ever be regarded as JUST “Insurance”. It’s not.
When I used to go in a bank lobby to see my banker to borrow lots of money on a 150 unit Apt project, the first thing he wanted to see was my “personal balance sheet”.....and, whoa bubba if there was any mis-representing going on.
Flash forward to now on “derivatives”. “Derivatives”, at their lowest common denominator, are a “wager” or a “bet” by the bank on some future event unforeseeable by anyone but God himself. It’s almost sorta like betting that lightning will strike at a certain address on a certain day at a certain time, AND YOUR USIING OTHER PEOPLES MONEY TO MAKE THE BET! That scenario is not insurance. In Vegas, it’s called CRAPS! (love that game actually)
Back to my banker, and the construction development loan on an apartment project, if he saw ANYTHING on the ASSET’s side of my balance sheet he did not like, he would just summarily move it over into the liability side or just wipe it out or just shake his head and say re-do it. I remember his vivid admonition to me.......”that’s an Appraised Value”.........GAAP only allows COST on balance sheets submitted to obtain a loan. We don’t “bet” on appraised value of YOUR “assets”.
Now, here we are decades later, and the banks have made the biggest bet in the history of the universe not on an appraised value of a hard asset but quite literally just a “paper bet” backed by nothing, on what market value might be in years going forward. Because they did this with depositors money, it is a criminal act, in my opinion.
So, to make a few bucks NOW, the banks, with government regulatory connivance or disregard, or bribes, have RAPED their balance sheets over these past few decades just so they all could make a some big bucks now and never mind their depositors whose money they were using.
When a bank like JP Morgan, just naming one, is allowed to ignore GAAP, and Banking 101 on balance sheets, and run up a 70 trillion NEGATIVE NET WORTH balance sheet then the bankers and the government officials involved should all go to jail for life. In China, they would be executed. That’s ok with me too as they have stolen the peoples money and cannot pay it back and our government could not even begin to. One article says the total derivatives out there is 700 trillion! That paralyzes the mind!
Regarding your last sentence about the government’s guarantee of 100 k in deposits. I’m sure you know that in a rush on banks that guarantee is only able to cover a very tiny amount of total deposits. So, again, out government (both political parties) have robbed us and defrauded us again. In the coming collapse, you will lose your deposits. The government and the banks have already stolen them!
Now, some of my “smart” friends say “yeah, but oh well, the government will paper over it somehow”. For my kids sake, I hope so.