I have talked about the fact that the modern banking system has collapsed and has triggered a financial tsunami, but now I will talk about the 'weapons of mass destruction', not those  - purported to be found in the Middle East, but the financial weapons of mass destruction - derivatives.

I will quote Warren Buffet, the world's greatest stock market investor, in his Chairman's Letter in the Berkshire Hathaway 2002 Annual Report:

"We view them (derivatives) as time bombs both for the parties that deal in them and the economic system.  In our view derivatives are financial weapons of mass destruction, carrying dangers that, while now latent are potentially lethal."

Further:

In 1990, Sir Julian Hodge in a memo dated November of that year to senior executives of the Julian Hodge Bank said:

"In no circumstances enter the derivatives trading market without first agreeing to it in writing with me…At some time in the future, it could bring the world's financial system to its knee."

So what exactly are derivatives?

First, let's establish that there is an organization that started all of this - the International Swap and Derivatives Association (I.S.D.A).  This is the organization that spawned the US$500 trillion global derivatives market - the organization that manufactured most of the derivative products, the financial WMD's. 

Derivative trading could, at the extreme, be described as 'loan sharking' and 'gambling'.  In reality, it is the ability to trade with money you don't have to 'put up' or even money that you don't own, the ability to trade on 'margin'.  Say you want to trade an amount of US$ 1000, you need only to actually part with 10% of that amount and despite the fact that you are 'truly' working with 1000, your actual physical cash exposure is only 100.  Now multiply this into the millions.  There is a downside however…losses can be unlimited!

The problem is that the officers of the ISDA are from the worlds leading banking institutions! 

I talked earlier about the fact that banks are now lending to almost anyone and this has spawned from the lack of money making opportunities from 'traditional' banking.  

The banks have been forced into forming their own 'elite' money making club in an effort to protect their industry, the industry that is worth literally billions.

Many mathematical geniuses are employed to create elaborate mathematical models to eventually come up with the 'sucker deals' - the endless list of investment products that are inveitably sold to the public.

If you are from the UK, you will probably be aware of how, in the early to mid 1980's, the building, banking and insurance industries collaborated to sell more homes and the creation of a set of 'products', that lined the pockets of the same industries, but only served to potentially bankrupt the individuals in the process.  I am talking about the 'endowment' mortgages that promised to pay off a 25 year mortgage in 15 years, through the 'prolific' investment capabilities of the fund managers…and we were sold!

I am not against the sales people who sold them for they were totally indoctrinated by the belief, nor the people that bought them, for they knew no better, but I am against the acceptance of blame when it all went wrong and disaster struck in 1989/90.

…continued

~Neil