[Moonman62]

One word describes this paragraph – GREED! The investment and commercial banks of the entire world put everything at risk so that they could ‘participate with the big boys’ where it involved risk.

I thought they were the big boys, and how can the derivatives be worth several times more than the bonds themselves? The only net loss was the $800 billion on the $2 billion in bonds, since they were still worth 60%.

[BikerJoe]

I thought they were the big boys, and how can the derivatives be worth several times more than the bonds themselves? The only net loss was the $800 billion on the $2 billion in bonds, since they were still worth 60%.

I've seen some estimates of the total exposure at ~450 trillion.

Considering that some estimates of the total replacement cost for human civilization (every house, car, airport, sewer system, etc.) is ONLY around 130 trillion, how in the hell could the exposure ever be that large?

[PapaBear3625]

I thought they were the big boys, and how can the derivatives be worth several times more than the bonds themselves?

Suppose I buy insurance on the full value of your house from Insurance company A. Then I buy insurance on your house from Insurance Company B. If your house burns down, then I make double the value of your house.

But doing this will put me in jail, because it creates an incentive to burn down your house.

It's a similar deal with CDS's. they created a financial incentive to burn down our economy.

[politicket]

and how can the derivatives be worth several times more than the bonds themselves?

Because many 'insurers' sell 'insurance' on the bonds (between party's that don't even issue or own the bonds), so when the bond defauts it can pay out many times the face value of the underlying bond.