“A little dose of fiscal reality and it ain’t pretty!” Admin
All the world’s largest banks are overleveraged on these toxic derivatives contracts: Deutschebank, Goldman Sachs, Wells Fargo, Bank of America, etc.
Basically a derivatives contract is like insurance. I always use the example of oil. If an energy company knows it’s going to need oil to run their electricity plant, but the price of oil fluctuates daily, they might want to negotiate a “set-price” [to make it easier for them to build the cost into the accounting models]. Such an energy company might go to Goldman Sachs and say, “Can you negotiate with Saudi Arabia to give us a stable price?” Whereupon Goldman Sachs creates an insurance contract, locking in a spot-price of, say, $100 a barrel. No matter where the international price goes, Goldman Sachs is now contractually obliged to deliver the oil at that price. But what if oil plunges from $100 to $20 a barrel?
Goldman Sachs has to eat $80 for every barrel sold.
(And that’s just what happened.)
So Goldman Sachs, that has $900 billion in assets, now owes $54 trillion on these derivatives contracts.
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