<Oh god.>Oh, drama! ;-)<Because it was IR derivatives and FX swaps that made the banks lose money. Sure it was. Not the fact that Citi, BofA, Bear, Lehman were levered 32x to the RE market and mortgages...which is how pretty much every US bank in history has gone bust, ever.>Obviously, excessive leverage exacerbates losses.<Derivatives were invented approximately 3,000 years ago to hedge risk. They have yet to break a financial system. >Certainly, the Maestro, Alan Greenspan, enthusiastically agreed with you in 2005. So you must be right -- derivatives actually reduce risk by spreading it!http://www.federalreserve.gov/boarddocs/speeches/2005/200505...Unfortunately, the use of derivatives, especially CDSs, came as a shock to traders, who were quoted in the WSJ in late 2008 plaintively complaining, "We never thought any of these would go down!" Yes, I remember that so clearly because the traders literally thought their derivative bets were essentially a way to make money risk-free.<Notional is just a number the know-nothings in the media use to scare the ignorant, the rubes, and the witless in order to sell papers.>Lest you think that I am a rube or witless, let me point out that only a small fraction of $700 trillion needs to be concentrated and fail in a misplaced bet to sink a company -- such as AIG -- which is so connected that it can potentially crash the entire system.If you disagree, please replay the exciting months of September 2008-March 2009 for your own personal edification.Wendy
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