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SixWise Readers Share Wise Words About the Year 2000 Derivatives Law … And Their Impact on Your Financial Future


Derivatives are a financial instrument whose value depends on the value of some other asset (including stocks, bonds, currencies, interest rates, commodities, and related indexes) or a combination thereof. In other words, a derivatives value is derived from something else. Rather than actually trading the other asset, derivative traders wager on the future performance of that asset.

Warren Buffet has called them "financial weapons of mass destruction." Others have said they’re a form of legalized gambling.

In 2000 a little publicized piece of legislation was passed that removed derivatives and credit default swaps from federal oversight -- and may have caused the U.S. economic collapse.

At the center of the derivatives market is what’s known as a "credit default swap," which are private insurance contracts that pay off if the investment goes bad … but that don’t require you to own the investment to collect. The simplest way to put it is it’s like buying an insurance policy on someone else’s house and then collecting on it if their house burns down.

In the last several years, trillions of dollars in "side bets" have been made on mortgage securities, and whether or not people would default on their mortgages. But these side bets were made in a completely unregulated market, and the banks and investment houses selling them did not set aside money to cover potential losses.

This process was actually illegal up until 2000 with the passage of the Commodity Futures Modernization Act of 2000. Prior to this, in the early 1900s "bucket shops" lined the streets, allowing people to make bets on whether stocks would go up or down. This speculation contributed to the stock market crash of 1907 and the later Great Depression, and laws were put into place to ban the bucket shops.

In 2000, however, this little publicized piece of legislation was passed that removed derivatives and credit default swaps from federal oversight. The Act also pre-empted states from enforcing existing bucket shop laws against Wall Street.

If this sounds like it is beyond one's greatest imagination -- it is for us as well ... except one point of focus: The ability to STOP NOW the derivatives deficit bleeding by demanding Congressman and Senators revoke the law back to the 1917 "no bucket shop law." This law has silently caused the collapse of our economy and everyday continues to tax us all further by transfer of unconscionable wealth to a select few who have and continue to take advantage of this created loophole in the 1917 law.

How to Take Action Now

To express your thoughts on the Commodity Futures Modernization Act of 2000 to your elected officials, visit and enter your zip code to find your representatives and speak your mind.

Last week, we also asked readers to respond to this 60 Minutes expose on the derivatives market… and here are the important thoughts you had to share.

"Derivatives should be be made illegal also Risk Arbitrage! In both practices it is a lose lose scenario for the investor with no recourse!"

"Legalized gambling in the form of derivatives have no place in our financial markets. It seems that sometimes we chose to ignore the lessons that history has taught us. Congress needs to step up and outlaw them, or our great grandchildren will be paying the price of another bailout."

"This is devastating News! Based on these insights there is no end in sight unless the Law is repealed... now! SixWise: Please Tell us what the exact Bill / Law is so we can contact and demand our congressmen repeal this Law immediately! Can you give us the link?"

The law is the Commodity Futures Modernization Act of 2000. To find your elected officials, visit and enter your zip code to find your representatives and speak your mind.

"Demanding the derivatives 2000 US law is repealed is an URGENT needed start."

"Your article got me looking further into this. I found two sources that stated the international derivatives deficit exceeds $500 trillion. This is over 10 times the Gross International Product of what is made and sold in the WORLD as your Sixwise article stated. What this means for the US and our future is that a small group is owed more than the World can make each year which is horrific. This must be stopped. Demanding the derivatives 2000 US law is an URGENT needed start."

"Derivatives make money for those few who manipulate and gamble with them. Everybody else is sure to lose to the gamblers. They degrade financial strength in banks and individuals and should be closely regulated."

"Derivative market operations have and will continue to destabilize the efficiency of financial markets. Since derivative instrumens have already been misused due to no regulation and the ignorance of the American people, the economy will continue to suffer with the burden and deficit falling on Joe the plumber/taxpayer."

"This is an unacceptable form of gambling, that could bring down world economies .The Glass Stegall act when lifted was the green light to create greed and avarice like the world has never seen, now we are in a economic spot that we may not be able to get out of. Write congress Now."

"Outlaw derivatives."

"I believe that derivatives are vampires in the financial market and should be outlawed permanently. They are making a few rich and the rest of us poorer."

"An Easily Understandable Explanation of Derivative Markets from my perspective:

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand? …. Regards"

"Yes, they should be outlawed! This could happen in the future if we allow it to continue. The brokerage houses are now marketing a new product where they are buying insurance policies of people who are choosing to cash out their policies early. Unfortunately this too could be a ticking time bomb since we are living longer and the insurance companies will more than likely be forced to raise premiums to compensate for the added payout (and the fact that the cost was kept down by those who died and never collected)."

"They should be treated as any other gambling venture."

"This is like taking money from your checking account to put in your savings. It diminishes the ability to pay your bills causing a deficit, which could be catastrophic. Yes it should be illegal."
--Victor. NY, NY

Recommended Reading

Is the Derivatives Market Dooming Your Financial Future?

What is Deflation, Why Should You be Concerned -- And What Can You Do?

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