Dondon:

Though in general I agree with you regarding the use of derivative instruments, we need to recognize that it was not the derivatives themselves that caused the problem but rather the excessive leverage which was allowed to accompany the derivatives. Though 40X leverage was common, I have heard that in some cases they were levered up 100:1. (ie: a $10,000 bet engenders a potential 1 million dollar liability). It is the scope of this problem that they are now trying to unwind.

It seems some lessons, we just never learn. One of them is the lesson of 1929 and the Great Stock Market Crash. At that time what precipitated the "crash" was excessive margin trading with very low regulatory margin requirements. Sound familiar? Basically the same problem we have today. Except, many of the derivatives were just bets made on phantom events and not a real asset. So many of them were entirely divorced from any linkage to underlying or inherent value. Derivatives to me are loathsome if they merely represent a simple wager with no linkage to anything of measurable value. However, the real danger comes from the excessive risk to the entirety of the securities industry through overly permissive margin requirements and resultant "asleep at the switch" regulatory authorities. All of which we had in abundance!

Brian