How do you make $100 million per day? Goldman Sachs did it—and still does it. It even brags about it. Goldman’s net revenues for 2009 were over $45 billion. Most of this—$34.37 billion—came from trading. During the second and third quarters of 2009, Goldman made over $100 million per day on 82 out of 130 trading days. It lost money on only three days during the same period. Goldman explained that they were brighter than other people. They were “doing God’s work,” as Chairman Lloyd Blankfein put it. Well, maybe; it does sound miraculous. But could we have a few details? Goldman is the biggest player in the $600–800 trillion derivatives market. Everyone agrees Goldman is operating with a “too big to fail” taxpayer guarantee. If we are going to have to pay for it when it blows up, we should at least know what is going on.
The derivatives market is huge. The entire world economic output in 2009 was $66 trillion. The derivatives market is perhaps ten times that. And twenty years ago, that market did not even exist.
What is a derivative? In a March 4, 2008, report, the Joint Committee on Taxation gives a technical definition: It is a “bilateral (two-party) executory contract . . . with a limited term (lifespan), the value of which is determined by reference to the price of one or more fungible securities, commodities, rates (such as interest rates), or currencies (an ‘underlier’).”
Essentially, it “is a wager with respect to the change in the price or yield of an underlier.” Derivatives were unenforceable until President Clinton, with bipartisan support, signed the Commodity Futures Modernization Act of 2000, which exempted them from being treated as gambling contracts.
