Wait, the Derivatives market is worth $1,200 TRILLION dollars???

[FBaggins]

15. That's certainly correct.

There are a group of financial institutions who made the same amount of money that JPM lost.

That is not to say that this is not a serious problem

Right. But the problem isn't that derivatives exist. They're actually a very good idea that reduces risk when used properly. The problem is when they're used to make large bets.

What many of these are used for is to create the illusion of "insurance" or "hedge" against loss.

Wait... now we disagree. There's no illusion there. They are insurance and they do provide an appropriate hedge against loss. The problem begins when they aren't used that way.

A much simplified example is home insurance. If you own a home it's entirely reasonable to hedge the risk of its loss by purchasing homeowners insurance. That's a highly-leveraged investment that returns zero in most cases but a ton in certain rare events. What is not appropriate is purchasing insurance on the property down the street for which you have no ownership interest.

It gets worse when you purchase insurance on lots of homes you don't own. Then take it to the next level and imagine a company that does this for profit... and you purchase options on the stock of that company (layering more leverage onto those insurance contracts).

If JPM morgan had a large loan portfolio that behaved in the opposite direction from the swaps they puchased... there would be zero problem. They would be exchanging a small portion of possible gain for an insurance policy against a large loss. But buying that same investment "uncovered" is an inappropriate risk which should not be permissible for that type of institution any more than I should be able to take out a life insurance policy on you.