The article below provides a good explanation but I have my own take. Now using the chart below we see that the total of all the assets of the 5 major banks totals $5.47 Trillion but the total amount of derivatives contracts for the same five banks equals $206 Trillion. This means that if the banks liquidated all of their assets they have enough to cover only 2.5% of the outstanding contracts. So how did it get this bad. First you have regulators and our elected representatives either asleep at their desks (or surfing for porn). Second they all lined their pockets in the good times with Wall Street money so they don't care what happens to main street when the Ponzi scheme blows up.
The next time you get pissed at that idiot down the street that refinanced his house into bankruptcy remember he probably didn't graduate from Wharton or Harvard but these clowns did. They have created the ultimate house of cards and we need just a light breeze (maybe the PIIGS) to have it all come crashing down. By the way if you still don't think derivatives are a problem the total GDP of the World was only $58 Trillion in 2009 according to the IMF or just 27% of the total amount of derivatives in the U.S. Now that's going to be one hell of a bailout.
From Ezra Klein's Blog in the Washington Post
The banks, of course, aren't big on Blanche Lincoln's idea to spin derivatives-trading desks out of the banks. Particularly the big banks, which as you can in the graphic atop this post, pretty much control the market. But it turns out the Federal Reserve is on their side. According to the Wall Street Journal1, "the Federal Reserve over the weekend tried to kill the provision," sending lawmakers a letter saying the idea should be "deleted" from the bill. But as it is, the idea actually appears to be gaining ground, moving from some weird regulation that Lincoln proposed and nobody expected to part of the actual bill.
The easy explanation is that derivatives-regulation is popular and no one want to stand in its way. But the new Washington Post-ABC poll2 complicated that story. Though financial regulation is very popular and Obama is far more trusted on the subject than the Republicans, opinions on regulating derivatives are split, with 43 percent supporting federal regulation of the derivatives market and 41 percent opposing it. And derivatives were pretty much the only item in the poll where the skeptics were even close to the reformers.
Chart credit: Wall Street Journal.