Matt Miller says we should all be really worried:

There are plenty of reasons to be freaked out by the banking and sovereign debt crisis now reaching a crescendo in Europe. But one factor that’s gotten little attention could turn this Very Bad Situation into a True Calamity.

It’s this: Regulators here and in Europe have no idea — repeat, no idea — of the full extent of the derivatives exposure that could be triggered by an “official” Greek default, or by the failure of a major French bank. And if the people in charge have no clue as to the fallout from what may be trillions of dollars in side bets waiting to be triggered in a catastrophic cascade, they’re basically flying blind.

If it strikes you as insane that officials don’t know the exposure of these derivatives, given the havoc these “financial weapons of mass destruction” wreaked last time, you’re thinking clearly. The idea that we could be back on the edge of a Lehman/AIG-style implosion, just three years after the near-death experience of 2008, defies all presumptions about the human species’ capacity for learning. But then, Darwinian optimism leaves little room for the greed and myopia driving the global banking lobby today — or for the industry’s destructive power to kill or defer common-sense reform.

Remember, it was always odd that problems in the relatively small market for subprime mortgages could have brought the global economy low. The reason they did was because these subprime woes were massively amplified by trillions in side bets placed on these mortgages via exotic derivatives.

Ah, derivatives. Remember when Warren Buffett called them “financial weapons of mass destruction”? That was 2003. Remember the late 1990s, when Brooksley Born warned that the hidden, unregulated derivatives market threatened to destroy the whole economy — but was told to shut up and go away by Alan Greenspan, Larry Summers, and Robert Rubin? Michael Greenberger, who worked at the time with Born, told Frontline how the Clinton Administration machers responded to Born’s attempt to regulate the derivatives market:

There were two first shots across the bow, a double shot. One was I walk into Brooksley’s office one day; the blood has drained from her face. She’s hanging up the telephone; she says to me: “That was Larry Summers. He says, ‘You’re going to cause the worst financial crisis since the end of World War II'”; that he has, my memory is, 13 bankers in his office who informed him of this. “Stop, right away. No more.” … It was not done in a tactful way, I’m quite confident of that.

Why is he acting that way? What power do the 13 in his office have? What’s that all about?

… A lot of this has to do with finance contributions, political contributions.

Later, says Greenberger:

In November ’99, the President’s Working Group on Financial Markets issues a report (PDF). Brooksley is gone; I’m gone; Dan’s gone. “These markets should be unregulated because there has been so much uncertainty about them. Because of the CFTC saying that they should be, this has been troubling to these markets. It hasn’t allowed them to grow. The market will be limited henceforth to ‘sophisticated investors,’ not the widow and orphan. [They] won’t be able to invest in it. But companies with names like Lehman Brothers, Bear Stearns, AIG, Merrill Lynch — they’re savvy — will take control of these markets.” And actually the thresholds are companies with over $5 million in assets are entitled to trade these unregulated.

They push the recommendation forward to Congress: Deregulate it. …

On the very last day of the lame-duck Congress, Dec. 15, 2000, suddenly out of the conference committee report on the 11,000-page omnibus appropriation bill is a 262-page deregulatory bill for the over-the-counter derivative market. … I doubt very much that there is one member of Congress or one staff member in Congress who read from end to end that legislation. I firmly believe it was written on Wall Street. When they suddenly saw that they had a chance to pass it, they just threw everything under the kitchen sink into this bill. There are little exceptions to regulation that are next to bigger exceptions to regulations that make the little ones irrelevant. It’s a dog’s breakfast. But that is the law that, as we sit here today, we operate under.

There’s no doubt the CFTC cannot do anything about this. The SEC can do virtually nothing about it. This is an unregulated market — no transparency, no capital reserve requirements, no prohibition on fraud, no prohibition on manipulation, no regulation of intermediaries. All the fundamental templates that we learned from the Great Depression are needed to have markets function smoothly are gone. …

You know what the estimated value of the global derivatives market is? $600 trillion. That’s roughly 10 times the annual GDP of the entire world. But that’s just an estimate; nobody can say for sure how big the derivatives market is. That’s the monster under the bed. The Republicans, the Democrats, and Wall Street will have hell to pay if this all blows up.