Dec. 10 (Bloomberg) -- You may think terrorists pose the greatest threat to civilization. You're wrong. It's derivatives traders, according to the British Broadcasting Corp.

The BBC broadcast ``The Man Who Broke Britain'' last night, a 90-minute spoof documentary, splicing interviews with actors portraying traders and government officials with genuine footage of Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown.

The show played on three fears: The threat of terrorism, higher oil prices and those scary securities called derivatives, which everyone knows are weapons of financial mass destruction because Warren Buffett once said so.

The underlying message of the show was clear: Derivatives are dangerous, and the people who trade them are reckless gamblers who shouldn't be trusted.

As the program's voice-over explained, derivatives had given us ``lower mortgage rates, made our pension plans more profitable, even given us cheaper petrol.'' But there's a catch. ``These derivatives could transmit problems around the world faster than ever.''

It's Always The Quiet Ones

Our protagonist is Samir Badr, a Saudi Arabian described as ``the David Beckham of derivatives trading'' by the program's newspaper reporter, and as ``quiet, difficult to get to know, difficult to understand'' by his boss, Philip Crighton, the head of derivatives trading at Sun First Credit Bank, or SFCB

Now for the action.

On Jan. 5, 2005, terrorists attack Ras Tanura, the largest oil terminal in Saudi Arabia, the biggest oil producer in the Organization of Petroleum Exporting Countries. News footage of a burning oil installation is interspersed with the standard cliched pictures of men in garish jackets waving their arms around in a trading pit, culled from the International Petroleum Exchange.

As the price of oil surges, the derivatives traders at SFCB are trying to minimize their losses. Somehow, the bank's contracts are tied to the price of oil. As the crisis unfolds, trader Badr disappears from his desk.

The camera cuts to an interview with head trader Crighton: ``I said, `I think he may have done a Leeson.' What other logical explanation could there be?'' referring to Nick Leeson, the so- called rogue trader who bankrupted Barings Plc in 1995 after losing 791 million pounds ($1.5 billion).

Street Gamblers

Enter the U.K. Treasury minister, who explains that SFCB's problems are ``very different from Barings,'' because of its use of over-the-counter derivatives, a form of private securities contract, as opposed to securities traded on an exchange.

``It's the difference between gambling in a casino and gambling on a street corner with a complete stranger,'' the Treasury minister says. Uh-oh. An even more poisonous flavor of derivatives.

A character from the government's Joint Terrorism Analysis Centre describes the market as ``the Achilles' heel of the global financial market.'' And the danger posed by these derivatives is exemplified by SFCB's use of credit-default swaps, contracts tied to the creditworthiness of corporate bonds. The bank had added custom clauses to its swaps, which made the contracts null and void in the event of oil climbing to more than $75 per barrel.

Badr can't be found, so he's under suspicion for inserting those poisonous clauses. Maybe he's a financial terrorist?

Oil climbs to more than $70, from about $65. Then it passes $75. ``SFCB's losses soared from millions of dollars to billions,'' intones the narrator. SFCB declares itself insolvent.

Suicide Terrorist?

By Jan. 7, the police have found Badr in his silver Mercedes near his bank's headquarters. He's dead; red pills on the floor point to an overdose.

The suggestion is that Badr is some form of suicide terrorist, in cahoots with the attackers in his homeland of Saudi Arabia. After planting the $75 oil grenades in SFCB's derivatives trades, Badr has topped himself. A picture of him at an Islamic banking conference standing next to an alleged Syrian terrorist financier is slipped to the Financial Times newspaper.

``There were rumors of more sleeper cells, ready to sabotage more financial institutions,'' says the voice-over. The stock market collapses, and there's a run on commercial banks as nervous depositors retrieve their savings.

With the notion of terrorists bringing down the global financial system firmly embedded, the show introduces its twist and starts to spotlight the real baddies. ``Credit derivatives traders earn the highest bonuses in the City,'' says the narrator, adding that head trader Crighton is in line for a bonus of 7 million pounds.

Boosting Profits

By adding the oil clauses to SFCB's credit swaps as a sweetener -- effectively an embedded put option triggered by an unlikely event -- Crighton was able to cut his trading costs, boosting his profits.

``I've never been in so much trouble in my life,'' says Crighton.

The camera pulls back, revealing that all of Crighton's interviews took place in some sort of detention center where he's awaiting prosecution.

``We knew derivatives could be dangerous, and we'd let them become central to the world financial structure,'' says the U.K. Treasury minister.

I see where we're headed. In the 1970s, shadowy Arab investors were poised to destroy the global financial system. Then black-box computer systems were the worry. Rogue traders and hedge funds briefly topped the danger list. Now it's derivatives.

Any day now, we'll see a program about how the guys who run China's $540 billion of foreign exchange reserves are holding the world ransom. The accusation will be as misguided as the one made in last night's BBC program against derivatives traders.

To contact the writer of this column: Mark Gilbert in London magilbert@bloomberg.net.

Last Updated: December 10, 2004 09:52 EST