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One problem with this article is that it really does not tell us anything. It could have been written by a reporter with a first grade education. In fact, maybe it was. Recite a few well-known facts, take some quotes out of context, and throw-in some meaningless scare phrases like “the Fed has crossed the Rubicon of central banking,” “resorted to the ‘nuclear option’, “Depression-era clause,” and “the meltdown panic,” and lo and behold a newspaper article appears.

Someone with something to gain likely spurred this “reporter” into writing this gibberish. Likewise, we will eventually likely learn that someone (probably a few hedge-fund managers) with something to gain brought down Bear Stearns (not that the Bear Stearns management doesn’t deserve plenty of blame for putting its organization in a position where those with something to gain could kill it).

No, try $90 Trillion:

‘But JP Morgan is already up to its neck in this soup, with $77 trillion of contracts. It will now have $90 trillion on its books, a sixth of the global market.

Risk is being concentrated further. There are echoes of the old reinsurance chains at Lloyd’s, but on a vaster scale.

The most neuralgic niche is the $45 trillion market for credit default swaps (CDS). These CDS swaps are a way of betting on the credit quality of companies without having to buy the underlying bonds, which are less liquid. They have long been the bête noire of New York Fed chief Timothy Geithner, alarmed that 10 banks make up 89 per cent of the contracts.’

To give you an example, let’s say one bank out of this 89% goes insolvent, that would be $8 Trillion dollars. What’s the U.S. total annual GDP? $14 Trillion or so. WHEN one of these banks (counterparties) goes bust, no person, institution entire U.S. people can stop it. The real question is WHEN this will happen and no longer an IF in my mind. When the house of cards falls, we will be eating government wheat & cheese. Do you really think our government needed to fill up it’s strategic reserve to 700 M barrels to bomb Iran, pleeeeease. Countries around the globe know this and are simply waiting for the firesale of our assets to plummet to pennies on the dollar. We’ll default on every promisary note to every U.S. and global investor and citizen alike.

Now here is what we can do to actually survive this intact (we will have pain no matter what):

1) Regulate Hedge Fund Leverage Now, Stop increasing risk
2) Declare National Financial Disaster, Use Executive Orders to de-regulate drilling and I mean ALL areas.
3) Use Treasury to subsidize $300 B into nuclear plants, biodeisel, solar & coal liquification. Lots more trains running biodeisel and repair old rail lines, we’re gonna need them!
4) Part of $300 B, say $50 B provide to SBA (small business administration). Get the service economy to work for the fiscally responsible commercial banks on energy independance that will create highly regulated investment vehicles for domestic investors.
5) Use all prominent Ivvy league business schools graduate students and have people like Buffett drill into the true financials of the subprime pig. Peel the skin back so the market can reach bottom and fiscally responsible Americans can then buy. Overseas buyers will also come in droves.
6) Stop cutting rates, but combat the inflation by creating competing product which will force speculators out of the oil market helping Joe six pack and the entire responsible financial system at the same time.
7) Be prepared for pain and to help out your neighbors as well as family. Also, as time progresses we had best be prepared for some kind of ‘make-good’ on this mess to other allies and trade partners. Nothing like turning allies into enemies and letting them have several years to stew over it. First we’ll fix America which also helps allies. Then we’ll make-good on a portion of money due. Lastly, we’ll be exporters and the global investor will come back to America.

Do this and we will quickly get out of depression and create millions of jobs through innovation. Don’t do it and expect severe depression and another global war.

Can some financial wiz please come along and splain to me why this article shouldn’t worry me?? Puh-lease????

I am not a wizard, but it seems that if common sense is forced to prevail, the value of these derivatives bear no true connection to assets. To my mind, these end up being like “side bets” on the creditworthiness of a bond, a bank, some entity. Supposedly, there is some link...notice that the ratio of the value of the derivatives to the underlying asset is about 20:1, just like the reserve ratios for typical retail banks.

But, if you have, for example, off-setting positions that evaporate when they mature, then where is the value linked to the asset? It doesn’t sound to me like it exists anywhere except on paper as something that grossly inflates the true value.

It is the financially self-immolating nature of these credit default swaps and such that are being overlooked until now. It is also becoming a case of the rest of the world looking at these sorts of risks the big banks are taking and asking if the “wizards of wall street” have rocks in their heads. Like so many things, they get so close, so involved, they lose all perspective until the proverbial s**t hits the fan and even then they are not sure what the fuss is really about.

So, while some of these geniuses are complaining, the rest of the system bounces from crisis to crisis until these mistakes are fixed permanently - and a lot of innocent people get hurt in the process.

It could lead to new regulations attempting to fix a problem, but then create additional problems as a result....