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Congress should compel over-the-counter (OTC) derivatives dealers to publish monthly the pricing models they use or register the models with the Securities and Exchange Commission, says risk analyst Christopher Whalen. Disclosure will reduce the complexity of derivatives. Even so, an outright ban is preferable to eliminate the "horrible damage" they have inflicted on the global financial system, Whalen contends in his written answers to 33 questions submitted by a Senate panel following his testimony last month. Mind Over Market has obtained a copy of Whalen's letter containing the Senators' questions and his answers, and has published the entire text below....

American International Group Inc. (NYSE: AIG) is under pressure. This morning is the effective date of a 1 for 20 reverse split. Our closing bell price was $1.16 yesterday, and that would imply a $23.30 share price this morning. Just one problem. The “20-factor” is not even close as the very early trading indications are down by almost one-third and trading around the $15.00 handle in early trading. As part of the annual meeting, holders approved that reverse split. This was something we did not have firm on the calendar for today as an effective or ex-split date, and that...

Today’s Wall Street Journal carries the amazing story of a small Texas brokerage that pulled a fast one on some of the biggest banks in the world. The short version goes like this. Amherst, the Texas brokerage, and others sold hundreds of millions of dollars of credit default swaps on bonds back by $29 million of subprime mortgages to JP Morgan, Goldman, UBS RBS and other banking giants. The banks paid steeply for the swaps—up to 90 cents for every dollar of insurance—but thought it was easy money. After all, these were Lehman packaged California subprime loans made in 2005,...

Cannot excerpt, article at http://www.portfolio.com/views/columns/wall-street/2008/10/15/Credit-Derivatives-Role-in-Crash

Here s one big part of the answer. First, the alert reader will notice that Ben Stein said many times that the amount of money at risk in the subprime meltdown was just not enough to sink an economy of this size. And I was right...to a point. The amount of subprime that defaulted was at most - after recovery in liquidation - about $250 billion. A huge sum but not enough to torpedo the US economy. The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever...