The size of the problem

The problem with this financial tsunami is getting the average dude/chick on the street to grasp just what madness the monsters of Wall Street and Greenwich have put us in and just how hard it will be to get out of. Plain and simple, debt is not wealth. But it was treated that way for the last 25 years, and the result if all the borrowing and crazy, highly leveraged (that means borrowing by the truckload) derivative deals.

The sub-prime mortgage is peanuts compared what these Wall Street wizards have come up with. Remember, the motivation here is that you get a big chunk of winnings if you win, and at worst you lose your job if you don’t.

Think about it. Someone hands you $100 in a casino, and tells you can keep 20% of the winnings, and if you lose you have to leave the casino. Logically, you want to make the highest paying bet, no matter the odds. I’d drop it on roulette; it pays 17 to 1. So you take a shot and win 20% of $1800, or $360. Sweet! You made more than you bet. Now add in the concept of being able to borrow $10,000 because you have that original bet. Win now and your personal payday is $36,000. Lose now, and you don’t just leave the casino, you owe it $10,000.

That almost exactly what happened on Wall Street with something called a credit default swap, or CDS. It works like insurance for corporate bonds, but you buy them whether you have the bond or not. Like buying life insurance on someone else. There are an estimated $65,000,000,000,000 (sixty-five trillion dollars) worth of these out there, and nobody is sure who or where they are. To compare, every mortgage in America adds up to about $13,000,000,000,000 (thirteen trillion dollars).

When the CDS market collapses (as it must) the net losses are FIVE TIMES the effect of every home in America with a mortgage gets foreclosed and never sold again. Fun stuff, huh? Now get this; the CDS market is only about 10% of the total derivatives market, estimated at $650,000,000,000,000 (six hundred trillion dollars).

To sum up, the toxic loans, deals and derivatives on the books of the world’s banks, pension funds, college endowments are worth fifty times the value of every mortgage in America. The current economic decline cannot end until this debt goes away. One teeny problem is that there isn’t this much money in the world. This is so much more than any sub-prime mortgage, and the next asshole who tells me it’s the fault of lefty do-gooders helping poor people houses they couldn’t afford and political contributions by Fannie and Freddie is gonna get hit.