The $700 Billion bailout - Part II

I don't think we know yet whether this is a bailout or a blip on the slide into banana republicanism ... there is a lot more we should be finding out ... like ...

According to Time Magazine the world economy is annualized around $54 Trillion ...

According to Bloomberg News the credit default swap (CDS) industry is around $62 Trillion ...

And the way I am beginning to understand is that a CDS is what allows a financial institution to carry a questionable instrument of debt -- such as subprime mortgages and bundled credit card debt -- on its books at full asset value ... (even when that instrument of debt is about to go in the tank ... because the CDS is supposed to pay off on default)

So ... if CDS's start going south ... as in what happened to AIG ... then the world has to revalue the instruments of debt they carry on their books as assets ...

So ... the perfect example is Lehman Bros. ... as I understand it ... it was leveraged at 35 times its capital ... see, assets = liabilities + capital ... so say you have $36 Billion in assets then you have $35 Billion in liabilities (what you have borrowed -- from creditors -- to combine with you put in as capital to buy the assets) plus the $1 Billion in capital -- your own money -- (this is an example, of course, the amounts are representative)

So ... the value of the assets goes south by 5% or .5 X $36 Billion = $1.8 Billion ... this means you now owe your creditors $ 800 Million ... which is a manageable amount in terms of getting new capital ...

But what if the assets start going south by 10-20-25% ... or like what is happening now: 50-75-100%? and everybody's assets are going south at the same time?

And what if this then also triggers a collapse of the CDS industry?

Don't we have to have some idea of what the CDS industry is insuring if we are going to figure out whether the $700 Billion is a bailout or a blip?

These geniuses keep saying these are "derivatives" that are too complicated to understand ... I don't think so, IF they are forms of insurance for questionable instruments of debt.

I think the gurus don't want to explain them to us because it would scare the bejabbers out of the rest of us and they wouldn't have a snowball's chance in hell of getting the money they think they need to escape the collapse.

But I could be wrong ...

Upon reflection ...

Let me tell you when I realized the size of the $62 Trillion credit default swap industry relative to the $54 Trillion annualized world economy ... I took a deep breath.

I believe Secretary Paulson and Chairman Bernanke are playing Col. Jessup: "You can't handle the truth!"

We need a whole lot more honest information.