DougM

The Financial Crisis Explained

While I agree that shoddy lending practices, bad tax law, and unbelievable leverage levels all fed into this mess, you've not mentioned a few other salient factors.

The unregulated swaps market, which has been growing since the early 90s, has reached the point where it threatens to bring down the entire financial system if a single large player fails. This should not have been allowed to happen - regulators, but specifically Alan Greenspan, were asleep at the switch. This systemic risk creates the need for government action now.

Moreover, the mark-to-market accounting change couldn't have been more poorly thought out or timed - when there is no functioning market, this rule creates a balance-sheet vicious cycle that's adding fuel to the fire. Throw in the the complete lack of enforcement of the rules against naked shorting and you have a recipe for violent market action.

Finally, how can you not take note of the fact that Greenspan took the funds rate too low for too long, driving even more investors into the only asset classes that were still producing any yield?

Frannie CDS Triggered

I've been trying to figure out what the problem is here for sellers of protection, since the bonds are now backed by the US Gov. Let me make a stab at it: they're now going to have to pony up cash and go long the bonds at whatever the nominal interest rate is. If you're a hedge fund that used a leverage position to sell "insurance" on these bonds, you're probably not looking forward to raising enough cash to pay off your counterparty and then ending up long these bonds at today's historically low interest rates. Just a guess.