insideoil

What's Behind the Market's Instability?

Can someone explain to this novice how you can package good debt with "poor" debt in a CDO, so effectively as a bank then having assets classed as AAA based on model assumptions, then when these assets drop like a rock, that this does not affect bank liquidity requirements.
Can someone calculate the potential leverage that may be involved, to see what the multiplication factor might be from sub-prime debt to overall debt, based on the possible impact to required bank liquidity covenants ?
I do not know enough - and would like someone with the smarts to do the numbers - so us plebs out here can get an idea of the scale of the problem. Then we can all judge whether and then when and for how long it will matter !!!