Worldwide sales of CDOs exceeded $500 billion in 2007. A June 2007 Bloomberg article lays out the story of the recklessness and greed surrounding these “financial weapons of mass destruction”:

"Because CDO contents are secretive, fund managers can't easily track the value of the components that go into these bundles. ‘You need to monitor the collateral in your investment and make sure you're comfortable there will be no defaults,’ says Satyajit Das, a [Minyanville professor] who has written 10 books on debt analysis.

"Most investors can't do that, because it's extremely difficult to track the contents of any CDO or its current value, he says. About half of all CDOs sold in the US in 2006 were loaded with subprime mortgage debt… Since CDO managers can change the contents of a CDO after it's sold, investors may not know how much subprime risk they face, Das says."

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It’s quite interesting that many are now railing against short sellers as the cause of the market meltdown - a smokescreen to cover up the incompetence of others.

Again, Alan Greenspan praised the rise of the subprime mortgage industry and the tools it used to assess credit-worthiness in an April 2005 speech at the very peak of the housing frenzy:

"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants… With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. …These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s."

The SEC essentially abdicated their role as regulator and protector of individual investors in 2004. An exemption for 5 investment banks (Goldman Sachs (GS), Merrill Lynch (MER), Lehman Brothers, Bear Stearns, and Morgan Stanley (MS)) allowed them to take on the kind of risk which has brought the worldwide financial system to its knees.

Paul de Grauwe, in the Financial Times, indicts Greenspan for failing “to take his responsibility to supervise the financial markets blinded as he, and his colleagues, were by a belief that markets and bankers know better than governments.”

The events of the past year were avoidable. A conscious and willful decision by the SEC to allow these 5 firms to legally violate existing net capital rules in place since 1975, which had limited broker/dealers debt-to-net capital ratio to 12 to 1, is a major cause of the financial collapse. Instead, the 2004 exemption allowed these 5 firms to leverage up 40 to 1. It’s no wonder that 3 out of 5 of these firms have blown up.

The conservative mantra of total deregulation has been catastrophically discredited, having practically brought down the worldwide financial system. Pundits who proclaim that free-market capitalism is the best path to prosperity are now in favor of weekly bailout packages for their buddies on Wall Street. This flip-flop in their regulation mantra has resulted in a total loss of credibility.

In very simplistic terms, this crisis can be summed up in one sentence:

If you loan money to people or companies that cannot pay you back, you will go bankrupt - unless your government bails you out.