Starting back in 1995, the masters of the bond and credit market universe got too cute by half and structured a new and exciting financial instrument, the credit default swap and it's these credit default swaps that are the crux of the problem. The magnitude of the fallout from this hairy piece of "financial engineering" is staggering. Believe me, when I tell you that these things are so wrapped around the axle I don't think anyone knows who's got what.

Under a CDS, a bank originates loan to a company. A second bank (or other financial institution) can agree to cover the credit risk for the loan, by agreeing to make payment to originating bank if the company defaults on the original loan. The originating bank pays a small insurance premium to the second bank for assuming the risk of the loan.

Typically, payments under a CDS would only be triggered by the company’s failure to pay interest or principal on its debts due to bankruptcy or some other severe liquidity issue. But there are a host of intermediate or special cases that will doubtless provoke lawsuits when something goes wrong (CDS being a new market, it is by no means "recession-proof").

Credit default swaps were sold to the world as hedging transactions. Investors were told that they were simply transfers of risk, so that banks that made loans could transfer credit risks to insurance companies, which did not make loans directly, or to foreign banks that could not easily make loans in the U.S. market.

But they didn't work out that way...

I'm also a free market trader and believe that the market has to work this out. These type of bailout programs just tend to delay the pain and there is going to be some pain, my friends. I oppose the structure of this bailout on principle, so watching these government types preening and posturing in front of the cameras this weekend was like watching a train wreck in slow motion. They are beyond clueless.