Hi,

Thanks for the comment.

Rightly so when there is a large blowup like this there is a lot of suspicion as to how it happened and to who is to blame. In this case as with most others that are this large however it is in my opinion normally a lot more complicated than it is often made out to be.

One of the reasons why leverage comes up so often that people do not normally understand about these instruments is that the nature of how they are designed "embeds" leverage into the instrument. This means that even if leverage is not used by the purchaser to acquire the asset, they are still exposed to amplified market moves which are the result of leverage which is embedded into the instrument.

The most common example of this is the use of tranches as I mention in my explanation of the subprime financial crisis part 2 video (here is part 1 as well, in case you have not seen that).

Lets say for example you have a bunch of mortgages which are pooled together and the expected default rate on these mortgages is 5% so the pool carries an interest rate of 10% (making these numbers up for simplicity) By dividing this pool up into three sections or traunches where the first traunch is the first to take losses should anyone default, you automatically magnify the risk and potential return of that traunch. This is the embedded leverage part.

On top of the above many of the derivitave instruments which were built off of those CDO's also had embedded leverage.

Then on top of this many buyers of these CDO's used traditional leverage to purchase them.

With this in mind I don't think there is any way to know exactly how much leverage is out there when you include the embedded part however some estimates of the size of the different markets here are mentioned in the below two articles:

The Next Subprime Dominos to Fall: Junk Bonds and Hedge Fund Risk Insurers :: The Market Oracle :: Financial Markets Forecasting & Analysis Free Website

naked capitalism: CDOs: The Ticking Time Bomb

I don't really think this is related to off shore bank secrecy.

It is certainly related to OTC derivatives as a CDO and instruments which were used to hedge and speculate on the risk of default like Credit Default Swaps (CDS) are Derivatives which are traded off exchange or in other words Over the Counter (OTC).

For a discussion on the Enron connection see my post on Off Balance Sheet Entities Here.

If there are any other questions or comments on this please feel free to post them below.

Best Regards,
Dave