Why such a rapid meltdown?

I have been astonished by the speed of the collapse of our financial system. There is no precedent in my lifetime for such a rapid collapse. And I doubt that the lessons of the Great Depression pertain to the current situation. This is the Greatest Depression -- about which I posted in March -- and the lessons of this one are likely to expose five fundamental flaws in our financial architecture.

These flaws are the reason for the rapid meltdown and they include:

1. Securitization -- the popularity of shifting risk from an originator to a group of investors in a package wrapped in a AAA credit rating based on flawed analysis.
2. Lack of transparency -- the inability to estimate the future cash flows of such a complex security -- thereby creating massive uncertainty in a period of decline.
3. Leverage -- borrowing way too much money with too tiny a sliver of capital to protect against risk -- making it possible to wipe out all the capital with a 6% decline in the value of these securities.
4. Heads-I-win, tails-you-lose pay -- Paying deal makers for the size of their deals and sticking taxpayers and shareholders with the losses.
5. Global interconnectedness -- thanks to information technology and ease of investment rules, a sneeze in the US causes hurricanes around the world.

How could we cure these problems? As I posted, we could end securitization, demand complete transparency, raise capital requirements, link pay to profits rather than sales, and create firewalls to prevent problems in one market from infecting the rest. But with the global financial architecture crumbling worldwide, there's no time for this now.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.