Voltaire said, "Common sense is not so common" and George Bernard Shaw commented that having " ...enough of it was genius."

This reminds me of Warren Buffet, CEO of Berkshire Hathaway (BRK.A) or Steve Jobs, CEO of Apple Inc. (AAPL) that have both displayed plenty of the former and arrived at the latter in their business pursuits.

Derivatives like Collateral Debt Obligations, or CDO's, and Credit Default Swaps, get their value from something else entirely: total hype in an environment of smoke and mirrors.

It turns out that if you build layer upon layer of derivatives until you have no idea what the original underlying value truly is, it becomes so convoluted that a genius can't comprehend it at all. It is self evident that nobody could even determine all the counter-party risk.

Remember just a few short months ago when the financial markets were in a tailspin? Day after day, selling came in to the market. Short selling accelerated. Then came "naked short selling." The markets ended up being chaotic and the government had to step in. With frantic short selling going on, the SEC banned naked short sales of a few select banks for a few days.

Now we fast forward to Europe. The same scenario is being played out against the euro. Hedge funds have increased their short positions. Traders are buying credit default swaps (CDSs) supposedly as protection against a Greek default. But very much like the U.S. meltdown, traders are also buying naked CDSs. Traders holding naked CDSs do not have an underlying position that they are hedging.

One trend that has to reverse for the U.S. economy to return to premiere economy status: the trend of top talent toward financial services and away from other fields, including engineering, and the natural sciences.

The income gap between those who went into finance (for example as hedge fund managers and/or product designers of derivatives, credit default swaps, and other investment instruments) and those who went in to mechanical engineering or civil engineering widened considerably during the past 20 years: and where do think a lot of the talent went? You guessed it, in to designing derivatives, etc.

Investors in developing countries no doubt wonder which countries that issue debt are safe and which ones could default. CMA Datavision, a subsidiary of CME, has put together the "Sovereign Risk Monitor."

The Risk Monitor uses five-year credit default swaps (CDSs) and ranks the countries according to volatility. It uses the percent of change to determine the ranking of these countries. The new index is called the cumulative possibility of default (CPD). If, for example, a country has a 20% CPD, it has a one in five chance of defaulting in the next five years. Also included is their most recent credit rating.

Looks like Former U.S. Treasury Secretary Henry Paulson may be headed back up to Capitol Hill soon.

On Wednesday, the Chairman of Congress' Financial Crisis Inquiry Commission (Phil Angelides) stated that Paulson may be one of the witnesses called to testify in front of the panel. Right after emerging from the panel's first meeting, the chairman of the bipartisan group noted that it "must examine" the financial institutions that did or could have crumbled if not for the help of the government.

Luckily for American International Group Inc. (NYSE: AIG), the embattled insurer has agreed to sell its AIG Finance unit to China Construction Bank for $70 million in cash. This news is helping to offset some distinctly less bullish developments for AIG today.

Specifically, Patrick Fitzgerald of Dow Jones Bankruptcy Review reports that Lehman Brothers Holdings (LEHMQ) is asking a bankruptcy judge to force AIG to pony up millions of dollars it owes Lehman for credit default swaps.

Listen up! Listen up to what Fed Chairman Bernanke has to say about commercial real estate. He said that the market for securities backed by commercial mortgages had "completely shut down." This is a serious if not devastating statement. Can we infer that the market for credit default swaps (CDSs) has shut down? If so we are at the brink of a new financial situation.

Mr Bernanke also stated that continued deterioration in commercial property with defaults rising sharply would present a "difficult" challenge for the economy. Prices for commercial real estate have fallen 35% since the market's peak.

In the past sixth months, IntercontinentalExchange, Inc. (NYSE: ICE) has gone from high-risk play to a model whose electronic trading and centrally-cleared products have become marketplace leaders, particularly for energy products.

Further, while FY2009 revenue and earnings will not overwhelm, look for electronic trading, energy products trading, and clearing house function revenue streams to resume solid growth by mid FY2010.

In the film version of Tennessee Williams' 'Cat On A Hot Tin Roof' (1958), Maggie 'The Cat' (Elizabeth Taylor), knows her husband Brick (Paul Newman) is hiding something, but she can't figure out what it is.

Later, we learn that Brick is hiding the truth about his father, millionaire Big Daddy (Burl Ives), and he slowly gathers the courage to end the mendacity that has permeated their lives.

At some point the nation will, likewise, end the mendacity about American International Group (NYSE: AIG) and announce the full, probable cost of the orderly stabilization of AIG. For economic conservatives, market absolutists, most Republicans, and others who oppose government intervention, the above would be bad news, but at this juncture, it appears to be unavoidable.

Citigroup (NYSE: C) and American International Group (NYSE: AIG) have already taken about $496 billion in U.S. cash and guarantees to keep them from failing. This makes me wonder: Is there no way to allow them to simply fail without causing the entire global financial system to collapse? And if not, is there a limit to how much more taxpayer money we pour into them before we say "no more"? The answers: Maybe and Yes.

Citi looks to be a basket case after $345 billion in taxpayer bailouts. It has already gotten $45 billion in cash -- $25 billion of which was recently converted from preferred to common -- and $301 billion in guarantees of its toxic assets. The U.S. now owns 36% of the common stock of Citi -- which lost $27.7 billion in 2008 and has a market capitalization -- Citi common shares times price per share -- of $8.2 billion.

It looks like America has shut down until 2009. And that's probably a good idea because there were so many bad ones in 2008. Bad ideas are like vampires. They charm their way into the good graces of a host society and then they suck the blood right out of them.

Although they all didn't just pop into our lives in 2008, these eight ideas reached a peak of awfulness in 2008:

• Deregulation is good. The wave of deregulation that started in the early 1980s has created enormous problems for society. Sure there were some bad regulations on the books, but just one deregulated industry -- the $62 trillion credit default swaps (CDS) market -- has cost taxpayers hundreds of billions of dollars in the bailout of American International Group (NYSE: AIG).
• If you can lend against it, securitize it. Securitization -- the practice of buying, credit-rating, and bundling loans backed by assets like mortgages, credit card receivables, and leveraged buyout loans -- created the illusion that you could mix risky loans in with safer ones and you could earn above-average returns with no risk. Bad call -- securitization has spread toxic waste around the world from Iceland to Whitefish Bay, Wis.
• Home-ownership is good for everyone. The hungry maw of securitization created enormous demand for new mortgages. And that led mortgage originators to lend to people who couldn't afford to pay back the loans. The $1.3 trillion subprime mortgage market was born and it grew so big that its collapse refused to remain contained. In 2004 Bush bragged about home ownership reaching 69.2% -- three million foreclosures later it seems we should be careful what we wish for.
• Leverage up your balance sheet 30:1 or more. In 2004, the SEC gave financial institutions (FIs) discretion to borrow more money than they had ever borrowed before. Most banks and hedge funds borrowed as much as $35 for every $1 of equity. If they had used their $340 billion in equity to buy the $13 trillion worth of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs), a 3% decline in the MBSs and CDOs value would have wiped out the FI's capital.

Once again, Dow 8,000 has come back into focus.

For those investors who may not follow indices closely, the 8,000 level has a psychological but not technical support, the latter of which measures such things as the number of investors who are buying / selling, whether investors are committing more money to the market etc.

Even so, right now, a battle is taking place between the bulls and the bears: the bears argue the worst economic news stemming from the financial crisis is yet to come; the bulls argue that the worst news is behind us, and that government stimulus, fiscal and monetary, will get the U.S. economy moving again.

The Dow Jones Industrial Average Wednesday closed below 8,000 at 7,997. If the bears can keep the Dow below 8,000 and then push it through 7,800, then 7,600, it will not be a pleasant time for investors.

Let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment decision / conclusion regarding where the Dow is headed, near-term.

With apologies to actor William Shatner, How big could the bailout of AIG get? Really big.

The U.S. government -- which is all of us, citizens and taxpayers -- may have to increase its investment in American International Group (NYSE: AIG) by still another $70-80 billion to keep the insurer solvent through the end of 2009.

Just call it USG-AIG

AIG, which reported $43 billion in losses tied to home mortgages in the past quarter, "will probably not function properly if it doesn't receive another cash infusion by September 2009," economist David H. Wang told BloggingStocks Tuesday. Wang based his forecast on his projection for cashed-in credit default swaps stemming from home mortgage defaults.

AIG is a major issuer of credit default swaps, actually a type of credit default insurance, which many holders of mortgage backed securities and bonds purchased to hedge against bond issuer defaults.

"If we project a rise in home mortgage defaults through Q2 2009, that will likely take credit default claims to levels that will require more money for AIG in late 2009," Wang said, although he qualified his projection by stating that it is contingent on negative U.S. GDP for Q1/Q2 2009. A U.S. economic recovery in Q2 2009 is possible, but not likely, Wang said.

AIG's shares fell 15 cents to $2.14 on Tuesday at mid-day, amid a broader market sell-off.

Every once in while during a crisis or history-altering event, you run across a quote or an observation that sort of summarizes events on the ground, in a nutshell. Former U.S. Federal Reserve Chairman Paul Volcker articulated one such observation during a recent chat he had with PBS's Charlie Rose.

"It seems to me what our nation needs is more civil engineers and electrical engineers and fewer financial engineers," Volcker said.

U.S.: a decade of descent

And there you have it -- the United States' decade of descent, in a nutshell. Volcker's observation speaks volumes about where the United States economy -- and the nation, at large, for that matter -- is today.

For reasons that historians will undoubtedly debate for decades (globalization, automation, flawed public policies, inadequate regulations, overconsumption, the availability of foreign capital, greed) the United States embarked on a financing boom -- creating an increasing array of creative and untenable mortgage types, accompanied by an equally problematic set of mortgage backed securities. It generated an unsustainable housing bubble, which ended as all bubbles do -- badly -- triggering the global financial crisis.

And yet, all the while, as Volcker observed, public investment in infrastructure -- the physical backbone of the economy, of the nation, really -- declined. That infrastructure is now in a state of disrepair. The nation's schools, hospitals, roads/bridges/mass transit systems/air travel system and even our electric grid are inadequate to meet the nation's current requirements, let alone the requirements of an expanding, vibrant, dynamic, twenty-first century economy.

What financial services/banking reforms and related measures should the new U.S. Congress consider when it convenes in January 2009?

How much time do you have?

Yes, without question, the Congress is going to have a full plate when its first 2009 session starts, and there is a sincere wish -- a really, really sincere wish -- that none of these items has to be addressed sooner. That's the hope, anyway. We'll see.

Task 1: Credit default swaps/derivatives regulation and reform

Simply, all credit default swaps/derivatives -- direct and those with counterparties based in the United States -- must be regulated by the U.S. government through the Securities and Exchange Commission, or by the creation of a new Derivatives Regulatory Commission.

Among other powers, this agency would establish capital requirements, list pricing data, and limit leverage ratios for all parties. Banks protected by the FDIC would be banned from owning or selling derivatives or swaps.

The global derivatives market was more then $530 trillion as of June 2008. Of this amount, credit default swaps -- it's really credit default insurance -- totaled more than $55 trillion, according to the International Swaps and Derivatives Association.