It is sometimes remarkable that 3 years into the biggest crisis of all time, some people are still unclear as to how some of the most degenerate gamblers, also known as Wall Street workers, took an asset, and added leverage up to the 4th (and even 5th) degree to it. Hopefully the attached chart will explain clearly why even with world GDP at about $50 trillion, the total leverage associated with it is estimated at around one quadrillion. What is surprising is that it is only $1 quadrillion. The chart below can easily be extended by one more level, to include such Frankenstein monsters as CDOs Cubed. Furthermore, when using a leverage 'creep' model such as the one below, it is easy to see why when the underlying asset's cash flows either stop or are severely impaired, how tens if not hundreds of billions of associated debt become worthless. And at the end of the day, the person holding the leverage4 or leverage5 basically bets the house (bought with other people's money) on the smallest incremental moves higher, and prays these continue as every underlying change in values is magnified by 4-5 orders of magnitude. The second they end it is game over, and the securitized system collapses.
Source: SocGen
