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ok, I've been reading trying to figure out what exactly went wrong with the banks and I now understand that these "credit default swap" contracts are largely to blame.

http://en.wikipedia.org/wiki/Credit_default_swap

For example this is a good article about AIG explaining what went wrong with these credit default things.

http://www.washingtonpost.com/wp-dyn...123102771.html

Now this is what I don't understand..

being that these CDS instruments basicly started as unregulated insurance contracts and CDS eventually morphed into speculative casino like "side bets" by bailing out these banks are we not just giving money to banks so they can give it to other banks/hedge funds/etc.?

To my understanding the mortgage problem isn't really the problem, as stated here a numberous other articles:

Quote:

The amount of subprime that defaulted was at most - after recovery in liquidation - about $250 billion. A huge sum but not enough to torpedo the US economy.

The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.

The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)

These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.

http://finance.yahoo.com/expert/article/yourlife/109609

It seems to me that we are bailing out banks so they can payoff speculative bets to other banks.. am I missing something?

Thanks to anybody that can elaborate.