Things just got extra ugly this morning on Wall Street.

AIG is begging for some funding from the government. Merrill Lynch just sold itself to Bank of America. And Lehman Brothers has filed for bankruptcy.

One of the factors behind Lehman’s massive failure is a little investment known as the credit default swap (CDS). This type of investment was basically introduced by Phil Gramm (one of McCain’s top economic advisers) back in 2000 when he was still a senator.

This legislation deregulated mortgage loans so far that lenders did not have to assume risk. Just package them and pass the risk on. Which is part of the reason that mortgage lenders stopped worrying so much about whether borrowers could actually afford the loans they were given. It didn’t matter.

BloggingStocks offers this insight into how Gramm’s legislation and CDSs brought down Lehman — and may bring down more before this bloodbath is ended:

How does this relate to Lehman’s bankruptcy? "[CDSs] were a key factor in encouraging lenders to feel they could make loans without knowing the risks or whether the loan would be paid back. The Commodity Futures Modernization Act freed them of federal oversight," according to Texas Monthly. And it was due to these CDSs that Wall Street held an emergency session yesterday to try to minimize the damage of Lehman’s CDSs
and other derivatives. Unfortunately, this session did not produce much
thanks to the built-in lack of knowledge of the risks in these
transactions that Gramm’s legislation ensured.