Why global markets are fluctuating

Ok, first let's talk about what really went wrong in an easy to understand layman's language

Financial Markets is all about confidence in the System and an underlying assumption that system will not fail. But, after the bankruptcy of Lehman Brothers in USA and Northern Rock in UK and the bailout of Fannie, Freddie and AIG investors world over have lost confidence and faith in the system. Infact some people have even started doubting if any system exists at all.

Their doubts are not unfounded as the tricky web of Credit Default Swaps (CDS) and Collateralized Debt Obligations (CDO), which are traded privately and no one, yes no one including SEC, FED or US Treasury regulate them.

And this is where the problem lies. It is an unregulated trillion dollar market which has no system in place to track follow and regulate the flow of deals and transactions. It all started with the boom in USA real estate market a decade back. The cheap credit fueled the real estate rally for almost a decade. The innovative Investment Bankers at Wall Street wanted a pie of the action and devised some new innovative instruments like mortgage backed securities and insured them with Credit Default Swaps.