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if we want our officials to consistently obey our Laws & Constitution.

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Lets assume (since the author is not including the 5x leverage ratio from the first example), that in this case, $1,000,000 in new equity has been infused into the Company (yippee). I now can take that and buy $1,000,000 worth of mortgages. No leverage yet.

Now – assume I transfer these mortgages into a CDO (Called CDO-A). CDO A then sells the $950,000 non-equity tranch, and we keep the $50,000 equity stake. A couple of things. First of all, CDO's are typically issued with two potential traits: Guranteed and non-Guranteed.

In example 1: there is no leverage, since what Lehman did was sell an asset, and there is a legal transfer of ownership to the CDO, and Lehman is only responsible for the $50,000 equity piece. Any losses in excess of the CDO are either the new CDO Share owners or if the mortgages were insured by AMBAC or MBIA (both of which are in huge trouble right now), their issue, not Lehman's.

In example 2: assume this really is just a collaterlized loan, and the CDO owners require Lehman to guarantee the underlying securities. Lehman then invests in a $950,000 equity tranches. But remember, there are already mortgages underlying the $950,000. Assume those perform well, and there are no losses in CDO-A, but Lehman lost everything in the other equity tranches it invested in. Yes, I agree Lehman lost the $950,000. But CDO-A is still performing well, so in reality, it would not be required to pay the upper tranch security holders.

THE ONLY way that the above author's scenario works from what I can tell (again – please correct me if I am wrong), is if Lehman takes $1,000,000 and buys $1,000,000 in Equity just equity tranches. It then sells a new CDO called “CDO Equity Tranch-B”, guarantees the value of all of the equity tranches (as this is designed more as a collateralized loan than a sale of an asset). But it cannot sell the lowest tranch (the Equity Tranch of the Equity Tranch CDO). In this case, you would have a 20 x 20 leverage situation. But again – this is NOT the situation presented by the author.

But remember, the $950,000 is borrowed perhaps, but the interest payments are not coming directly from Lehman, and typically, there are no margin calls on CDO's no?

Now assume I take this $950,000 and buy only other CDO Equity tranches, I guess

Lets assume (since the author is not including the 5x leverage ratio from the first example), that in this case, $1,000,000 in new equity has been infused into the Company (yippee). I now can take that and buy $1,000,000 worth of mortgages. No leverage yet.

Now – assume I transfer these mortgages into a CDO (Called CDO-A). CDO A then sells the $950,000 non-equity tranch, and we keep the $50,000 equity stake. A couple of things. First of all, CDO's are typically issued with two potential traits: Guranteed and non-Guranteed.

In example 1: there is no leverage, since what Lehman did was sell an asset, and there is a legal transfer of ownership to the CDO, and Lehman is only responsible for the $50,000 equity piece. Any losses in excess of the CDO are either the new CDO Share owners or if the mortgages were insured by AMBAC or MBIA (both of which are in huge trouble right now), their issue, not Lehman's.

In example 2: assume this really is just a collaterlized loan, and the CDO owners require Lehman to guarantee the underlying securities. Lehman then invests in a $950,000 equity tranches. But remember, there are already mortgages underlying the $950,000. Assume those perform well, and there are no losses in CDO-A, but Lehman lost everything in the other equity tranches it invested in. Yes, I agree Lehman lost the $950,000. But CDO-A is still performing well, so in reality, it would not be required to pay the upper tranch security holders.

THE ONLY way that the above author's scenario works from what I can tell (again – please correct me if I am wrong), is if Lehman takes $1,000,000 and buys $1,000,000 in Equity just equity tranches. It then sells a new CDO called “CDO Equity Tranch-B”, guarantees the value of all of the equity tranches (as this is designed more as a collateralized loan than a sale of an asset). But it cannot sell the lowest tranch (the Equity Tranch of the Equity Tranch CDO). In this case, you would have a 20 x 20 leverage situation. But again – this is NOT the situation presented by the author.

But remember, the $950,000 is borrowed perhaps, but the interest payments are not coming directly from Lehman, and typically, there are no margin calls on CDO's no?

Now assume I take this $950,000 and buy only other CDO Equity tranches, I guess