It has been a very busy and volatile week in the financial markets and we wanted to provide some rudimentary idea of what is going on and why. Here is a very short synopsis.

Higher than expected default rates on sub-prime mortgages have led to the re-evaluation of, and declining values for mortgage-backed securities generally. That in turn has caused several hedge funds to basically lose all their value. These events have led investors to become wary of other risky securities including lower quality corporate debt (junk bonds) and securities backed by them. This has led to that market being unwilling to accept new issues which has put the leveraged buyout business on-hold and has made banks' balance sheets riskier than they were a few weeks ago. Many believe the LBO business was underlying the strength in the equity markets and so those markets have traded down on fewer LBO's likely to happen, credit being more difficult generally and the possible economic impact of a "credit crunch." In addition to this additional softness in the housing market is now expected which also doesn't help.

The last time we saw conditions like this was in 1998. It took a few months to work its way out. We'll have to watch and see what happens here.