This past week was truly historic, as we saw the biggest weekly selloff ever for global stock markets. Many stock markets fell over 20% just this week! This brought the decline from their peaks last year to about 40% - 50%! Other financial assets were not immune either, as bonds and commodities also fell.

Why the huge drop? There were many factors, mostly negative. It looks like the US auto companies may be a lot closer to bankruptcy than people imagined. It also looks like the rot is spreading from the banks to the insurance companies.

Even more importantly, the credit markets are still basically frozen. The very important commercial paper market, which I discussed last week, has improved a bit. The improvement came after the Federal Reserve announced that they would be buying commercial paper directly(another financial first).

Another area I spoke about last week, the LIBOR market, continues to get worse.
Banks are not lending to anyone, including other banks. More on this later in the article.

The specific reason for the huge selloff this week was that hedge funds and investment banks were forced to liquidate highly leveraged positions. Wall Street has invented all types of instruments for traders to use leverage.

What does that mean in plain English? It means that the fat cats were trying to get even fatter and become overnight billionaires by making stupid 'bets'. Many of these guys were using leverage of ten-to-one or higher.

Here's an example of 10-1 leverage - you place a $1 million'bet' on XYZ stock at 10-1 and buy $10 million of XYZ. If XYZ goes up a point, instead of making just a million you make $10 million. Nice, huh?

But it's hell on the downside. Firms using leverage are required to keep some collateral. If your positions start going down, you will receive what is called a margin call. You MUST sell to meet the margin call.

Say firm A gets a margin call for $10 million. The problem is they were using 10-1 leverage. They must now sell $100 million of securities to meet the call!

This is what happened on a large scale this week. These firms using leverage literally sold everything! It's hard to believe, but some of those geniuses on Wall Street were using 40-1 leverage! Sheer greed gone bad.

What is going to happen next? It looks like on the political side, governments all over the globe will have to step in to save the financial system.

First, look for governments to directly put capital into the banks. Britain announced their plan earlier this week. Uncle Sam will probably be forced to actually buy shares of bank stocks. The banks will be forced to issue new shares to Uncle Sam which will make existing shareholders big-time losers.

Next, it looks like governments globally will be forced to guarantee all interbank lending, such as LIBOR. If there are insolvent banks out there(which there probably are), it will cost governments a bundle. The hope is that the countries with the money (MidEast,China,etc.)will kick in some money.

Is there any good news? Yes! If the governments globally take the actions I described, things should stabilize. The other good news is that since much of this week's selling was "forced" selling to meet margin calls, there are lots of stocks that were beaten down for no reason.

I am finding some really high quality stocks with good dividend yields too. For instance, British Petroleum (symbol-BP). They aren't going out of business any time soon and yet, because of the huge drop in the share price, they have a yield of over 8%.

There are many other similar high-stocks quality selling cheaply right now. However, before you buy any individual stock in these tough economic times, look for one key item. How much debt does the company have? Hopefully, little or no debt at all and plenty of cash like Microsoft has.

Hopefully, governments will act responsibly soon(not like Wall Street)and avert a financial nightmare.