President Bush addressed the nation trying to explain the need for a massive $700 billion bailout plan for US financial institutions. In brief, the plan involves the US Treasury directly purchasing bad debts from the instititions that have these debts and putting that debt onto the US government's already stretched balance sheet.

Will the bailout plan work? My feeling is that the plan is better than having no plan at all. But I do not like having this perverted mix of capitalism and socialism. The gains are 'privatized' and kept in the hands of the fat cats while the losses are 'socialized' and dumped onto the backs of the public.

However, the US credit markets are almost completely frozen and no nation can survive that for long, so there is little choice but to go forward with a plan. But there are many mis-conceptions about the plan being propagated by the media, which just does not understand finance.

First, the US taxpayers must understand that the government bailout will cost much more than $700 billion. As discussed in prior articles, there are many more problems, such as the FDIC or the new 'insurance' on money market funds, looming on the horizon. Best estimates right now for the total cost range from $1 trillion to in excess of $3 trillion!

Second, don't pay attention to the smoke being blown by the politicians that if the government holds on to these bad debts, they will eventually turn a profit for the taxpayer. If there was any hope for profit, private money such as private equity firms or overseas sovreign wealth funds, would be falling all over themselves to buy these debt instruments.

Sadly, there is no market for these debt instruments, that is there are no buyers. The 'smart' money knows there is little hope for this bad debt.

The one piece of good news is that there may be a crackdown on executive compensation at these financial firms. These executives are 'earning' hundreds of millions of dollars to run these companies into the ground.

Why doesn't the US adopt the standard used elsewhere in the world? Any and all executive compensation must be approved by a shareholder vote. That is why executives elsewhere make so much less than US executives.

How did US financial institutions get themselves in such in a mess? A few words come to my mind - stupidity, arrogance, hubris. The people running these firms believed that all US assets always go up.

To make money off of this 'fact', Wall Street created all types of strange, new derivative instruments which they sold. They made hundreds of millions in the process.

Derivatives are too complicated to explain here, but they are highly leveraged products and I believe dangerous. Several years ago famed investor, Warren Buffett, called them "financial weapons of mass destruction". How prophetic!

I will use one easy example to explain. There is an instrument called a CDS or a credit default swap. It started out basically as an insurance policy. Say an institution, such as a pension fund, owned bonds issued by XYZ company. The pension fund could buy a CDS on XYZ company. If XYZ failed to pay on the bond, the pension fund was covered because the issuer of the CDS would pay the pension fund instead.

Wall Street has sold and issued an amazing $62 trillion dollars of credit default swaps!! They thought it was riskless. After all, assets in the US only go up - no one would default on a bond!

Then the mortgage problems hit and there were defaults. Wall Street had to start paying huge amounts of money out on the mortgage bond CDS they issued and which defaulted. Wall Street said - OOPS! Houston - We have a problem!

One other point on the CDS or credit default swaps. Recently, some major Wall Street firms and hedge firms have really 'abused' the system.

What these 'abusers' would do is buy CDS on various firms and then go into the market and aggressively short the stocks of these companies, driving the prices of these stocks down sharply.

In layman's terms, that is the equivalent of you buying a life insurance policy on your neighbor, and then promptly running him down with your car.

It's a sad commentary on the state of our country currently.