If you want to under­stand what’s at stake with the cur­rent eco­nomic crisis, and why it could very easily go from bad to 45-trillion-dollar bad, you could do worse than to read the two arti­cles from the New York Times Sunday Busi­ness page on credit default swaps. Nelson D. Schwartz and Julie Creswell lay out the basic story in “What Cre­ated This Monster?” and Gretchen Mor­gen­son explains the impli­ca­tions of the Fed/JPMorgan bailout of Bear Stearns in her Fair Game column.

Here’s the key grafs from each arti­cle (at least as they appear from the very dis­tant side­lines where I’m sit­ting). From Mor­gen­son, who’s dis­cussing the pos­si­bil­ity that JPMor­gan had effec­tively sold insur­ance on Bear Stearns’s bonds via credit default swaps, and there­fore had a very direct inter­est in making sure that Bear didn’t end up in bankruptcy:

An inter­est­ing side note: It’s likely that JPMor­gan, the biggest bank in the credit default swap market, had a good deal of this kind of expo­sure to Bear Stearns on its books. Absorb­ing Bear Stearns for a mere $250 mil­lion allows JPMor­gan to elim­i­nate that risk at a bargain-​basement price. JPMor­gan declined to com­ment on the size of its port­fo­lio of credit default swaps.

And from Schwartz and Creswell, who are dis­cussing the reason the Fed had to get involved:

Bear Stearns held credit default swap con­tracts car­ry­ing an out­stand­ing value of $2.5 tril­lion, ana­lysts say. “The rescue was absolutely all about coun­ter­party risk. If Bear went under, everyone’s sol­vency was going to be thrown into ques­tion. There could have been a sys­tem­atic run on coun­ter­par­ties in gen­eral,” said Mered­ith Whit­ney, a bank ana­lyst at Oppen­heimer. “It was 100 per­cent related to credit default swaps.”

And finally, check this arti­cle for a look at the fight that’s already brew­ing: how to imple­ment reg­u­la­tions that will help keep all this from hap­pen­ing again.