John Carney has a great "two cows" explanation of Wall Street’s goofy transactions and vaporous balance sheets:
You have two cows.
John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.
You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John’s $10 to make up the rest.
You brag to everyone about your financial health. You have assets–two cows you own, plus one Paulson owes you–worth $300, and liabilities of just $100.
A third of the country goes vegetarian.
You thought your two cows were worth $200 and now they are worth $140.
Read the rest here.