Next up on the collapse of the global financial system this week is Tuesday's anticipated massive default on what's left of the Lehman Brothers derivatives debacle. Lehman acted as both originator and counterparty in the completely unregulated Credit Default Swap market, whereby lenders hedge default risk by buying insurance in the form of swaps. Lehman's failure put $400 billion worth of these contracts into default, and at auction last week, the receiver realized just over 8 cents of the dollar.

That means the swap issuers are on the hook for over $320 billion due on Tuesday, and since the entities who owe the money are at least a third hedge funds, there is a great deal of doubt over the likelihood that the obligations will be met.

The real danger, and this is the really big elephant in the whole picture, is that this could be the event that initiates a domino effect of widespread collapses of financial institutions including banks, insurance companies and hedge funds so rapid that no government will be able to abate the carnage. There are $64 trillion in derivative contracts out there that have the potential to blow up.

Chris Whalen, head of Institutional Risk Analytics, says this creates a huge moral dilemna. Why should taxpayers now responsible for AIG foot the bill for huge windfall transfers to hedge funds?

"We need to shut this whole thing down. The people who don't own the underlying collateral and were just betting should be flushed away. It would be grotesque if the US authorities were now to subsidize speculators. The US political class is waking up to this," he said.