Systemic failure means what it says. A system filled with complex parts fails. Most complex systems evolve over time to be robust and contain multiple subsystems. They may be mechanical, biological or informational. Think of a an airplane, your body and the internet.
A major system system is the financial system. Every once in awhile, it faces a serious challenge, not the kind that USA today writes about, but the kind that historical economists study and write about for decades to follow.
The current hedge fund and debt markets using ever more esoteric instruments deriving value from literally 3 degrees of seperation from their underlying instruments are facing a challenge. Hedge funds are not huge financially $1.5 trillion under management which in the global scheme of $50-$60 trillion in global fiscal assets isn't huge. However Hedge rely on leverage and liquidity like you and I use oxygen. Without it things get awkward fast.
The most recent CDO issues are most likely the tip of the iceberg. My past posting on hedge fund risk probably makes for interesting reading about systemic risk and yet more failed VaR models.
