"Derivatives are financial instruments whose value derives from something else, such as a mortgage-backed security or a commodity like oil. The allure of the over-the-counter derivative, as opposed to those swapped on exchanges, is that it can be individually negotiated and tailored to meet the specific needs of the buyer.
Geithner said the ease with which derivatives were bought and sold in an era of easy credit encouraged financial institutions and investors to take on too much risk. At the same time, government regulators weren't given the proper tools to mitigate those risks and protect the American consumer, he said.
"The complexity of the instruments overwhelmed the checks and balances of risk management and supervision," he said.
The administration's proposal, part of a broader overhaul package, has run up against much of the financial industry, which says it would raise costs and squash innovation." Yahoo News
For me, the best were the Credit Default Swaps that were sold by financial houses to people who did not own the underlying asset. These "insurance" intruments allowed the same asset to be insured as many times as desired. As a result, the same asset could be "insured" fifty or a hundred times. An analogy would be that everyone on your block might insure your life if they wished, and without informing you as well.
Monte Carlo? Las Vegas? The Mississippi coast casinos in the pre-Katrina days? This whirlwind of fraud was ridden by people so arrogant or foolish as to believe that they could "time" the collapse and escape. Some of them managed to do that. "Into the valley of death rode the six hundred…" Madness. pl