>> good money can be earned from bad debt
There is no money in bad debt. There is money in shuffling bad debts. And that's what we had. Every bad loan requires atleast 2 good ones to cover it. And if you have a few bad ones you raise the rates. But when all you have are bad ones what do you do?
Even insurance has its limits, thats why reinsurance exists, to bail out the big guys when they've stretched themselves. Ask any Floridian about how they feel about home owners insurance? Car insurance is easy the risks are known and easily modeled. Home insurance is easy money until you have a major disaster. The governor of Florida had to threaten to shutdown all of Statefarm's business because they didn't want to pay claims after katrina and Rita.
No one knows fuck all about derivatives. Even the people that are supposed to know know fuck all about them. They're not in the business of holding derivatives, just shuffling them. As long as they could shuffle them, convince someone else to buy them (clients), and make a profit they didn't care.
And that's the point. When one company does it they have an edge, it's dangerous but the market can absorb the loss. Losing Barings Bank in 1995 was the same thing though on a smaller scale. They went bankrupt, the market picked through the carcass.
When they all do it, we are vulnerable. There are no others to pick through the pieces. Hell they had to foist Leyman brothers on BofA because if no one took the bad debt then people would realize they were gambling. People realized it anyway and boom goes the dynamite.