Don't get confused about derivatives and CDOs and all that, it's all quite simple. Here's a quick lessen of the complex financial mess that stands before us.
That wonderful product that you bought on late night TV seemed like the greatest thing since sliced bread. Surely the glamorous Hollywood star wouldn't lie to me. But somebody way down the line overlooked the fact that substandard parts were used and at one point the pizza delivery guy was used in the assembly process. Hey he was handy at the time because we were short on personnel. And they knew damn well that this was a dog since their QC checker was on the payroll and the regulators were too busy watching porn to be bothered. Why bother when everything was running very well and everybody was making a ton of money. But as the process evolved other manufacturers wanted in on the action. They could get rid of the shitty material that had been sitting in the back room collecting dust. So they just made a deal with the rating guys to beef things up and slap on a AAA . "This stuff isn't bad" they were told because the stockroom guy mixed it with just enough good stuff to fool his own mother.
And so the hot potato was born and it was mixed many times as it was passed from one seller to the next buyer. Neatly packaged in shiney foil wrapping with a nice pink bow. And who wouldn't want one of these neat presents with GOLDman stamped on the side? It must be mmmmm good. Even though this tater was a hot one everybody wanted one but knowing how greed works they just couldn't hold on for long. Just had to flip it to the next buyer (er sucker) and make that quick short term profit. So the tater was tossed around and around working it's way through Great Britain, France, Iceland and beyond. Until one day the potato cooled off enough for the buyer to look down to see what he'd bought. And he realized what he had was rotten. But he really wasn't worried because he had bought insurance on the potato. And it was only when he went to collect on his policy that the whole thing unraveled. For you see the insurance companies hadn't bothered to have enough to cover a loss when most of the potatoes went rotten. They too were making tons of money selling insurance and wallowing in the cash. That is until the foreign buyers realized what they had and wanted to file a claim. And that is when everyone realized that nobody could make fries or even mashed potatoes out of this rotten mess.