JMO but I think your analysis is not quite accurate. Derivatives, or credit default swaps are essentially an insurance product. Theoretically the exposure shouldn’t be more than the combined potential losses on the underlying mortgage backed securities of which derivatives were basically another layer of insurance. The fact that each time a package of mortgage backed securities was sold and likely came with a NEW CDS doesn’t really reflect the value of the underlying security. CDS’s(derivatives) were likely issued up to several times the value of the underlying securities if you assume new “policies” were issued on each trade. When the CDS’s themeselves began to be traded it was like kissing your sister. All you had was a financial instrument backed up by absolutely nothing. Each time they were traded though, somebody made a big payday.
Thanks.