>> One example is credit default insurance resold or booked as an asset. It is nothing but a piece of paper. There are many trillions of that.
Who owns that paper? For what purpose did they buy it?
And (not to be callous, but to understand better): why do we taxpayers care if the owners of that paper lose money on it? In a macroeconomic sense.
Goldman Sachs, hedge funds, etc. They bought it to speculate on MBS defaults. It was obvious to everyone with any common sense that the structure of these securities would fail when the housing market turned. People here have been talking about that since 2005 or earlier. Those funds bought the securities hoping for a payoff when the underlying MBS or corporate bonds defaulted. It is "mortgage-related" so would be eligible for bailout money. The taxpayers should not be buying up those, but we will.