That was a great article. It's amazing there is/was little or no regulation involved. I traded options for a few years and at times could be overwhelmed at the complexity of some spreads but the whole mortgage derivative market, with credit default swaps, blows me away. I would have loved to hedge some of my trades with 'air' and then been able to show the clearing house that I was (wink, wink) hedged on paper. It would certainly make shorting options quite a bit less stressful.
I also thought it interesting that the author traced the root cause of this back to the investment firms going public. Didn't Greenspan just say the one flaw in his model was his inability to account for the lack of concern given by investment firms to their shareholders? I agree that a privately held firm would be quite a bit more careful.
Thanks for the link OP. I've passed it on to quite a few friends.