OMG, where to begin. Outraged? Hell yes! Pissed? You betcha! How about we bring back the stocks and put all the bastards in them. Since there are so many of the SOBs, it would probably solve the unemployment problem as well. BTW Robert, did you follow the links to the Times Topics for derivatives and credit default swaps? They answered my questions regarding yesterday's thread on CDOs.

This paragraph really drives home our dilemma:

Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.

If I were the administration, I would get out in front of this tsunami and start speaking frankly, now! The people who perpetrated this scam need to be brought into the sunlight and absolutely, unmercifully grilled and prosecuted. The continued assurances, platitudes and non-speak from Bernanke, Geithner and Summers will not suffice. I would think that Congress will be compelled to start investigations real soon.

The quality of a derivative instrument is only as good as the actually data it consists of. All the other analytics are "derived" from that underlying data. Now, it may not have been 100% fraud, but a lot of things go into scoring a mortgage besides Fair Issac. School district, employer size, security, demographic composition. Many of these statistical methods are never used at the mortgage committee level. It's basically unregulated, making more art than science.

since it's obviously a ponzi scheme and a scam, how can the U.S. taxpayer be left on the hook to perpetuate the entire system?

People in the 3rd world have been dealing with this dilemma for decades. Their corrupt leader takes on enormous amounts of foreign debts, sometimes to fight useless wars, most times to just line their pockets. Then the impoverished public is left with a government that provides no services, but taxes them mercilessly to pay interest on the debt.
It's immoral to make these poor people pay for these debts, but America has often sent its army in if they refused to pay.

Now the game has come home to the developed world. But things aren't going to work the same, because an entire world that is impoverished and in debt servitude is a very unstable world. There will be violence.