"No one could have predicted the financial crisis..."

"...just as no one foresaw 9/11."
--Dick Cheney


In 1998, Brooksley Born, then chair of the Commodities and Futures Trading Commission (CFTC), made a call for "public comment" regarding the derivatives market, which had evolved over the 90s, and whether new regulations were appropriate or, at the very least, whether relevant laws needed clarification. Greenspan, Rubins, and Larry Summers opposed the IDEA OF A CONVERSATION itself, not simply the regulations, for fear of the "uncertainty" such hearings would cause, legally, for those engaged in risky derivatives trading. Instead, Greenspan/Rubins/Summers encouraged Congress to pass the Gramm-Leach-Bliley Act.

Born's official call for comment:
http://www.cftc.gov/opa/press98/opamntn.htm
"The Commission has not required any recordkeeping requirements for OTC [over the counter, ie. unregulated] derivatives dealers or other OTC market participants. Having retained authority over fraudulent and manipulative behavior in the OTC derivative market, the Commission wishes comment on whether some recordkeeping requirements would facilitate its exercise of that authority."

In English:

CFTC: "How in the hell are we supposed to watch out for fraud in derivatives trading (which, 'regulation' or no 'regulation,' is still our job) when we don't require these guys to make ANY ACCOUNT of what they're doing? ...Hello? ...Anyone?"

Alan Greenspan: "Fuck off."

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The real beginning of "moral hazard," vis a vis credit derivatives, occurred when the Fed, via AIG, Goldman, and Berkshire Hathaway, bailed out the failed hedge fund LTMC whose books had been decimated by bad credit swaps (sounding familiar?). The systemic risk that unregulated derivatives trading posed to the entire economy was made apparent then, TEN YEARS AGO:
http://en.wikipedia.org/wiki/Long-Term_Capital_Management

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Plenty of people saw the risks (note the dates):

Excerpts from Berkshire Hathaway's annual report, by Warren Buffett, Mar. 2002
http://74.125.95.132/search?q=cache:KRHQRp7BNlMJ:www.fintools.com/docs/Warren%2520Buffet%2520on%2520Derivatives.pdf+warren+buffett+derivatives&cd=2&hl=en&ct=clnk&gl=us&client=firefox-a
"I view derivatives as time bombs, both for the parties that deal in them and the economic system."
"Derivatives are financial weapons of mass destruction."

"He's Forever Blowing Bubbles" by Dr. Gary North, Jul. 2003
http://www.lewrockwell.com/north/north187.html
[The derivatives market is] a zero-sum game: for every loser, there is a winner, assuming – the central assumption on which our civilization rests – the loser pays off. If he doesn't, "the knee bone's connected to the thigh bone; the thigh bone's connected to the hip bone." It's cascading cross defaults time!

"The Coming Disaster in the Derivatives Market" by Michael Panzner, Nov. 2005
http://www.financialsense.com/editorials/panzner/2005/1109.html

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Honestly the best over-simplified explanation of derivatives and the threats they pose(d) came from survivalblog.com (a guy who is a bit of a nutcase, but also does his research):

"Derivatives: The Mystery Man Who'll Break the Global Bank at Monte Carlo" by James Wesley Rawles, Sept. 2006
http://www.survivalblog.com/derivatives.html

Predicting the demise of Iceland: "directly or indirectly, central ("state") banks and national governments themselves are now inextricably tied to the derivatives trading universe. They are not just "dabbling in derivatives". Rather, they are in derivatives up to their necks. If and when the global derivatives bubble ever pops, it may topple not just trading companies like Goldman Sachs, or corporations like GM, Daimler-Chrysler, or RCA, but entire nations. I'm not kidding."

Quoting Gary Novak: "The total annual product of the globe is around $30 trillion. I estimate that the total value of the global real estate is around $50 trillion. A few years ago, Alan Greenspan said the amount of derivatives on the books was $200 trillion. More recently, the figure was stated to be $300 trillion. Now, someone is saying $770 trillion."

Concluding: "my advice is to do your own form of hedging: Hedge against the future follies of the big hedge funds by diversifying out of dollars and into tangibles. You can expect trouble to occur when you start to see radical swings in interest rates or in the stock and bond markets. I predict that someday there will be big, bad, financial news about derivatives in the headlines. How big? Reaalllly big."

And no one saw this coming.