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As somebody who was an early pioneer in derivatives the capacity of Wall street to engineer products will far outstrip the capacity of the regulators to monitor them. Throw in bonuses, mark to market and investor greed we will continue to get problems as we are currently witnessing.
The only way to manage this beast is to insulate the "real economy" from the financial casino. Limit the the bonuses that can be paid by entities that use the government guarantee to attract funds, fence of certain activities in distinct subsidiaries and have stronger rules for the use of some of these new fangled instruments by banks and corporations and limit the amount of credit that can be extended by banks against these new types of instruments- banks are already limited in the amount of they can lend to a single borrower.
The net effect is that if a player in the financial casino gets into trouble the costs will be borne by the other players. Paradoxically we get a safer system by not regulating these instruments- once the participants realize that the government will not bail them out they will be more disciplined
