>If investment banks and holding companies remained separate the CDSs never would've become so pervasive.
>
>But you have to ask why bankers piled up a mountain of risk that in hindsight could not possibly have a happy ending. Obviously investment-grade US mortgages had a very low default rate, but you'd have to ask whether and why the bankers who converted shonky mortgages to investment grade using the instruments you describe, believed it could be true. Either they didn't believe, in which case it's hard not to describe the behavior as fraud, or they did believe because they thought they had evidence from tools like Li's Gaussian copula formulae. In that case they were merely incompetent.

[X] All of the above

Greed, ignorance, incompetence were all engaged in by a multitude of people across this mess. Of course these are all a result of reversing the lessons of 1933, 1929, 1907, 1873 and so on.

>To blame government for this faulty behavior seems like blaming government for drunk driving because they relaxed Prohibition.

1) Drunk driving is against the law. This mess was created legally.
2) The drunk in question would have to be driving something with planetary consequences...like a comet ;)
3) I not excusing or blaming the government for the behavior of individuals who legally pooch-screwed the system. I am holding them responsible for messing with known regulations with decades of successful history thereby allowing said individuals to pooch-screw the system.