Toxic Assets are Illegal Bets

It is early morning on a Saturday, my son woke us up early, so it is time for some early morning thoughts. Being not quite awake, please pardon me is it does not make sense.

There is something I do not understand about these so called toxic assets that are one of the root causes of the recent financial meltdown. These "credit default swaps", at least the ones where the underlying itself asset is not part of the deal which as I understand it far outnumber the simple re-sold default prone loans, are basically bets. And since the financial institutions that issued them do not have a gambling / Casino license, they are illegal bets. Which makes the solution simple: declare the toxic assets illegal bets (which they are) and therefore null and void. Fine the financial institutions for acting as bookies. The people who (or institution that) bought these assets, who placed the bets, loose their money. But that is a relatively small amount compared to what the financial institutions would have to pay to all the holders of bets on loans that have defaulted or will default in the near future. Some rich people loose some money, the financial balloon lets out some air but does not have to burst.

I must be missing something, since this is way too simple. Oh well, it is a bit of a dreary morning. Should clear up soon.