CDO. This creates obvious perverse incentives. If you did this with a real asset (e.g. a house) it would be criminal fraud. But with a CDS, it is currently completely legal. The total market value of outstanding CDSs on a bond issue can exceed the bond/CDO issue itself by an order of magnitude. This hugely magnifies the potential damage if the bond or CDO defaults. (This is what took down AIG). Both these problems could be easily corrected by requiring CDS buyers to have an `insurable interest' (i.e. their portfolio of CDS must match their portfolio of credit instruments). There is third way that regulators can mitigate financial market gyrations. A lot of speculative activities is correlated with traders moving in and out of markets at high frequency. (This is to be contrasted with `value investing', which involves very long-term investments.) This sort of high-frequency trading can be discouraged with a small (e.g. less than 1%) transaction tax, a.k.a. `Tobin tax'. Of course, this depends on whether you think high-frequency trading is a net social positive or a net social negative. There is an argument that `most' high-frequency trading is socially positive, because it simply mops up arbitrage opportunities, thereby making price signals more accurate. I don't understand finance well enough to take a position on either side of this argument. I am simply pointing out that the `Tobin tax' has some fairly strong arguments in its favour. There are also other ways in which regulation can improve financial markets.