How do you figure?
The level of risk posed by the investment vehicles in question turned out to be FAR higher than what anybody ever claimed.
People who were in the position to ensure that they were not reselling or facilitating the creation of bad debt, failed to do so.
Is this how you think the free market should work?
If you cannot trust the person you are doing business with, and you cannot trust the courts to uphold contract terms and punish fraud, there will be severe impediments to economic growth.
It is not fraud to be wrong about an estimate of someone else's creditworthiness.
The follow on losses are caused by those propagating up a chain of intermediaries. The rating agencies gave high credit ratings to senior tranches of packages of debts because they thought the overall losses would be limited, and therefore confined to the lower tiers. This proved not to be the case, primarily not because of originator failures, but because of loss of liquidity higher up the chain as confidence declined. Meaning, the SIVs and such could not sell their commercial paper, etc.
The credit mechanism is inherently unstable that way, and confidence can strike it anywhere. If enough people think investment form A among the intermediaries is a dodgy risk, then it will become a dodgy risk, as its interest costs soar and it cannot carry long dated assets. Good bankers are familiar with this and keep an eye on liquidity (aka the exits) in their investment strategies. But when times are good, it will always appear possible to increase returns by running more risk in such matters.
The underlying driver was not fraud, it was easy monetary policy coming from the Fed, and a resulting large spread in the rates that corporate paper cost to get capital, and the rates the lower credit tiers were charged to use it. And high valuations of long dated assets - here homes - from an expectation that IRs would stay low for long periods.
That is a typical forecast error. It is avoidable and the best financiers do avoid it. But we get bubbles and cycles because not all do - without it making any of it fraud.
The attempt to criminalize error in the deployment of capital plays into the hands of trial lawyers on the one hand and socialist grabbers on the other, as more and more decisions are pushed into the political arena or the courts, and fewer and fewer are left to free markets. That way lies sorrow, not sounder finance.
Believe me, it is quite punishment enough that Citi has lost 40% of its market cap inside of six months. It is not productive, nor needed, to add the pile-on of also demanding everyone's heads.
If you only ever got to keep freedoms that you exercised flawlessly by external standards of "flaw", you'd be a slave in a few year's time. Do not criminalize other men's use of their own freedom of economic action. Or you soon won't have any, yourself.