This same article presents this simplified summary of derivatives:

But the most lasting impact of her diligent approach to public policy is likely to come from her crusade for financial reform, particularly the fight over regulation of derivatives. Derivatives are securities at one or more layers of abstraction from real economic transactions. A mortgage loan, for example, is a real transaction. A bond backed by a sub-prime mortgage loan is a derivative. A package of such bonds is an even more abstract derivative. And a credit-default swap, which is an insurance policy against such packages of bonds going bad, is four levels removed from financial reality. At each stage of abstraction, derivatives invite pyramids of leverage and huge speculative profits for insiders — as long as the bubble keeps inflating. When the bubble bursts, the losses can be as infinite as the capital is infinitesimal.

The Obama administration does not seem to understand that this rage, left unaddressed, could consume it. It has pushed aside the entreaties of many — including Paul Volcker, the chairman of the White House’s own Economic Recovery Advisory Board — to break up too-big-to-fail banks. Those behemoths, cushioned by the government’s bailouts, low-interest loans and guarantees, are back making bets that put the entire system at risk. Yet last Sunday, we once again heard the Treasury secretary, Timothy Geithner, on “Meet the Press” dodging questions about the banks in general and Goldman in particular with unpersuasive bromides. “We’re not going to let the system go back to the way it was,” he said. Surely he jests.

http://www.nytimes.com/2009/11/08/opinion/08rich.html?_r=1