When over-the-counter derivatives really began to gain traction in the financial world, Wall Street insiders and industry regulators constantly proclaimed their virtues -- and ignored their shortcomings.

Among other things, they argued that these paper promises would allow complex risk to be broken down into its constituent parts and redistributed to those who wanted and understood the exposure they were taking on.

In truth, no one really knew what it was they were slicing-and-dicing, what new risks were being created in the process, and where all this stuff was actually ending up.

Proponents also claimed that new age finance would make the system more durable because risks would be disbursed far and wide, rather than being concentrated in a small number of institutions or portfolios.

Again, those who were allegedly in the know failed to take account of the fact that in a tightly-connected world, serious problems in one part of the system would invariably spill over and affect other parts.

We now know, of course, that many proponents of Frankenstein finance were clueless charlatans or greedy insiders creating smokescreens that helped facilitate a major Ponzi scheme.

Unfortunately, at this point, it's too late to do anything about it. In the days and months ahead, we are bound to see more reports like the following, "What Will Mac ’n’ Mae Cost You and Me?" by the New York Times Gretchen Morgenson, highlighting developments that will only worsen the fallout as the crisis continues to unravel.

The inevitability of a taxpayer-funded bailout of Freddie Mac and Fannie Mae, the hobbled mortgage behemoths, shook investors last week, and shares in both companies plummeted on fears that existing stockholders would be wiped out.

These government-sponsored entities guarantee or hold $5.2 trillion in mortgages and have been hammered by defaults across the nation. Fannie Mae’s shares closed on Friday at $5, down from almost $70 a year ago. Freddie Mac fell to $2.61, which is down from about $65. Their heavily leveraged balance sheets magnify even a small rise in delinquencies.

There is no certainty about what form a Mac ’n’ Mae rescue would take. Naturally, this is giving investors the jitters. Up and down Fannie’s and Freddie’s capital structure, debt and equity holders want to know how a bailout would affect them.

It is widely assumed that debt issued by Fannie and Freddie will be backed by the taxpayers. Call it “too big to fail times two.”

But in our highly interconnected financial world, where one company’s ills have the potential to infect many others, no bailout exists in a vacuum. And the ripple effects that may result from shoring up these giants extend from the obvious — hammering their shareholders — to the fairly obscure, involving participants in the market for credit default swaps.