Bad mortgages are one type of large, illiquid unhedged asset, yes. But my general point is that the main danger to large institutions is a huge asset that loses

Bad mortgages are one type of large, illiquid unhedged asset, yes. But my general point is that the main danger to large institutions is a huge asset that loses value very quickly and can't be easily sold. If you accumulate too many of those, other banks can lose faith in your ability to meet short-term obligations, and then you're essentially up the creek. That is exactly what happened during the 08 panic. As for #2, the main way trading shifts from assets to derivatives is this template: the government says I have to pay a tax if you sell me one share of AAPL. Instead, you sell me a contract that says, "if the price of AAPL changes by $X, I will give you $X. This is financially equivalent to a sale of AAPL stock for both parties, but does not require you to transfer ownership of a share of AAPL stock, and so you can avoid the transaction tax. Even if the US tries to impose the transaction tax on the derivative, it can be moved offshore, and thus avoid the tax. What I just described is a simplified version of a Contract For Difference (CFD), as mentioned by another commenter. But there are innumerable other sorts of derivatives that could accomplish the same basic purpose.