Without the help of government regulators and the public's blind faith that those regulators would protect them banks could not do this. In a free market these institutions could not garner enough public trust to get away with these something for nothing deals.

It is truly immoral to jeopardize the future of our society in such a manner and is not in anyone's long term self interest. Put up a shield of "Too big to fail" and thieves and scoundrels will steal everything insight while crowding out those that are conducting banking on the terms of a rational business model.

I naively imagined banks used derivatives to eliminate rate risk, i.e. to protect against rising rates if their assets are long term loans and their liabilities are short-term deposits. This article implies they use them for speculation too.

I don't understand the counter-party risk. As a retail investor, I can't write options I couldn't make good. I guess these large institutions buy each other's options on faith.