Actually, that's not what happened. What Paulson put into Abacus was insurance policies on pools of those mortgages. The counterparties were not purchasing the rights to streams of payments from pools of mortgages, they were accepting streams of premium payments from him on a pool of insurance policies on pools of mortgages. Also, he sent a list of suggestions for which pools of mortgages should be insured to a third party, which rejected some of them. Finally, the customers were not individuals, but banks who should have the facilities to properly analyze the risks. There were failures of due diligence by both the institution responsible for the final selection of the instruments and the institutions that purchased them. If I buy a house insurance policy from someone, and they don't bother to check if the house is on a flood plain, why should they get to complain that they have to pay out when the water hits?
The problem is when the seller does not reveal that sort of information to the buyer. There are a variety of existing laws covering that sort of behavior, for example: lemon laws and laws covering full disclosure in real estate.
This relates to the idea of asymmetric information in free markets. Not revealing pertinent information doesn't help anyone. It's fraud.
