[yummyfajitas]

This is really important because as the world falls apart around you, you don't know if your OTC derivatives happen to be based indirectly and at least in part on some other failing financial institution.

This is simply incorrect. The cash flows involved in an OTC derivative are explicitly stated in the contract itself.

I imagine that the complicitness of the rating agencies in the whole thing never would have even gotten so egregious if most institutions had vanilla instruments on their books that were straight forward to value. OTC derivatives made it very easy to hide finagling...

You imagine incorrectly. Pricing most of these contracts is 8'th grade math given a specific scenario - fancy math comes into play only in estimating the probabilities of each scenario. In principle, the pricing formula is this:

    price = P(housing goes down) x BIG LOSS + P(housing goes up) x MODERATE GAIN

That's the price, regardless of whether it's a straightforward vanilla mortgage or a fancy synthetic CDO. The ratings agencies, banks and government all assigned a very low value to P(housing goes down). Using vanilla instruments doesn't change this basic calculation.