Financial innovation is to innovation as theft is to wages. For both the thief and the worker, there is certainly economic gain from their industry. It is a bit harder to see the broader social benefit from the activities of the average thief than it is find benefit from the productive efforts of the average working person.
The use of terms like 'financial engineering' to dignify gaming schemes and regulatory arbitrage with some quantitative aspects should offend both linguists and engineers. Most derivatives and swap products are simply insurance contracts for which no adequate reserving was undertaken. The fact that the regulatory regime was so weak that it was possible to do this offers no excuse for the organizations that took on the risks without appropriately underwriting and pricing them. Those organizations were, after all, private enterprises with a profit making goal. Some--AIG, in particular--even had the internal expertise to do it right. Instead, for whatever reason, they chose as their business model the casino rather than the insurance syndicate. And, even as a casino, they didn't get it right. They confused their gross with their net, and compensated the coupiers and the dealers out the gross, forgetting the need to payoff the winning customers.