We use the high-resolution TNG50 cosmological magnetohydrodynamical simulation to explore the properties and origin of cold circumgalactic medium (CGM) gas around massive galaxies (M 1011 M) at intermediate redshift (sim 0.5). We discover a significant abundance of small-scale, cold gas structure in the CGM of 'red and dead' elliptical systems, as traced by neutral H i and Mg ii. Halos can host tens of thousands of discrete absorbing cloudlets, with sizes of order a kpc or smaller. With a Lagrangian tracer analysis, we show that cold clouds form due to strong 1 gas density perturbations that stimulate thermal instability. These local overdensities trigger rapid cooling from the hot virialized background medium at ∼107 K to radiatively ineff...