Warning: this post will require you to be able to intelligently ponder philosophical concepts and theories, and perhaps try to forget some assumptions you may already have. I failed in my attempt to explain the concepts below in a comment thread on NakedCapitalism, so here's the full thought process:

Let's have a quick CDS tutorial: Credit Default Swaps are insurance on the credit of an underlying company. An investor who buys CDS on company XYZ will pay a fixed fee (ie, 1% of the notional he is purchasing) every year, and in exchange, the seller of the CDS will owe the buyer money if there is a default event at the company.

The biggest problem with the CDS market was that sellers of CDS - ie, sellers of insurance, wrote checks their bodies couldn't cash. They ended up with liabilities they couldn't possibly make good on, and you know the rest of the story - government bailout to avoid Armageddon.

There is another problem with CDS, though, and that's the fact that there are many more CDS outstanding on some companies than the actual