The theory and the practice of CDS’ have always been wildly different.

In theory, a CDS is “insurance” if a bond issuer defaults.

In reality, CDS’ are used to go in and out of positions on companies because contracts are too difficult and expensive to cancel. The end result is big firms end up with huge, complicated CDS positions all over the place for 5-10 years until the contracts cancel.

A CDS on the United States is another stupid end result just like CDO2 vehicles were.

The CDS market is just so incredibly flawed when markets are stressed.