Credit Default Swaps

While we all watch the Congressional drama over the "toxic mortgage" crisis, there is another, even larger boogyman in the background. Credit Default Swaps are privately-placed "bets" or insurance on the potential default of debt instruments. In essence, anyone can create such a swap, and even bet on the default of someone elses' debt -- sort of legalized gambling. Hedge Funds got onto this a decade ago and some have made billions on it, but it is totally unregulated, and there are now trillions of dollars of such bets out there, ready to collapse.

See The $55 Trillion Question for a good and quite readable discussion of this risk.