This is the best explanation I've received yet of what these CDS are, and why they are so deadly to the financial system.
If you watch all the way through, at the end he explains that no one understands how many of these things that there are.
Basically the CDS is like insurance, but there is nothing preventing an investor from insuring on losses on GM bonds for example multiple times.
So even though the investor may "lose" 50% on an investment and have that made up to them by the insurer, they can cash in on multiple policies. Which means that if the asset drops from $2 million to $1 million, that the person who insured the asset can collect on this $1 million dollar loss multiple times.
So let's say that the investor takes out 10 CDS policies (i.e. insurance plans) at a 10% premium. So the investor has to give up $1 million to the insurers, but if the asset collapses and is collected on, then in exchange for this $1 million in insurance premiums, the investor gets back $10 million.
This is the reason that even the slightest drop in asset values covered by these CDS sets off a chain reaction in which the immediate loss in the value of the asset is multiplied across the firms that have covered the lost through a CDS. So a $1 million default is transformed via these CDS into a loss 10 or 20 times that.
It seems at the very least that a policy prohibiting double payment is in order. Insurance should be a way to distribute risk through a market not a financial instrument used to make money at the insurer's expense.