People aren't sure what to make of the synthetic credit default swaps market. The media has been rife with stories suggesting that the market is creaking and may be the next leg down in the credit crunch. Some think it is inevitable that the same pain felt in CDOs that invested in subprimes will be felt by their counterparts that invested in CDSs.

No doubt, some banks have been really hurt. Susquehanna Bancshares has written off $17.5 million for such CDOs. This is not a market-breaking loss, but the issue is whether larger losses are to come. National Australia Bank has purchased some hedges to the tune of $60 million a year in cash. Do we need to fear another massive meltdown? There's a lot of nervousness as people anticipate credit rating downgrades, but when you stop and think about it, only seven entities have gone into default. Granted, Lehman CDSs were widely traded, but the majority of financial firms, which underlie the most CDSs, are safe from insolvency now. But at a time like this, that doesn't count for as much as we'd like.

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