The great unknown of credit default swaps

Credit default swaps were born as a way for parties to bet or hedge against the risk of a company defaulting on bonds. But it has spread rapidly, largely because of hedge funds, and has become a very speculative market that is very sensitive to interest rates and changing spreads. In fact, the entire credit derivatives market has soared to something like $26 trillion in notional value. This explosion has occurred in a period of low volatility and few defaults, though many a new hedge fund has really been vexed by the market. The market ranks as a supreme challenge for regulators, notably Tim Geithner at Treasury, who pondered the effects of a wave of defaults, soaring rates and perhaps even a sell off. It's fair to say we're in the great unknown.

For more:
- here's a New York Times article