A quick overview on what credit default swaps are. The biggest issue at this moment (early in the morning) is AIG and can they get by the need for capital.
A credit default swap is like an insurance policy. In fact, it is an insurance policy. Suppose you own bonds issued by XYZ Corporation and you want to hedge against the possibility of a default. The credit default swap market has developed over the years to allow you to do that. You would enter into a contract with say an insurance company that would sell you a "policy" that would make you whole if XYZ defaulted. The contracts usually run for five years and you pay an annual premium for the coverage. AIG is a big insurance company and they issued a lot of these contracts. They allowed their customers to "swap" to them the risk of XYZ defaulting.