How Credit Default Swaps Became a Timebomb | Newsweek Business | Newsweek.com:
"By the mid-'90s, JPMorgan's books were loaded with tens of billions of dollars in loans to corporations and foreign governments, and by federal law it had to keep huge amounts of capital in reserve in case any of them went bad. But what if JPMorgan could create a device that would protect it if those loans defaulted, and free up that capital? What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves. The scheme was called a 'credit default swap'..."

And it should have been (and possibly may have been) illegal. It is also called a Ponzi scheme. And the sheer gall of these persons now running to the taxpayer to cover their risk is beyond comprehension. In a fair world, they would be facing criminal charges for fraud at the very least. But we all know this world is many things but fair is not even in the ballpark.