The CDS were underwritten by other large financial institutions for relatively cheap premiums. These institutions thought that "safe" assets will never go out o

The CDS were underwritten by other large financial institutions for relatively cheap premiums. These institutions thought that "safe" assets will never go out of money so the insured event will never occur. CDS is the reason AIG went bust. It gets trickier, they did not go busting having to make make payments for the CDSes that they had written but the likelihood of them having to pay increased in light of increased defaults, so the rating agencies cut the rating of AIG. Now, whenever CDS or similar derivatives are written they are done looking at the ratings of the parties involved and with caveats that any fall in ratings would translate into the parties making additional margin payments (money to safeguard against parties defaulting); getting back to the AIG story, when the ratings fell, they were obligated to pay additional margin money to the tune of billions.. which they did not have. A small facet of the big big story.