One thing I was wondering about with all the insane loans out there: given that--unlike ordinary insurance--one is not limited to buying CDS "insurance" on assets one actually owns, and given that there's no clearinghouse of CDS bets, what would prevent someone from "insuring" a bad loan for many times its worth? That would seem to offer an effective way for a scam artist to make a lot of money, at least until all the phony bets kill off the CDS firms.
That's effectively what a Collateralized Debt Obligation (CDO) does. It can be a tranche composed of bond insurance "bets").
That's why the "seller" of the insurance takes it in the shorts, and that seller has, for the most part, been investment banks and insurance companies.
Speaking of insurance companies, I don't expect AMBAC to last much longer.