Good explanation, but I am not sure why the Paulson plan would lead to an implosion. The “bets” are between investors and, as I understand it, don’t directly involve the actual debtor. The counterparties are the entities that bet that that debtor will pay (i.e., the seller who sells the contract for payments on the assumption that the debtor will pay) and the buyer who pays a flat fee or makes regular payments, yet bets on the ultimate default. The CDS counterparties are typically entities who are trying to hedge their other investments (usually in the same market or another market with a comparable beta).
That suggests to me, at least, that while the “bailout” (which I think is a really misleading term) might cause CDSs to unravel, the corresponding relief to the underlying instrument (i.e., relief to the original lender of the underlying debt obligation) would balance that out. The goal here is not to save or harm the derivatives market, but simply introduce liquidity to the market. If the derivatives do implode (as they might), it won’t matter so long as the underlying debt obligations are assured to a point and lender are able to provide needed credit to their routine customers (i.e., regular businesses).
Either way, it will affect counter-parties down the chain. The problem with the CDS market is that it is so intertwined. There are literally bets upon bets upon bets. When Paulson affects the Mark to Market price of an asset then everything will be thrown off kilter and it will be felt throughout the world's financial systems.