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It's not about mortgages being paid on time. It's about banks and other lending institutions lending new money. Small businesses, existing businesses with credit lines, HELOC's, car loans, etc. These guys have already started to choke off lending. If these derivatives are allowed to unwind and hundreds of billions of losses have to be absorbed by the market (read, you and me and anyone who owns any type of investment instrument) they will tighten lending further still. Companies will fail. People will lose jobs.

Again, I am not a pro-government guy. My screen name should tell you that. I truly feel this is an issue of economic/national survival. We need to get something passed...very few Republicans in Congress disagree with that...let's make it as good and as clean as possible.

Here's Ben Stein on the issue of CDS derivatives:

According to what I hear from my betters in the world of finance, the most serious problems are not with the bundles of subprime mortgages themselves — a large but not lethal quantum as far as I can tell — but with derivatives contracts tied to subprime and other dicey debt. These contracts are superficially an attempt to “insure” against risks of default, hence the name “credit-default swaps.” In fact, they are an immense wager — which anyone with lots of money or borrowing ability can enter — about how mortgage-backed bonds, leveraged loan bonds, student loan bonds, credit card bonds and the like will perform.

These wagers entail amounts many times larger than the total of subprime loans. In fact, there are roughly $62 trillion in credit-default swap derivatives out there, compared with about $1 trillion of subprime mortgages. These derivatives are “weapons of financial mass destruction,” in the prophetic words of Warren E. Buffett. (Apparently believing that the worst is over, at least for one big investment bank, Mr. Buffett is now investing in Goldman Sachs.)

He proposes to simply annul the CDS's existing today. Interesting idea. Not sure the feasibility.