CDS were definitely a weak stressor in the system, as were the high leverage and some of the incentives in credit ratings, but bad mortgages are indeed the issue, not hedge funds, for example.
It is the uncertainty of the quality of mortgage-based assets on the books of financial firms that is making inter-bank lending and the other party in some CDS excessively risky. Now you can add on top of it the negative effects of bad governmental intervention and fear of compounding fear to what at the core is bad mortgages.
Well, anybody who looked at it and watched it knew and stated that the explosion in real estate prices could only end one way. Just like a game of musical chairs.
Except instead of taking one chair away per round, it was like taking ten chairs.
Why are small, local banks that originate loans, and keep the mortgagee and thus the risk in house, doing fine? Because they knew and cared.
So, the whole racket was to strip money and pass on risk, to pass on the stinking waste bag of this racket.
Morgages were just the vehicle.