CDS is an insurance contract that one Bankster or Wall St wise guy buys from another to insure that a dicey security (bond maybe) he just bought will not default or go into semi-default. With that CDS contract in hand the bond holder will demand the CDS issuer to make him whole. To rebuild the house that burned down or the part of the house that burned down.
I think CDS's should be illegal. They are what I call a "cascade" investment. Trying to take the same profit from one investment three or four times over is a total scam.
You are correct in this way--->>
One of Wall St/Bankster biggest profit centers during the real estate bubble was cobbling together, selling and trading mortgage backed securities. Called CMO for collateralized mortgage obligation. These CMO were securities and if a CMO holder was worried he would take out CDS (insurance) on it. So profits were racked up and mega-bonuses doled out for the CMO business and then all over again for the CDS business to insure these CMOs
This went on all over but one specific case is Goldman Sachs holding a bunch of dubious CMOs so it went to AIG to them insured via some CDS. When AIG tubed the taxpayers were forced by pond scum Tim Geithner to make Goldman Sachs 100% whole on the CDS insurance that AIG could no longer make good on
A much fairer remedy would have been to bail out Goldman Sachs at 20 pennies to the dollar instead of 100 pennies to the dollar