[RochesterFan]

I guess in all this discussion the part I struggle to understand is why someone would purchase CDS beyond the amount of the actual paper they own, especially since one has to present the asset (defaulted bond or mortgage) to get paid. When there is leverage in these instruments it becomes a game of musical chairs with the fraction of guaranteed losers (1-1/L) going up very rapidly with the degree of leverage (L). I cannot think of a single reason to make a periodic premium payment to be in such a rigged game. I just don't see an "up" side for someone who doesn't hold the asset. Where is the payoff for these folks?

Then there is the pertinent question, "why should I bail them out from what appears to be an imprudent decision of epic proportions?" My working class parents repeatedly admonished me during my youth that there were two important truths: "In a free society, there is no law against being a fool", And "a fool suffers his folly."

[ThePythonicCow]

why someone would purchase CDS beyond the amount of the actual paper they own, especially since one has to present the asset (defaulted bond or mortgage) to get paid.

For a couple of possible reasons:

1. to hedge some correlated asset they do have risk in, or
2. as simply a (hopefully) profitable gamble.

why should I bail them out

Because the alternative sucks worse. That is, deliberately or not, they are blackmailing us. "Pay up, or else your wives and children to the N-th generation go hungry, as a result of the catastrophic collapse of the world economy."