Elusive Definition -- CDS's

I realize that in two previous posts devoted to credit default swaps (CDS's), I have yet to say in a concise manner exactly what they are. That's because I still have no clear understanding of them. Yet, in discussions about the current condition of the economy, in the U.S. and all over the world, which continues to be threatening, mention of those things keeps cropping up. This suggests that others are much more privy to that valuable information, though they are strangely stingy, in plain English or in any other language, when it comes to defining the swaps and explaining how they fit into into the general scheme of things, for good or for ill. It's not enough to say that they are "a form of corporate debt insurance" and letting it go at that.

I think I know what "credit" is. That's being trusted to pay back money. I think I know what a "default" is. In one sense of the word, commonly used in computer talk, it is the property toward which a choice is keyed, in preference to other outcomes. In another sense, which must be the way it is used here, it's the state of things when a loan is not repaid in the stipulated time. And I'm certain that I know what a "swap" is. It's slang for a "trade."

I also know that hydrogen and oxygen are separate, gaseous elements and that when combined, the most well-known result is something very different, water. But taken together, in my grossly inadequate noggin, the three words "credit," "default," and "swap" still don't add up to anything that makes acceptable sense.

So in this article today, which tells of how the recent gigantic bailout of the American Insurance Group, the AIG, is being restructured, with more billions predictably involved, I expected mentions of credit default swaps to shed some light on what they are and why they hang over the financial world in amounts far exceeding the amount of real money in the world. But you may have more luck than I did with those mentions, lifted as follows from that article:

The credit crisis has proven to be a difficult environment to spin off assets. Furthermore, the company's investors continued to demand that the insurer post collateral to back its credit default swap agreements - essentially insurance contracts that AIG had sold to customers worldwide - forcing AIG to borrow more and more from the government.

...Funded with $30 billion from the New York Fed and $5 billion from AIG, it will purchase up to $70 billion of multi-sector collateralized debt obligations, or CDOs, on which AIG's financial products division wrote credit default swaps. As the value of these CDOs plummeted, AIG was forced to post more collateral to back up the swaps. Some 95% of the division's writedowns originate from these multi-sector CDOs.

Once this entity is funded, the credit default swaps on these CDOs will be terminated. This is aimed at stopping the collateral calls that have been overwhelming the insurer.

"...We cannot continue to hemorrhage cash in posting collateral for credit default swaps," said AIG Chief Executive Edward Liddy. "We need to stop that, and we need to stop that now."

I guess, till one or a bunch starts dropping certain unwelcome gifts on my head from high overhead, I will just have to be satisfied with saying that CDS's are simply huge and unknowable numbers of hungry vultures circling just above the dense clouds of economics talk and waiting till it's their time to drop straight down on us with an all-devouring vengeance, whether by that time we are still whistling or not.