It’s not necessarily the CDO or CMOs, it’s the CDSs that were written against them. A bank/trader could write unlimited amounts of swaps against the obligations. 

I thought CDS were on company debt (or company default). how does a cds relate to a CDO?

If it was just a homeowner default issue, it wouldn't be this critical of a problem. The issue is the number of leveraged bets that were made on homeowner mortgages. Those are losses that can't be 'insured'.

Anyway, as I understand it, the feds have already backstopped at least two trillion that is most likely been vaporized.

Oh, and while we're backstopping losses, why doesn't the government 'insure' my General Electric stock. Paid 35, trading at 9 -- if it doesn't come back in the next six months, Uncle Sam should make up the difference to me.

It’s sad that most people in our industry don’t even know what they’re talking about…

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

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