As I explain in this paper, credit derivatives are merely a financial tool that can be used by those exposed to credit risk, say a default by the Greek government or General Electric, to share that risk with others.

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Additionally lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

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It isn't enough to compare the spread to its average, Mr. Fridson says, because the average doesn't reflect the current level of default risk, the strength of the economy, the yield on government bonds or the availability of credit.

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Layering of risk means the borrowers courted by these lenders had multiple characteristics that would put them at high risk for default, including no down payment, no documentation of income or assets, low credit scores and second mortgage in lieu of a down payment.

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