The simplest way to say it is a credit default swap is investing by purchasing insurance against the failure of a stock bundle or a market or a bank or a country. The insurance you bought pays off if that "financial entity" you have insured defaults or goes into bankruptcy.

You pay a premium every year, say for five years, maybe you pay a half-million a year, to buy the insurance held against the default or bankruptcy of whatever you may be insuring. Essentially, you are insuring someone else's property, assets, or wealth, but you are the owner of the policy and the beneficiary of it.

Now here's the sweet part: If they fail, you get to collect the "insurance benefit." So like if you paid a half million for the premium, when the country of Greece "fails" by defaulting on its bonds, you (not Greece) collect your insurance, maybe $25 million dollars (just to make up some numbers).

The subprime mortgage thing was you were buying insurance against the mortgage stock bundles that other investors (maybe even you) had invested in, so if they went into free fall, you would then collect your hefty insurance benefit from, for instance, AIG, the insurer.

It gets even more interesting if AIG itself defaults because it cannot pay all the benefits to the CDS investors who won on their insurance bet. Then again you might have bought a "credit default swap" on the impending default of AIG itself!

To continue with the example of Greece, you as an CDS investor are hoping Greece tanks, so you can collect. The most devious yet is Goldman Sachs is advising and financing Greece (allegedly to keep the government on its feet), in such a way as will lead to default. Then Goldman Sachs and its investors will collect on the credit default swaps it created.

It's cool. You win if they succeed (by investing in the up). And you win if they fail (by investing in the down by buying a CDS). Neat scheme, eh? You get to count your money all the way to the bank when an economy or institution folds.

One might just want to notice here too that Goldman (and other such investment banks) has set itself up as a private World Bank or International Monetary Fund. Finally, worst case scenario, should Goldman itself be in in danger of failing, well then, we just bail them out! Being a generous people, we ask nothing in return.