[Bloody Sam Roberts]

My plan is simple to deal with these derivatives. Simply let the banks and corporations default on fulfilling these contracts....en masse. Take them off the books since there is no way they can be paid off. There isn't enough money.
Then let them say, "Sue me."

Hell would be frozen over before any appreciable portion of these lawsuits came to fruition resulting in any movement of funds.

Probably an unworkable idea but hey...it sure would be good for the market in the short term.

[freeandfreezing]

Simply let the banks and corporations default on fulfilling these contracts

There is a better way. Revise the tax code treatment of income from CDS contracts. Make the recipient of any payment caused by a default event covered by a CDS liable for an income tax on the payment -- on an accrual basis. Require the payer of such a CDS to deposit the tax due with the Treasury before paying the counterparty. In the event that the payer can't live up to his obligation, require the recipient to cover the tax shortfall. Set the tax rate high enough, and CDS contracts will miraculously be unwound all over the world - without requiring either party to pay anything to each other.

Another damper on the problem would be to legislate a fee on the outstanding value of the contracts, payable quarterly to the Treasury. Set the fee high enough and you'll see the volume of outstanding CDS' drop overnight. Also, this would instantly generate visibility into who holds what, and what the amounts are. Why that could be page one of Form CDS-2008.

If there are 55 trillion dollars in swaps outstanding, then a fee of say .3% per quarter generates revenue of 660 billion dollars per year - money which would allow the Treasury to cut taxes, or reduce the debt, or whatever. At least until all the CDS' magically disappeared.