Per wideawake, it seems that the CDS play a reasonable, if not valuable (from a social perspective), role in ‘normal times.’ However, we are faced with a tsunami of defaults in mortgage-backed securities that might overwhelm the capacity of protection sellers to gain control of the underlying securities - bankruptcy might be their better business decision.
It seems a matter of scale, and as said, that scale may be abnormally large as well as highly unexpected (or at least ignored while we let the good times roll).