"Further, the buyer of a CDS does not even need to own the underlying security or other form of credit exposure. In fact, the buyer does not even have to suffer an actual loss from the default event, only a virtual loss would suffice for collection of the insured notional amount.
So, at 0.02 cents to a dollar (1 to 10,000 odd), speculators could place bets to collect astronomical payouts in billions with affordable losses. A $10,000 bet on a CDS default could stand to win $100,000,000 within a year. That was exactly what many hedge funds did because they could recoup all their lost bets even if they only won once in 10,000 years. As it turns out, many only had to wait a couple of years before winning a huge windfall. But until AIG was bailed out by the Fed, these hedge funds were not sure they could collect their winnings."
See
http://www.atimes.com/atimes/Global_Economy/NE18Dj03.html
Joanna