Why not trade CDS in some kind of system similar to the way options are done. That way someone takes an obligation but has to security with cash or something etc.. Like options. And people can buy/sell them on Etrade pro just like options. CDS sounds like insurance just like an option contract. Maybe it will help things. Having all those eggs in one basket like AIG is looking for trouble.
I thought the CDO is like an ETF of a bunch of bonds. and the CDS is an insurance on a CDO against default.