As the first wave of the credit crunch plays itself to a messy conclusion, we are almost certainly now into its second leg.

Collateralized debt obligations (CDOs) may have been the opening gambit, but credit default swaps (CDSs) are the new kids on the block.

George Soros estimates that the value of CDSs now equals half of the U.S.’s household wealth, an almost unimaginable number — let’s call it $23 trillion. So what are CDSs?

They are hedges made by investors in case a company defaults on its debts. In effect you bet on a company failing to protect your investment in the event it does just that.

The problem arises when large numbers of companies go bust and the CDSs themselves become worthless since no-one can pay them out.

A CDS seller undertakes to compensate a buyer if a corporate bond defaults. Since there is no limit to the size of cover taken out, the value of CDSs often exceeds a company’s debts.

Moreover, many CDSs are bought with borrowed money so the infection of the system drives deep into the financial heartland like veins in a blue cheese.

As defaults rise to unprecedented levels, so the whole ricketty system threatens to collapse.

Another nightmare to look forward to.