Fahrenheit 451 is the temperature at which paper ignites. Subprime is a spent bonfire already. Junk credit is already on fire. The next lot to ignite will be credit insurance in the form of credit default swaps and monoline insurance contracts.

There are three potential hits to banks and others from a crisis in the credit derivatives market. First, there will be market price losses as risk is repriced as corporate and household credit quality deteriorates. Second, there will be corporate default losses on the loan or bond underlying the credit default swaps (CDS).  And finally, there could be counterparty losses if financial intermediaries in the market go under.