RiskTrade

Government Risk Rises: Credit Markets Face Structural Collapse

The reason some traders have bought protection on the US Sovereign is not because they expect the US to default but because they think things could get worse and spreads will widen thereby allowing them to close their position at wider spread levels. If the U.S were to run in to trouble with its budget deficit we would more likely see a downgrade rather then an outright default/ or debt restructure. Downgrades are not credit events and so the CDS is unlikely to be triggered.
Honestly, if the US were to default the rest of the world would be in far more problems as they are dependent upon u.s consumers, and investors.

Yields on treasuries will no doubt rise, and the u.s dollar will at some point fall, and markets will take a while to recover but we are not in danger of a systemic collapse.

Which Banks Will Survive?

This article omits most of the facts - AIG sold its 10 year deal on the basis of reverse inquiry i.e. investors asked for the issuance. The reason they asked for the deal is because AIG spread is indicative of a single B rated bond. AIG debt is great value for 4 simple reasons:
1. You are buying a AA rated credit at mid B levels.
2. AIG's business model is not at risk.
3. Leadership and operating performance have been weak but both are being addressed via new leadership and attempts at cleaning up the balance sheet.
4. Eventually, CDO's and other structured instruments will find a floor and a bounce will occur. I don't know when that will happen. I do however know that once a floor is found you will see that previous write downs were too conservative and hence AIG and others will actually record a mark to market gain on some of these assets.