The market's worries have been deepened by the weakening of a widely used defense against financial contagion: credit-default swaps, bilateral agreements that are supposed to insulate against losses from debt defaults. Recent efforts to quell the euro crisis have raised questions about the viability of that popular insurance-like hedging vehicle.
This latest chink in the financial armor has investors demanding more evidence that financial companies aren't making outsize bets in weaker European economies and aren't relying too heavily on hedges that might falter in a pinch.
Companies aren't buying CDS because it's actually insurance. By now we all realize the issuers either can't pay in the event of default because they don't have enough money or won't pay because the powers that be will declare that a default isn't really a default. I assume companies know this so they aren't really buying insurance, but the appearance of insurance, to make it possible for them to pretend they're hedged against bad bets if we all stick our fingers in our ears and yell "I CAN'T HEAR YOU." But they aren't, really.
Nobody could have predicted we wouldn't have learned the lessons of THIRTY EIGHT MONTHS ago.