Let us assume one of the largest mortgage entities, Countrywide, who would have certainly been a significant player in the credit derivative market, has a very major credit derivative position with Bank of America. Lets' assume that Countrywide was the entity that had the obligation to perform, but now clearly can't. If Bank of America was to buy the non-performing other side of the many transactions and Countrywide become one entity with Bank of America, as they would, would the transactions between them not evaporate in the merge? It absolutely would. What would you then have to mark down on those specific transactions? I believe NOTHING would have to be marked down any further as two sides of the transaction became one.
That would qualify the already invested $2 billion, plus whatever else needs now to be paid to Countrywide' stockholders. This would more than likely be paid in paper.
It might explain the inexplicable "why" of Bank of America putting $2 billion into Countrywide recently when Mickey Mouse could see that as a sketchy investment at best.