Other government policies that have distorted financial markets, thereby undermining the EMH, include shielding credit-rating agencies from lawsuits, government-sanctioned fair-value accounting rules, enforcing credit-default swaps where there is no insurable interest, mispriced deposit insurance, government-sponsored enterprises, and the over-promotion of home ownership.

ECONOMIST: Economic reasoning

By late 2007, the notional value of outstanding credit-default swaps was about sixty trillion dollars more than four times the size of the U.S. gross domestic product.

NEWYORKER: What Good Is Wall Street?

This downward spiral may have been exacerbated by Europe's efforts to cut the value of Greek sovereign debt without triggering a payout on credit-default-swap contracts.

ECONOMIST: The euro zone on the edge: The road to Rome | The

Treasurys remain a top choice for investors who value short-term safety over long-term growth because they carry negligible risk of default, says Erik Weisman, a portfolio manager at fund company MFS Investment Management.

WSJ: Upside: Finding Better Bond Yields Overseas

His worst-case scenario assumes that 90% of the CMO's mortgages default and it recoups only half their value, resulting in a net 45% loss.

FORBES: Panic Buying

This both increases the volatility of equity returns and transfers value from debt to equity in the presence of default risks but has little to do with the Modigliani-Miller theorem in which default risk plays no part.

ECONOMIST: No soft option

By separating a portfolio of derivatives into different tranches, banks can create virtually default-proof securities for conservative investors--if somebody else is willing to buy riskier "equity" tranches whose value vaporizes when as few as one or two of the underlying bonds default.

FORBES: Magazine Article