[flourpower]

You're thinking of CDS, not CDO. CDS stands for credit default swap(s) and CDO stands for collateralized debt obligation. You're right that a CDO would be really big if you printed out a formal specification, but that's because a CDO is special trust where the trustee buys and sells different securitized products and tranches out the payments to shareholders in the trust.

Also - AIG could have made the same mistake with conventional home insurance. Say they only keep 100 dollars of cash around and they decide to insure a million houses, each with a value of one dollar. If one ten thousandth of the houses burn down, AIG goes bankrupt. So it's not true that selling a dollar notional of home insurance is less risky than selling a dollar notional of CDS, because it could easily be the case that the expected payout on the CDS is higher. CDS are just harder to price. There are very robust statistics about houses burning down - the statistics on whether homeowners would default were a lot trickier to deal with.