Goldman Sachs (NYSE: GS) shares have plunged the most ever after a government rescue plan for American International Group failed to ease credit concerns. Many attribute the movements to rumors and fears, but these same factors have arguably led to problems in the first place. The big fear in this case relates to the $62 trillion credit default swaps market where Goldman Sachs has become a large player. The concern is that insurers that wrote the swaps won't be able to make good on their contracts.

Credit default swaps are essentially insurance policies again a credit default - that is, the possibility that a company won't make good on its debts. The seller of the swap - or policy - gets a regular stream of premium income. In return, the seller of the swap agrees to pay the buyer if the company goes broke or stops paying its debts for some other reason. Interestingly, the market for swaps is estimated at $62 trillion compared to just $6 trillion in underlying bonds.

Companies like AIG provided these insurance policies on bonds and their troubles are causing concern that the policies won't be honored. Investment banks like Lehman Brothers and Goldman Sachs rely on these policies to balance the risk of the bond portfolio. The government's bailout of AIG has also caused rumors that some policies won't be honored or that there may be other delays in the issuance of these insurance policies that are now needed more than ever before.

As a result, shares of Goldman Sachs are trading lower despite an extremely positive earnings report in which it announced a sharp reduction in leveraged loans.

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