From The Financial Times

The default of up to $500bn of Fannie Mae and Freddie Mac credit derivatives contracts triggered by the US government's seizure of the mortgage groups could result in billions of dollars of losses for insurance companies and banks who offered credit insurance in recent months.

The potential losses, as well as uncertainty about exactly how the derivatives contracts will be settled and unwound, is putting strains on the thus-far unregulated $62,000bn credit derivatives market, which has been a target of regulators worried about the hidden risks it could hold for the financial system.

The precise number of credit default swaps - a kind of insurance against debt default - outstanding on Fannie and Freddie are not known, reflecting the private nature of the sector.

However, according to the latest estimates from dealers and analysts, there could be up to $500bn of contracts outstanding. ...

The recovery value of the Fannie and Freddie CDS is currently expected to be about 95 cents in the dollar, leading to a potential 5 per cent loss for insurance companies or banks who offered protection against a default.

On CDS worth $200bn-$500bn, the losses would come to $10bn-$25bn.

The Fannie and Freddie defaults are highly unusual. The $1,600bn of actual debt issued by the mortgage groups is regarded as safe after the US government's move to take control of the companies.

Yet their seizure into "conservatorship" counts as the equivalent of a bankruptcy in the credit derivatives contracts. This means the contracts have to be unwound.

Credit derivative swaps are a form of insurance.  You pay someone a fee to make you whole if the bonds of the company you own declares bankruptcy. 

Since conservatorship is considered the equivalency of bankruptcy, an event is triggered for the insurers, similar to a hurricane hitting an insured area.

If the GSE nationalization were a hurricane - the result of a financial hurricane if you will - at $25 billion, it would be the fourth most destructive hurricane in history.