What's illegal is writing "side letters", namely, secret agreements stating that the insured will not and has no intention of collecting.  In this circumstance, it's a form of financial fraud because the insurance company is simply lying to get liability off of its books so that it can write more policies and collect more premiums.  AIG, as Ritholz documents, was heavily involved in this practice, and got stung for it (to the tune of only $10 million by Bush's SEC--which should give you some idea of how bad it had to be for them to act).

Enter CDS's.  If Ritholz is correct, these credit default swaps also worked the same way.  It enabled banks and investment banks to get bad debt off of their books.  Since the value of the CDS securities depended on an ever-increasing housing market, they were doomed to failure from the get go.  Inestimably stupid, yes.   But not criminal.  

If the counter-parties signed these side letters, then they never had any intention of paying back the loans in the first place.  Which means that the money that we spent to "bail out" these sacred contracts is nothing more or less than a taxpayer-funded windfall on a series of well-orchestrated financial frauds.  The presence of these letters would also explain why Cassano did not want either AIG's risk officers or its auditors to know what he was doing.  They would immediately see the parallels to the reinsurance scam and alert the board, and then the gravy train would be over.

The doctrine--which has been narrowly applied in a few cases, essentially stands for the proposition that Congress makes laws, and the Executive enforces.  The Congress may not insulate itself from the political consequences of its lawmaking by pawning off that responsibility to the Executive.