  The recent "correlation breakdown" in the modeling of credit default swaps,
in which model correlations had to exceed 100% in order to reproduce market
prices of supersenior tranches, is analyzed and argued to be a fundamental
market inconsistency rather than an inadequacy of the specific model. As a
consequence, markets under such conditions are exposed to the possibility of
arbitrage. The general construction of arbitrage portfolios under specific
conditions is presented.
