This has provoked a good deal of discussion. Felix Salmon at Portfolio argues that Gross may be missing the point:

...But let's take another look at exactly what direction the capital is sloshing in. Yes, the sellers of protection will be remitting $250 billion to the buyers of protection as a result of those 1.25% of credits which have defaulted. But at the same time, the buyers of protection will be remitting all of their insurance premiums to the sellers of protection on the 98.75% of credits which haven't defaulted. And on $45 trillion of CDS, those premiums are likely to add up to a lot of money - more, I'll hazard, than $250 billion. In other words, if default rates stay relatively low - and a 1.25% default rate is relatively low - then, in aggregate, the sellers of protection are likely to continue to make money, not lose it.

This is true as far as it goes, but there are three reasons still to be worried about CDS.

First, the problem of counterparty risk is very real (even though that's not what Gross was talking about) - Wolfgang Munchau in the FT makes the point that

...we might be tempted to conclude that this all is irrelevant, since this is only insurance, which is a zero-sum financial game. The money is still there, only somebody else has got it. But in the light of the current liquidity conditions in financial markets, that would be a complacent view to take.If protection sellers were to default en masse, so too could some protection buyers who erroneously assume that they are protected. Given that the CDS market is largely unregulated there is no guarantee of sufficient liquidity behind each contract... The subprime crisis came fairly close to destabilising the global financial system. A CDS crisis, under a pessimistic scenario, could produce a global financial meltdown...

Second, just because the CDS selling sector should be all right in aggregatedoesn't mean that all its individual members will be all right. There are plenty of other sources of pressure, and it's not impossible that a heavier-than-average CDS loss, hitting an already-strained institution, may tip it over into insolvency. (With all the knockon effects that implies.)
Third, this may be worse than we think. In a worst-case scenario - when, as a consequence of a US downturn, default rates don't just return to the historical average but overshoot to, say, 4% - losses could reach $1.4 trillion, according to a BNP analysis. The counterparty risk could affect 25% of total sellers. And, the analyst adds:

As risks rise, Cicione cautioned, then risk aversion alone can push leveraged players in the market under.
"With counterparty risk, you don't really need to have realized losses to have a problem," he said. "A hedge fund can go down because it is being asked for more collateral for a margin call, even though it has not had any defaults."