John Dizard at the FT helps to clarify further just how these newfangled CPDO thingies work:

The swap's income derives from holding an index that is a portfolio of five-year credit default swaps on major, investment grade issuers. Every six months, any CDS on a company that has been downgraded drops out of the structure. That credit is replaced with a new investment grade CDS. The probability that any investment grade company will default within a given six-month period is so low, based on experience, that the credit risk can be rated AAA. In the opinion of the rating agencies, that is.
While the CPDO has a 10-year life, its component credit indices have a rolling five-year life, with frequent upgrades.

In other words, I was wrong earlier today when I wrote this:

If I sell six-month credit protection on a portfolio of European corporate bonds, and none of them defaults, then after six months I have my money and I've taken no losses, even if the credit quality of the index deteriorated sharply over that time. During the six months, I might have mark-to-market losses, but by the time I need to make my coupon payment, that's all history.

The CPDO doesn't sell six-month protection, it sells five-year protection, which resets every six months. Normally, the spread on that protection will narrow over the course of the six months, since the chances of defaulting in four and a half years are lower than the chances of defaulting in five years. But if the spread on that protection goes up instead of down, then the CPDO does actually lose money. Steve Waldman might be on to something after all...