Some was actual insurance, and the insurance was real, but the insurance company couldn't deal with everything going south at once, just like a different type of insurance company might go broke if you had a series of really massive natural disasters all over the US.
The hedging strategies where not typically "sold as insurance", or "just like insurance", with one company or group of companies trying to market them to other companies and traders. They largely where the internal strategies of the various companies involved (including insurance companies that want to hedge the risks they insured). The problem is, that like "portfolio insurance" (a hedging strategy that failed rather spectacularly in 1987) before it, the hedge works fairly well in the case of isolated failures, but doesn't work if everyone is trying to execute it at once. It would work if the risks existed in isolation (one security or one company, or mortgages in one or a few areas, do very poorly), but not when the risks are highly correlated (with many local real estate markets, and other forms of debt or investment, booming, and then rapidly declining together) |
