In hindsight, AIG wasn't charging enough for this "insurance", and didn't have sufficient reserves to cover their losses if real estate prices across the whole country went down at the same time. Almost no one seriously considered that as a possible scenario at the time.
So the important questions are:
- Who is providing "insurance" this time around?
- Is the company providing "insurance" charging enough?
- Does the company providing "insurance" have enough reserves to cover losses if we have another situation where everything goes south at the same time?
The whole point is that those questions above cannot be answered ahead of time. The synthetic securities are so complex and intertwined that the risk cannot be safely calculated w.r.t. the amount of money being invested in them until after the fact.
Nobody can say if anyone is charging enough for insurance because nobody can quantify the risk accurately. Noone can say if the company has enough reserves because they we don't know how correlated that risk is or how large it is. If I'm shorting a stock I know exactly how much is at risk (within a reasonable margin of error), because these are complex contracts meant to balance out other complex contracts all with extremely high leverage any imbalance can spiral out of control. And any unexpected large change can destroy the entire financial system.
There are more degrees of freedom than can be well quantified in way something can go wrong.
It's not that people didn't think to ask and answer those questions above, it's that with the complexity of the system and the scale of money involved and leverage used they can't be answered with confidence. Only the appearance of confidence.
I agree that pricing and setting reserves for this insurance is extremely difficult. I disagree that it is impossible. I agree that there are very few people capable of doing this. I disagree that there is no one. I agree that there may currently be no one at the regulatory agencies capable of doing this correctly. I disagree that they cannot hire someone from the industry who is capable of doing this.
BECAUSE it is so difficult and complex to price this insurance and to have sufficient reserves, it's important to not throw up our hands and say that it's impossible. Instead it's important to bring the issue into the open. If regulators are not currently up to the task again this time around, then THAT should be the headline of the articles... "REGULATORS CURRENTLY UNABLE TO PRICE SYNTHETIC INSURANCE AND SET RESERVE LEVELS WHICH COULD LEAD TO THE NEXT FINANCIAL CRISIS"
If the industry could've calculated the risk correctly, they wouldn't have blown up the economy last decade.
Not to mention if only 4 or 5 people can accurately do it, there is no reason that other's will be able to accurately judge who the correct 4 or 5 are. 50 people will say they can do it, 5 are right 45 are wrong, who decides which 5 to believe? People outside of the 50 who knew they weren't even capable of doing the valuation themselves? They're deemed ok to judge?
This is analogous to trying to solve a people problem with technology.
How much risk should society take on so that people have one more avenue to make profit? Everything is risk reward tradeoff, and the risk to the financial sector and borader society isn't worth the reward of having the freedom of profit in those areas.