There should have been a firewall in place between their standard insurance business and CDS business.
BTW, the banks/financial firms did not only buy CDSs on securities they held; they bought default swaps — in large volumes — simply to speculate on the demise of the housing/credit markets. It’s a bit like taking out multiple life insurance policies on a neighbor who has late stage lung cancer — unbeknownst to the insurance company — and having the taxpayers cover your claims.
Not sure if this is exactly what the taxpayers were paying out, but it’s highly likely.
