They didn't. They hedged the long positions with credit default swaps, assumed that they couldn't lose (which was true if the counterparty could afford to pay t

They didn't. They hedged the long positions with credit default swaps, assumed that they couldn't lose (which was true if the counterparty could afford to pay the swaps) and thus didn't declare them on their balance sheets as they were viewed to be without risk. What ended up happening is the counterparties (most notably AIG) had taken on far more in credit default swaps than they could pay out, meaning there was lots of risk hiding off balance sheet. This is why Uncle Sam had to bail out AIG. (The Fed could have bailed out all of the people AIG owed instead, but that would have been far more work for no clear gain.)