The development of new financial instruments, such as credit derivatives, has also helped to shift risk from the banks to insurance companies, pension funds and others.
One of the ways the market measures credit risks is by looking at the spreds of credit default swaps, a default insurance derivatives market that measures the risk of buying foreign bonds as compared to buying a comparable maturity from the US Treasury.
Essentially, this money machine used extreme diversity and interlinking of transactions plus the insurance(credit default swaps) to give the appearance of reducing risk such that there could be a AAA rating.
The risk right now is that bond insurance firms will get downgraded by the major credit agencies, which means the bonds they insure will be worth less.