They had insurance on assets they held, sure. They bought the CDOs from some parties and sold (CDS on) them to other parties, like any middleman in any industry. A wash trade is something quite different: buying something from yourself, with no other parties involved in either transaction, to show a trade that manipulates the price.
There's nothing wrong with being in the middle of a line of trades. The crime is when that line becomes a loop and nothing is actually changing hands at either end.
There is no "muppet case"? The article just seems to be unsubstantiated allegations from someone who didn't get a promotion he wanted and is now trying to sell his book?
The only substantiated thing in that article is the Abacus case which is quite different: the counterparty there was IKB, who are a sophisticated investment bank, a million miles away from "one of these philanthropies or endowments or teachers' retirement pension funds in Alabama or Virginia or Oregon". They didn't get screwed, they bet on the US housing market and lost.
Um, no? What are you talking about?