Incompetence? Probably. Greed? Absolutely. Paulson made tens of millions off MBS.
But given how deliberately opaque and complicated MBS are, it's quite probable that few genuinely understood them. This is especially true when you get into the more exotic stuff like CDOs, CDSs, and SIVs, which is what Paulson was probably referring to.
Thus, we had a massive greedfest with trillions of dollars of these over-leveraged risky financial instruments being bought and sold by people who, for the most part, had no real comprehension of what they were dealing with.
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