I think they're talking about what happened in 2008, not in 2023.
Yes. The AAA-rates tranches which traded pennies on the dollar in ‘08 largely paid out as expected. That didn’t help banks trying to rely on them as their capital. But it noisily validated the ratings quality of those tranches. (Noisily because, again, massive government intervention.)
Risk cannot be destroyed, but it can be moved. Tranching lets one control this. So if 95% of a pool default, and 5% don't, and you prioritize their payments to a premium tranche, that premium tranche will continue performing. (The specifics are more complicated [1].)
[1] http://quantlabs.net/academy/download/free_quant_instituitio...
And when the borrowers defaulted on their mortgages, the property backing the mortgage went to the holders of the mortgages and got sold off to pay off the MBS holders.
Nevertheless, a 1% risk of default does not mean you might lose 1% of your money - it means 1% of the time you are going to lose 100% of your money, and 99% of the time you are going to lose 0%.
Confusion, uncertainty and a fire sale.
Nobody knew how bad defaults would get. Risk cannot be destroyed, simply moved. After a point it poisons the top tranche. The number of buyers who understood these complex instruments, moreover, was small. So if a bank held a bunch of them and needed liquidity fast, they would set off a fire sale.