"financial institutions understood ...
... how to spread risk, but they were not able to track risk. "
OK, it's clear they knew how to spread the potential damage around, by splitting each piece of subprime crap (SPC) up into fragments, then bundling ones of different origin together to make a new composite.
They imagined this mean the risk went away. On this basis, they constructed and sold more and more SPC, increasing the total potential damage without limit, whilst imagining that only a fixed fraction would fail at any time.
Now, _If_ it were the case that each piece of SPC was uncorrelated with the rest, then this would perhaps work. But crap is crap, and the crap is in fact highly correlated, both by economic conditions and market psychology.
So if enough SPC goes bad to switch economic conditions and/or market psychology, it drags the rest with it.
But before it went bad, the total potential damage had been increasing far beyond what institutions could stand -- and because the risk of each SPC was highly correlated with the others, it mostly all went bad at the same time (i.e. quite recently) -- and hence kneecapped the institutions.
They clearly understood jack shit about spreading risk (because they didn't) and therefore whether they could track it or not is irrelevant.