What is AIG? That's an interesting question because of its prominence in the news recently. It's also interesting because I just received a form from my mom's attorney, telling me that I am set to receive a third portion of an AIG life insurance policy that my mom had taken out.
It is a very large international corporation, about 18th largest in the world. It's biggest product is insurance, and as you can see above, it offers normal kinds of insurance, both personal and corporate. There doesn't seem to be any problem with these divisions, given they are regulated in a normal fashion.
The problem comes mainly from one division of the company, called the Financial Products Division. It offered an unregulated form of insurance, called Credit Default Swaps, which insured the products of investment banks called securities and derivatives. In other words, as I understand it, if a company like Goldman, Sachs loses money on a mortgaged-backed security because of a drop in the mortgage's value, then the insurance policy it bought from AIG is supposed to pay to cover that loss.
But because these Credit Default Swaps were not regulated like normal insurance, there was nothing stopping AIG from issuing these policies in such volume that it could not possibly cover them if they went bad. And that's exactly what they did, and made billions of dollars in the process.
The bailout money going into AIG is going out the back door to pay those policies off, to banks like Goldman, Sachs, Bank of America, and foreign banks as well. Not only were the derivatives and securities themselves risky investment vehicles, the CDS offered by AIG multiplied that recklessness.
So we taxpayers are forced to pay for the reckless irresponsibility of AIG and all those banks, under the threat that if we don't, they will fail and our whole financial system will dissolve.