AIG - Now owned 80% by US Government

Bailed out AIG Banks Bold Banks were major recipients Goldman, Merrill Lynch, Wachovia, Bank of America, HSBC USA Societe Generale, Deutsche Bank, UBS, Calyon, Deutsche Zentral, Bank of Montreal, Barclays, Royal Bank of Scotland, Drescher Bank AG, Rabobank, Landesbank Baden

NY FED The NY Fed created and funded (by printing money) a Special Purpose Vehicles called Maiden Lane II & III. These SPV's were set up to purchase the Toxic Assets from Banks insured by AIG

AIG is primarily a world insurance company which for a short period had a London Branch who wrote Credit Default Swaps and were not able to cover the contracted insured items. The magnitude of the problem requiring government intervention shows that the whole AIG-CDS  system was mismanaged and our government picked up the liabilities and approximately 80% ownership of the company. In short they wrote the CDS contacts and did not hold financial reserves to cover losses

Credit Default Swaps

Credit Default Swaps (CDS)  - special insurance type insurance type arrangement where a event is insured versus a specific item. A Mortgaged Backed Security (MBS) is a package of mortgage loans ( $ millions) rated at AAA can be insured against defaults or lowering of Ratings ( AAA -> B). So if you were a bank and wanted to insure (hedge) against those events, you would approach a firm like AIG, Bear Stearns, Lehman and others to write these highly customized packages which were not regulated and often existed on pieces of paper. The security owner and the insurer were called counterparties. If done correctly CDS can be a risk reducing mechanism for investments just as home owner and automobile insurance an be. The problem here was it was not regulated and the companies did not maintain financial reserves to cover bets.

Google SIGTARP-10-003 for an excellent report for reference material on this subject