No doubt if you've been watching the news you've noticed American International Group (AIG). Taxpayers have pumped about 170 billion dollars into AIG, and you probably are wondering why.
AIG quite simply wrote too many Credit Default Swaps (CDS). It guaranteed the losses of others with resources it didn't have. This isn't unusual. Banks usually only keep a fraction of the money on hand that they have under management, it's called fractional-reserve banking and it's why bank runs are so bad. Banks however have SOME regulation.
The problem was lack of regulation on CDSs. Imagine a tiny insurance company underwriting and guaranteeing all the losses of South Florida and then to have Hurricane Andrew to roll through. That's what's happened in a sense to AIG.
Thanks to the 170 billion dollars that the government has pumped into AIG, the taxpayer has now assumed the downside risk for AIG's counter parties. In short it's now a socialized risk for a private gain.
Who are the counter parties and what exactly have we bought? This is the greatest mystery.