What AIG Did.

Legend
AIG, you should already know what AIG is.
I        =     Investors
IB      =     Investment Banks
CDO =     Collateralized Debt Obligations

AIG sold CDS to not only holders but also speculators. CDS are Credit Default Swaps, another complex derivative. Fundamentally they insure those who bought the aforementioned CDOs. But people who do NOT own the CDOs could buy as well! Now of course like any other insurance you have to pay premium, right? So that's how AIG earned money from this.

Sure when everyone is paying their mortgage then the money goes up the chain to AIG and AIG receives those premiums, everything seems perfect, savvy? Wrong. Have we forgotten that the CDOs were made up of loans taken by the those who would face problem when it comes to financing?

When they default, AIG pays them back, whether it's 100 cents on the dollar or not i am not too sure as that goes into the minute details. This repeats itself with those speculators who bought CDS from AIG as well. That purveys the explanans as to why AIG needed bailout from the Feds.


However these merely skim through the multifaceted disaster. For example, there is the housing bubble and the bursting of the bubble, why asset value dropped, how that culminated to a liquidity crisis or how a vicious cycle flows underneath all these, like the rebuying of the derivatives by the same companies mentioned or some sort like that which contributed to the whole economic calamity.

:D