AIG

However, it also moved beyond its traditional insurance business. The Financial Services division also got into aircraft and equipment leasing, capital markets, consumer finance and insurance premium finance. The Asset Management operations provided institutional and retail asset management, broker-dealer services and institutional spread-based investment business.

AIG was a major seller of "credit default swaps." These swaps insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions bought these swaps.

AIG is so large that its demise would impact the entire global economy. For example, the $3.6 trillion money-market fund industry invested in AIG debt and securities. Most mutual funds own AIG stock. Financial institutions around the world are also major holders of AIG's debt.

AIG's swaps against subprime mortgages pushed the otherwise profitable company to the brink of bankruptcy. As the mortgages tied to the swaps defaulted, AIG was forced to raise millions in capital. As stockholders got wind of the situation, they sold their shares, making it even more difficult for AIG to cover the swaps. Even though AIG had more than enough assets to cover the swaps, it couldn't sell them before the swaps came due. This left it without the cash pay the swap insurance. (Source: WSJ, U.S. to take over AIG, September 17, 2008)

The plan was for the Fed to break up AIG and sell off the pieces to repay the loan. However, the stock market plunge in October made that impossible, as potential buyers needed any excess cash for their own balance sheets. The Treasury Department purchased $40 billion in AIG preferred shares from its Capital Repurchase Plan. The Fed will purchase $52.5 billion in mortgage-backed securities. The funds are allowing AIG to retire its credit default swaps rationally, saving it and much of the financial industry from collapse.