You know I listen to way too much commercial radio--so you don't have to. But when you really want to know about something complex, you usually have to turn to the noncommercial dial.
But, with all the talk about AIG's failure and the government bailout, I heard no one, until today, explain what AIG did wrong.
Finally, on Morning Edition, NPR economic expert Adam Davidson explained that the problem was AIG's fairly recent entry into bond default insurance, which it began a decade ago. The gist of it is this 70 trillion industry covers banks when bonds default, called credit default swap.
And unlike, say, when a house burns down and it doesn't mean that all houses in the area burn, when a bond fails, it shakes confidence in bond buyers and many fail together. Thus, AIG, which started this often cloaked level of insurance, takes a big hit.
The global economy is based on banks lending each other money all over the world, and if their insurance policies don't pay off, the system could seize up. That's why the government was compelled to help AIG.