I listened to NPR this morning and got a better understanding of what happened yesterday.  It also goes to prove my point that actions based on the pursuit of money as an end to itself do not serve anyone - yourself or the public.

So, here is my brief recap from NPR on WHY AIG and NOT LEHMAN?

The reason that AIG got into trouble is because they sought out a new insurance business involving credit default swaps.  They didn’t really pay attention to what they were getting into, but it was a HUGE business, so they delved into it - possibly to the tune of $70 trillion.  So basically, it’s insurance in case a bond goes belly up. 

Insurance on homes and such works in a way that the majority of the other insurance policies will protect and provide enough capital for the one home that burns down in a neighborhood.  They base it on the fact that one house burning down does not impact the other houses.

Insurance on bonds doesn’t work the same way.  If one bond fails, people lose faith in the market and other bonds start to fail.  It becomes a domino effect.

AIG doesn’t appear to have really looked into that very deeply.  They followed the money trail, thinking everything would support itself.

This might not be a big deal, but a lot of the BANKS in our country had this insurance.  If AIG goes belly up, all the banks might stop doing business with each other.  Banks do business with customers, but banks also process loans and transactions with other banks - this makes up a large amount of the economy as we know it, the passing back and forth of money between banks.  If banks are afraid to loan any money to OTHER BANKS, our economy comes to a screeching halt immediately. 

The other aspect of these swaps is that it is relatively obscure as to who holds them.  It could affect ALL the banks, or only a few.  There isn’t much of a way to check into that for sure (at least in a short time.)

Thus the government stepped in to stop our economy from totally collapsing.  Ta-Da!