In between working and trying to get software to work on a laptop that just refuses to cooperate, I am still trying to figure out what happened to AIG. Considering my knowledge of margin calls is limited to overplaying my hand in a few games of Railroad Tycoon II- Platinum several years back, what I gather is the following.
AIG had a large hand in insuring all the bad debt that was packaged and repackaged and sold all over the world. That bad debt was all the sub-prime loans mixed in with good loans, and no one has the first clue who holds what. What we do know, though (I think) is that AIG was the glue holding everything together. As long as AIG was still around insuring all the stuff that we don’t know is there, things were ok.
However, when the shit hit the fan over the weekend, people began to get very nervous about what exactly AIG is insuring, as no one still knows who is holding what and what the what actually is. Thus, it became very expensive in short order for AIG to continue to insure the unknown. Thus, they had to come up with huge amounts of cash to show that they could still back all the things they claim they can, even though they have no idea what they have. Add to this mess, the liquidity problem, in that banks no longer feel comfortable lending money.
Is this right? There are a ton of terms out there that I simply do not understand in either theory or practice, but I am trying to stumble through the basics here. Please use English when commenting.