In an incredible move, the Fed reversed its decision from Sunday night and decided to loan the struggling insurer AIG $85 billion. Unless backed by the government, the insurer would have followed Lehman Brother suit into bankruptcy. AIG’s struggle stem from credilt default swaps:
Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss.