The AIG Bailout

The Federal Reserve Board’s intimate relations with
the leading powers of Wall Street—the same banks that
benefited most from the government’s massive
bailout—influenced its strategic decisions on AIG. The
panel accuses the Fed and the Treasury Department of
brushing aside alternative approaches that would have
saved tens of billions in public funds by making these
same banks “share the pain.”
Bailing out AIG effectively meant rescuing Goldman
Sachs, Morgan Stanley, Bank of America and Merrill Lynch
(as well as a dozens of European banks) from huge losses.
Those financial institutions played the derivatives game
with AIG, the esoteric practice of placing financial bets
on future events. AIG lost its bets, which led to its
collapse. But other gamblers—the counterparties in AIG’s
derivative deals—were made whole on their bets, paid off
100 cents on the dollar. Taxpayers got stuck with the bill.

http://www.thenation.com/article/153929/aig-bailout-scandal