Please explain like I was a 5th grader

So it starts with all the bad loans that were then sold to investment firms and guaranteed by companies like AIG.

When Hank Greenberg was at the helm, the financial services part of AIG (the cancer that is currently giving it its liquidity issue) was small and there was an entire risk managment division that helped make decisions.  The board and  CEO basically stopped paying attention.  Here are a couple of videos that help explain this:

Cavuto

Tax payers (you and me) now own 80% of AIG as part of this deal via stock.  The $80 billion is a LOAN with a very high interest rate.  Libby is being brought in to basically recoup the loan by selling off many of the divisions of AIG - like the airline leasing business and potentially some of the foreign insurance lines.  The government has the right to veto things like stock dividends...

Think back to when Chrysler was in trouble (the 80s??) and the government gave a loan - they made a huge profit on that loan.

AIG is basically a sound company - this was  a liquidity issue so the government will likely make money on this deal.

It does not affect you - you will not get a tax refund out of it.

Me on the other hand watched stock that I started buying at 11 years old go from being worth about $200K in March to about $7k now.  So much for my nest egg.  I never planned to retire anyway, but now I have no funds for my children's college education....

Charlie Rose

Outstanding. Can you please break down each candidate's economic and national security policies as well?

There are a few things I still don't understand about all this:

1) If the people really expect that there is money to be made on the liquidation of AIG, why weren't any non-gov't players willing to step up with the $85B?

2) What happens when the next "too big to be allowed to fail" financial company comes begging to the Fed? e.g. Morgan Stanley, Wash Mutual, etc.    How many times is uncle sugar going to have to open his wallet for a "loan?"

3) Where are all the "get the gov't out of the way" free marketeers nowadays? Guess the gov't only needs to get out of the way when the trough is full of food to eat. When the bill comes due they go running to the gov't for salvation.

ETA:

4) What happens when the FDIC fund is tapped out and the treasury has to backstop THAT beast?

Your example is pretty dead on, just the wrong character...

Glen Beck on CNN.com today explaining it to a 5th grader

http://www.cnn.com/2008/POLITICS/09/17/beck.wallstreet/index.html

B/c no one has $85B in assets readily available AND the Triple AAA credit rating needed to make the deal happen. The key to many of these deals are credit terms and he how has the best credit rating gets the best credit terms.

The answer really is "for as long as it takes." Remember, Bush's claim to fame is that he thought he was a businessman before becoming a politician (think ARod's contract with the Texas Rangers). And Paulson is a Wall St. guy.

I believe in free markets and in fact am not a fan of this happening. But this is the backstop that gov't can and should provide. The free market screaming will come if the gov't delays unwinding this deal once the crisis has passed.

You have to remember, AIG as a whole is a very profitable company - it is really just these credit default swaps that killed them.

There is no fear of this fund being tapped out - in fact this is not a rational concern.

Other players would have had to been financial houses and they are all cash strapped at this point.

The problem is not within their insurance units, but these are the assets that will be sold off to satisfy the loan.  They have some very attractive insurance divisions that are well capitalized and with solid investment portfolios (which is where most insurance companies make their profit).  The problem for AIG is that they can't tap these insurance units for capital due to strict state laws that prohibit sharing of capital between business units.  This is done to protect the policy holders and make sure that they have enough funds to pay losses.  It is estimated that between Ike and Gustav AIG has over $6 billion in losses to pay.

As a father of a 5yo and 4yo that loves Spongebob, this answer just made my day. 

so in the world's biggest irony, Hank Greenberg has been offering for months to help out at AIG (gratis) and the only answer he received was that he 'cast a big shadow' - so due to EGO they would not accept his help.

Guess who will be first in line to buy up some of those insurance divisions that will be sold off? Hank in his private venture CV Starr and Starr International - the biggest share holders of AIG (well now second to the government).

Condor - thanks for your replies - I have follow-ups on the other things as well but for right now I have a quick follow-up to this one:

The FDIC fund is about $50B. Indymac is estimated to cost FDIC between $4B and $8B.

Wash Mutual alone has something like $150B in insured deposits. So even a 25% backstop of WaMu would pretty much soak up the rest of the FDIC fund.

So I don't understand why this is not a rational concern.

Bradley...you get 5 gold stars!

WaMu will be sold - so it will just change names.  The deposits are safe.

How will changing the names change the fact that it is insolvent (if it is, which the market thinks is likely)?

ETA: And why didn't that happen with Indymac?

I don't have time now to find it, but I read an article a few months ago that touch on this very issue.  The article I read went into the specifics of how the fund is set up (i.e. banks pay into the fund) compared with financial numbers for covering expenses.  The article described how the fund is really meant to be "unbreakable" because the vast majority of savings accounts are based in financial institutions that are more  geared towards ordinary banking.

Remember, the sub prime mortgage issue came about b/c the normal banking model of lending mortgages against a bank's savings accounts was thrown out the window.  Many banks who made mortgages sold these two investment banks that divided them into pools and sold the pools to investors.

From what I remember, WaMu and IndyMac were really the two biggest players in this arena, so their numbers may be high, but it isn't indicative of any iceberg tip.

Then again, I could be completely wrong on this, as I'm going on what I remember reading in the WSJ a few months ago. 

After reading that, I feel quite naïve for not realizing how much of an impact this all would have on people.  And after reading the rest of the posts in this thread, I realized that I really need to get a handle on how our economy works.

One thing I want to point out is that AIG is not "broke", they just had no liquid assets. It's like us not being able to pay our morgage or credit card bill even though we may own a house, a car, and other valuable property. It takes time to sell things to generate cash, and all of these companies decided that they didn't need to be liquid enough to cover worst-case scenarios and leveraged themselves too far.
So if you are that individual that has a decent net worth but no cash on hand to pay a looming debt payment, how many people are going to come along and offer to loan you the money to pay all your debts? None! It's the same with AIG. Not many companies have the cash on hand to make that type of loan, especially other companies in the same field since they all decided liguidity was for losers.
Now the gov't (you and I) own an 80% share of AIG and will begin to sell it's assets off in order to repay the loan, and AIG will probably be able to survive as a company because they HAVE the assets, they just didn't have the time/ability to sell them in order to make good on their debts.

So what's the message here?  That if you're company is big enough that it supports and entire industry or even a national or even WORLD economy... that you can make stupid, risky, business decisions that threaten the very-existance of your company and if those decisions should go bad the results would be:

1.)  The US Federal government will bail out the company.
2.)  You can personally take several hundred million dollars in bonus/severence regardless of what happens.

Did I suddenly get transported to bizarro-world?  What's wrong with this picture?