AIG's role in the financial crisis

I always knew why AIG got bailed out by the feds - they had insured a bunch of crappy bonds (CDOs, etc.), which then went bust, leaving AIG unable to pay out the insurance policies (which everyone in the world had counted on them being able to pay). But what I never realized was just how central this company was to the whole crooked mortgage/finance bubble scheme.

Via Brad Setser, Gillian Tett reports:

[B]anks ranging from Deutsche Bank to Société Générale to Merrill Lynch have been shedding [the risk of holding a bunch of crappy bonds based] on mortgage loans...Unfortunately, most of those banks have been shedding risks in almost the same way – namely by dumping large chunks on to AIG. Or, to put it another way, what AIG has essentially been doing in the past decade is writing the same type of insurance contract, over and over again, for almost every other player on the street.

That "insurance contract", by the way, is a "credit default swap" or CDS.

So a lot of these banks knew they had purchased a bunch of crap bonds. They decided to hedge their bets by all finding one big fat sucker to take on the risk that the crap bonds would default. And AIG's executives figured out that if they took on all that risk at once, they'd be the one company in the system that was absolutely, positively too big to fail. These were smart people pretending to make profits by being smart; actually, what they were doing was doing something really dumb, and relying on the knowledge that the government would save them (with taxpayer dollars). And the government, under Bush, turned a blind eye.

Then the AIG execs paid themselves massive bonuses for coming up with this stupid, economy-wrecking scheme. Is it socially acceptable to call those executives "evil" yet?