This morning the federal government (which means you the American taxpayer) became the not-so-proud owner of American International Group (AIG) Inc., meaning we are now on the hook for $85 billion in guarantees. That is on top of the $200 billion the government recently guaranteed to prop up Fannie Mae and Freddie Mac . While these may have been necessary steps to avert a full-blown financial meltdown, there’s a lot of taxpayer money at risk here.

Here is a very short and sweet description of what AIG does: 

Among other things, AIG essentially insures companies that hold mortgages, including the subprime and exotic mortgages that have fueled the housing meltdown. In addition, investors buy insurance from AIG to protect against investments they make, again, including in the subprime mortgage market. Because of the problems the housing finance industry has been having, many of the assets AIG owns and has insured have been declining in value. This in turn has caused AIG’s stock to plummet. And continuing the vicious cycle, that has spooked AIG’s investors, who provide the capital that AIG depends on to back up its guarantees.

The Wall Street Journal goes into greater detail here on how these problems mushroomed and what AIG does. The New York Times also has a very good Q&A here on what the recent turmoil means in the context of the larger economy. Check back with us as we will soon be writing in greater length about the government’s recent spending spree on these and other bailouts.