My read (I am no expert --- look, I'm reading Rolling Stone articles to gain insight) on the investment bank/insurance company differentiator is that the investment bank is compelled by regulations/regulators to account for their exposure in a CDS arrangement - so they buy a hedge to show a limit of their exposure.

I take it that the insurance cos. did not incur the same regulatory governance and so could write as much business as they could find - with no oversight (@ $500 Billion, it looks like they were successful in finding loads of exposure --- $64 Billion in sub-prime loans - for f#*k's sake). Perhaps AIG could only operate like this due to the weakness and scarcity of resources within the Office of Thrift Supervision (AIG had apparantly manipulated the system to fall under the weak OTS's governance.)

There are some 19th Century German philosophers who confidently predicted that these sort of cataclysms would eventually occur under our current economic structures... we'll see if the West can or will recover.

<< Thanks DannyC for that remakable Taibbi primer. But:

"When investment banks write CDS deals, they hedge them. But insurance companies don't have to hedge. And . . . AIG did[n't]."

That . . . just . . . doesn't . . . sit . . . right.

I can't say what's wrong, but I keep coming back to that point. I think something - something big - is missing in relation to those two sentences. >>