What was once unthinkable occurred on September 16, 2008. On that date, the federal government granted American Investment Group - better known as AIG (NYSE: AIG) - a plan bailout of 85 billion dollars. In exchange, the US government received almost 80% of the company's equity. For decades AIG was the world's largest insurance company, a company known around the world for protecting individuals, businesses and others. But in September the company would have gone bankrupt if it weren't for government help. Flying at High Altitude The epicenter of AIG's near-collapse was an office in London. A division of the company, called AIG Financial Products (AIGFP), nearly led to the downfall of a pillar of American capitalism. For years, the AIGFP division has sold insurance against bad investments, such as protection against changes in interest rates or other unexpected economic problems. But in the late 1990s, AIGFP discovered a new way to make money. A new financial instrument known as a collateralized debt obligation (CDO) became prevalent among large investment banks and other large institutions. CDOs bundle various types of debt, from very safe to very risky, into a single package. The various types of debt are known as tranches. Many large investors who held mortgage-backed securities created CDOs, which included full tranches of subprime loans. (For more on this concept, see our special section on subprime mortgage mergers.) The AIGFP was presented with an option. Why not insure CDOs against default through a financial product known as a credit default swap? The odds of having to pay for this insurance were highly unlikely, and for a time the CDO insurance plan was very successful. In about five years, the... medium of paper... And the Federal Reserve_.) Conclusion The AIG bailout did not come without controversy. Some have criticized whether or not it is appropriate for the government to use taxpayer money to buy a struggling insurance company. Furthermore, the use of public funds to pay bonuses to AIG officials only caused a stir. However, others have said that, if successful, the bailout will actually benefit taxpayers through returns from government shares of the company's stock. Regardless of the issue, one thing is clear. AIG's involvement in the financial crisis was important for the world economy. It remains to be seen whether the government's actions will heal the wounds completely or simply act as a bandage remedy. To learn more about bailouts like this, be sure to read our related article, Top 6 U.S. Government Financial Bailouts..