The repeal of a "anti conflict of interest" regulation on financial institutions such as the Glass Steagall Act, allowed an insurance company (AIG) to act like a bank. Not a Fed regulated bank, but an investment bank.

So they write insurance policies against sub prime mortgage loans, and do exactly what with the premiums??? INVEST IN SPMBS, that they insured against!!!!

This caused a crunch, as they did not have the assets to pay out the credit default swaps, which required government action to save bond holders. Saving bond holders is critical, as they provide a liquid market for paper debt, thereby allowing credit to flow.