Everything you don’t understand about the historic bailout.

A whole bunch of things, but of chief concern for our purposes, AIG insured against the default of mortgage-backed securities. AIG’s financial insurance model is based on something called credit-default swaps. AIG makes a ton of profit when payments are made to the financial houses it insures but incurs hefty losses when AIG has to reimburse its clients because payments never came in. For the past year, payments have not been coming in. That caused various dominoes to fall, including downgraded credit ratings, an increase in collateral, and a realization that that collateral didn’t exist.

The Fed’s decision:

Why is it historic for the government to be purchasing a majority share of AIG?

Before the government decided to make its loan in exchange for rights to AIG’s stock, it encouraged the private sector to lend AIG money instead. Nobody took the bait. Now the Fed—whose mission includes regulating banks, not insurers—is dealing with an insurance company who does business with banks. Awkward.

Why didn’t the government decide to bail out Lehman?

The government decided that Lehman wasn’t interconnected enough to totally implode the financial system. Many of Lehman’s assets have already been gobbled up by Barclays, who walked away from a full purchase of Lehman when the U.S. government wouldn’t guarantee potential losses incurred from Lehman assets. The government believed Lehman assets that nobody picks up would bend the financial system (because people wouldn’t recoup their investments) but not break it. AIG, however, was thought to have extremely interconnected toxic assets that would cripple the financial system if it lay fallow.