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When a bank or investment house creates a derivitive asset backed security, it tries to insure it. The securities have different ratings, or tranches as they call them, and companies who deal in insurance sell them a policy that more derivatives are created for. It's a weird financial device used to take risk and spread it out as far and wide as possible.

Anyway, AIG dealt in these swaps as they are a insurance company, as did many others world wide. These obligations are priced by the market and traded like money, and when the market froze up and they would not trade at any price, it froze trillions of dollars from moving through the system.

All this is stuff is backed initially by the mortgage market which as you know is in deep crap. We have to put a floor under it so that trader have confidence that there is value in these things, cuz right now the value is zero as they won't trade Zero is not a number, it's a sentiment, and the downward spiral of mortgage system must be stopped by the Fed's taking of this risk temporarily...(3-5 years or so)

This will free up the derivatives and there are trillions of dollars based on billions. This should settle it all back down, and even with this, there will be many failures of banks and financial institutions that are already too far gone to save but the majority will survive after heavy losses.

That's my best layman's summary with some technical stuff explained.

Does that help, or do I need to dig deeper for you?