This is a must watch and it just might scare the shit out of you. The Committee on Oversight and Government Reform held a hearing on AIG.
Eric Dinallo, who is with the New York State Insurance Deparmtnet spells out the trouble with CDSes (Credit Default Swaps), specifically Naked CDSes. It's about 5 minutes into the video.
Lynn Turner also gives some insight on what's wrong with the financial system, which so far has not be directly addressed at the Federal level.