re: What is the purpose of swaps?

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From what I hear, they got a bunch of hired guns to run that part of the business, without having any idea how to implement a competent risk management program. The hired guns had free rein to take risks without following quality control, which is fine for an individual, but gets dangerous for the whole corporation.

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In their defense, which they have very little, not many firms on the street were doing competent risk management on derivatives and structured products at the time. All AIG knew is "We write CDS on these AAA rated MBS, where default rates are insanely low. We can just keep writing these and picking up income that will more than offset any 100-200bp spike in default rates." Default rates spiked WAY more than that and they were left to find recovery values in products that had basically none.