American International Group says it purchased $16 billion of complex financial instruments in an effort to reduce its exposure to insurance guarantees written against the instruments.
The insurer bought investments known as collateralized debt obligations, which are bonds backed by various slices of debt such as mortgage-backed securities.
AIG had written insurance-like contracts, called credit default swaps, to protect investors against default of the CDOs. By purchasing the CDOs, AIG has eliminated the need for insurance contracts against their default, thus reducing AIG’s risk of needing to make insurance payments.
Hit hard by the ongoing credit crisis, AIG received $150 billion in loans from the government to help it remain in business.
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