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What is happening at AIG?

While AIG has a number of businesses which are still trading profitably and will no doubt be sold off if the group does go under, its venture into the loan package market and sub-prime sector has been the downfall of this great giant (even if it survives it will be a different animal from the one only a few weeks ago). So what exactly happened?

Not only did AIG get involved in buying, splitting and repackaging loans right across the risk profile but it saw an opportunity to sell insurances against these loans. In the event of failure, which AIG thought was highly unlikely, the group is obliged to payout what could turn out to be billions of dollars. However, at this moment in time these so called 'toxic' investment are impossible to value with a feeling that many are in fact worthless.

The term 'toxic' is used because all it takes is one event, such as the sub-prime mortgage sector crash, to happen and the 'toxic' nature of these investments (many of which were split and repackaged) begins to spread. One failure can lead to a whole host of investments crashing, which then leads to others falling and so on - like a highly infectious disease it can reduce investments to rubble overnight - and AIG has exposure to billions of dollars of these investments.

That in a nut shell is what has happened to AIG - although it is not the end of the road yet!

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