One of the key charges in the AIG lawsuit is that almost 20% of the mortgages in question were "underwater" at the time of origination. IOW, the bank loans exceeded the values of the mortgaged properties.
Hiding this information from an insurer is fraud, pure and simple.
Writing CDS's on underwater mortgages is not a practice which most insurers would countenance.
Sadly, many FReepers throw around AIG in much the same manner the left did Haliburton.