That's what that particular branch of AIG did (AIG0-FP). It insured the risk positions that banks and other financial institutions took on the Sub-prime paper and it's derivative investment vehicles. Essentially, AIG was the back-stop for these investment houses and banks so they wouldn't lose their shirts. Other investment vehicles are insured this way and have never caused a problem. But, no other vehicle has ever gone this far south this quickly.
As for AIG obligations, that's exactly what they were - contractual insurance obligations to their customers and partners - customers and partners that coincidentally (not) happen to be the largest financial institutions in the world. When the US government took an 80% equity position in AIG, it also took on an equity position in those contracts and as a result, exposed the American taxpayer to all that massive risk.
There were much, much better ways of handling this other than bankruptcy and clearly other than what they did. Hank Greenburg (AIG founder and longtime CEO before he was Elliot Spitzered) spoke at some length about this last night on Charlie Rose - it's a little too complicated to go into here.
Hope that helps a little.
Yes, all the replies here help. Thanks.
I’ve just found another thread posted concerning these AIG contracts. You might find it interesting if you haven’t read it already:
http://www.freerepublic.com/focus/f-news/2209706/posts
very informative post, thanks
bookmark- good AIG info