AIG unit took added risks in sideline business: report

(Reuters) - American International Group Inc's (AIG.N) AIG Investments unit, which managed money for AIG's own insurance companies and outside investors, took on additional risks in its securities lending business, the Wall Street Journal said, citing current and former employees.

In running the securities-lending business, AIG Investments bought tens of billions of dollars in subprime mortgage bonds, according to the paper.

At one point AIG Investments was putting about $70 billion into subprime mortgage bonds and other higher-risk assets, the paper said citing, people familiar with the matter.

These choices helped AIG squeeze an additional 0.2 percentage points in yield, or roughly $150 million in revenue, the paper said.

Insurers accumulate large quantities of long-term corporate bonds and other securities, earmarked to pay claims down the road, the paper said, adding that they lend out the securities to banks and brokers in exchange for cash collateral.

The insurers then invest that cash to squeeze out a bit more yield for themselves and the securities borrowers by parking the cash in other fixed-income investments, such as Treasury bonds or short-term corporate debt, the paper said.

The extra profits can be just hundredths of a percentage point, but when applied to tens of billions of dollars of securities, the returns can be significant, according to the paper.

The approach backfired, exacerbating the liquidity crunch that forced the U.S. government's bailout of AIG that now sits at $150 billion, the paper said.

An AIG spokeswoman told the paper that its securities-lending portfolio "came under pressure due to extreme market liquidity issues," adding that "it is our expectation that taxpayers could realize material benefits on their investment in this portfolio."