CHARLOTTE, North Carolina (AP) — American International Group Inc. said yesterday it is working on resolving nearly $10 billion in soured investments — without asking taxpayers for more money.

The exposure stems from investments in mortgage and corporate debt assets, and may make it more difficult for the battered insurer to repay the federal government for its bailout package.

AIG spokesman Nick Ashooh confirmed the company's exposure yesterday, after The Wall Street Journal reported the trades may be the first sign that the New York-based insurer has been gambling with its own capital.

The company also said the Journal incorrectly reported yesterday that the $10 billion in trades was a previously undisclosed obligation to AIG counterparties.

Ashooh said the trades in question were not speculative bets but "credit protection instruments," designed to hedge against losses. The swaps on these synthetic securities are also referred to as "cash settlement" or "Pay As You Go" swaps because they are settled in cash as and when losses are taken, the company said.

"These are not debts that we owe, but yes, they are an exposure for us," Ashooh said.

He said the exposure has been fully disclosed in regulatory filings and comprises about $9.8 billion of AIG's $71.6 billion exposure to derivative contracts on collateralised debt obligations.

CDOs are securities backed by pools of mortgages or other assets. They have plummeted in value since the credit crisis erupted a year ago. Credit default swaps are essentially contracts that insure against the default of bonds and corporate debt such as CDOs. Sellers of swaps are on the hook to repay customers if the value of the underlying bonds or debt declines.

"The majority of the multi-sector CDS swaps were written as 'physical settlement' swaps, where AIG is required to physically buy the underlying CDO bond in the event of a CDO credit event," AIG said in a statement.

The $9.8 billion notional amount does not represent a loss to AIG or a debt it owes to counterparties, the company said, because there are no underlying assets the company is obligated to buy. Instead "Pay As You Go" swaps mean AIG must pay losses on that tranche as and when they occur, the company said.

"It sounds like AIG is saying this is yesterday's news and they are acknowledging they have various problems in derivatives and these are among the problems they've had," Donald Light, a senior analyst at Celent, a Boston-based financial research and consulting firm.