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AIG Shelves Derivatives Portfolio Sale

NEW YORK (TheStreet) -- AIG (AIG) has dropped plans to sell its derivatives portfolio that nearly ruined the insurer in 2008, instead believing that keeping up to $500 billion worth of complex positions could help it survive as an independent entity and repay U.S. taxpayers, a report says.

Peter Hancock, the derivatives expert who has just been hired to oversee AIG's Financial Products division, the unit that bought and sold the portfolio, backs the move, the Financial Times reports.

Following AIG's bailout by the U.S. government, the original plan outlined by then-CEO Edward Liddy and the government was to sell off all the positions and close down AIG Financial Products as soon as possible.

However, Gerry Pasciucco, who joined AIG after the rescue, said that derivatives with a notional value of between $300 billion and $500 billion wouldn't be sold and could be either managed by AIG or outsourced to an external fund manager, the Financial Times reports.

AIG has sold derivatives and reduced the risk attached to them since the bailout. AIG's derivatives book, which had a notional value of $2 trillion in September 2008, stood at $940 billion at the end of December 2009, the newspaper reports.

The number of derivatives positions has fallen from 44,000 in late 2008 to 16,100 at the end of December while the "gross vega" -- a measure of risk -- in the portfolio has gone from $1.3 billion to $310 million, the Financial Times notes.

Pasciucco said the Financial Products unit would still be out of business by the end of 2010.

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