According to the Wall Street Journal reports, troubled insurer American International Group (AIG) Inc. is facing $10 billion in losses on trades. The speculative trades, engineered by the insurer's financial-products unit - AIG Financial Products Corp. - represent the first sign that AIG may have been gambling with its own capital. The company reportedly owes this money to Wall Street's biggest firms.

AIG Financial Products Corp, by selling protection against defaults on seemingly low-risk securities, put billions of dollars of the company's money at risk through speculative bets on the direction of pools of mortgage assets and corporate debt. WSJ report says that details of the trades go beyond what the company has explained to investors about the nature of its risk-taking operations.

AIG now finds itself in a position of having to raise funds to pay off its partners. The newly surfaced losses underscore the challenges AIG faces as it seeks to recover under a US government rescue plan - these losses are not covered by the terms of the current $150 billion rescue package for AIG. Moreover, the Federal Reserve reportedly has no immediate plans to help AIG pay off the speculative trades.

The problem AIG faces now is that the rescue plan calls for a company funded largely by the Federal Reserve to buy about $65 billion in troubled CDO securities underlying the credit-default swaps. However, there are no actual securities backing the speculative positions that the insurer is losing money on, as these bets were made on the performance of pools of mortgage assets and corporate debt. Hence, AIG now finds itself in a position of having to raise funds to pay off its partners because those assets have fallen significantly in value.