Should a senior tranche default, the insurer has the right to step in and make the missing interest payments to forestall a liquidation.

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The flow-through gain would have pumped up the basis in the partnership interest resulting in a capital loss on liquidation.

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If there is an insolvency, it would be in the public's best interest to allow the insurance entities to continue, however it will require a restructuring and even liquidation of the other assets within AIG's portfolio.

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