I should have written "if AIG, and others, failed to pay."
The hedge funds, placed elsewhere, will not pay in the case of a bailed out company.

This would be understood by anyone who knows how hedge funds are set up- but most of us don't have any knowledge of them because we lack the funds to play in their garden. I don't claim to know anything about their operations except that they are big players in investment nowadays.

Incidentally, hedge funds are a relatively new way (20 years or so?- certainly they were not important when I took introductory economics years ago) of gambling on the health of an investment. Not only companies, but funds of all kinds held privately or publically invest in them. I'm sure that the Government of Canada, and wealthier provinces, have part of their investments in them.

Our economic system (the world's) is, in a sense, a gambling operation. So far, it has done pretty well.