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Company History1
AIG was founded in Shanghai in 1919 when an American
entrepreneur named Cornelius
Vander Starr formed American Asiatic Underwriters (AAU) to
represent American insurance
companies that were providing insurance coverage in China.
Shortly thereafter, Starr started the
Asia Life Insurance Company, the first Western firm to provide

life insurance to the Chinese
people.
In 1926, Starr established American International Underwriters
(AIU) in New York City
to provide insurance to Americans outside the country. It was
his first office within the United
States and became his company’s headquarters in 1939 due to
political unrest in China. Starr
closed his Shanghai office in 1950 due to the rise of
Communism.
In 1945, after World War II, AIU established operations in
Germany and Japan to
provide insurance to American troops. In the postwar period,
European insurers had little capital
and could not provide enough policies or products to suit
customers’ needs. AIU took advantage
of these weakened European insurers and the global expansion
of American businesses in the
1950s to grow across Europe, North Africa, the Middle East,
and Australia.
In 1952, AIU made an aggressive move in the U.S. insurance
market; it acquired a
majority interest in the Globe & Rutgers Fire Insurance
Company and its subsidiaries, including
American Home Assurance Company. But by 1962, its U.S.
operations were struggling, and
Starr appointed Maurice R. “Hank” Greenberg to turn the
company around. The company took a
new direction; it sold off American Home Assurance’s agency
business, established an

independent brokerage model, and shifted the subsidiary’s focus
from personal insurance to the
high-margin commercial insurance business. Greenberg
established reinsurance2 policies, which
allowed AIU to take on larger numbers of policies and thus have
more control over pricing. He
also established numerous product and service innovations such
as deductibles. Within several
years, Greenberg had turned AIU’s operations around and had
begun to acquire many of the
companies that, in 2009, made up AIG’s Domestic Brokerage
Group.
In 1967, American International Group was founded as a
holding company for many of
the firm’s U.S. businesses. Hank Greenberg became president
and CEO of AIG, and in 1969, he
took AIG public. By 1970, AIU and most of its associated
organizations became subsidiaries of
AIG. AIG experienced periods of strong growth in the 1970s
and 1980s as it established itself as
a major international player, developed specialized services for
numerous market segments, and
1 Information in this section comes primarily from “American
International Group, Inc.” Funding Universe,
http://www.fundinguniverse.com/company-histories/American-
International-Group-Inc-Company-History.html
(accessed May 24, 2011).
2 Reinsurance, sometimes referred as insurance for insurers,
occurs when an insurance company transfers a
portion of its risk to another insurance company called a

reinsurer. The reinsurer obtains a fraction of the potential
obligation in exchange for a fee. This transaction reduces the
original insurer’s risk and allows the company to write
additional policies without raising additional capital.
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-3- UVA-C-2322
expanded comprehensive technical expertise. During this time,
AIG began a financing arm and
entered into oil and gas drilling rig insurance, pension fund
management, health care services,
residential mortgage insurance, and aviation insurance.
In 1987, AIG formed its Financial Services segment, which
consolidated specialized
financial units and grew business throughout the 1990s in fields
such as investment management,
venture capital, aircraft leasing, and risk management. AIG also
expanded or entered into foreign
countries such as China, India, Pakistan, and Russia during this
time. By 1994, 52% of AIG’s
revenue came from outside the United States.

Beginning in 1999, AIG entered into the Retirement Savings
and Investment
Management field by acquiring SunAmerica Inc. for $18.3
billion. In 2001, it made its largest
acquisition of American General Corporation for $23 billion.
Both firms provided AIG with a
dominant position in fixed and variable annuities and mutual
funds.
Greenberg’s impressive run, however, came to an abrupt end in
2005 when he and other
AIG executives were charged by the New York State Attorney
General’s office with inflating
reserves by $500 million through fraudulent reinsurance deals
with General Re Corporation.3 In
March 2005, Greenberg was removed as CEO through a deal
between AIG’s board and the State
Attorney General. Greenberg was replaced by Martin J. Sullivan
as CEO. In 2006, AIG paid $1.6
billion to settle the civil case by the New York State Attorney
General.4
Company Description5
In December 2008, AIG had 116,000 employees and operated in
130 countries. It was
organized into four principal business segments: General
Insurance, Life Insurance and
Retirement Services, Asset Management, and Financial
Services. Exhibit 1 shows a simplified
organizational structure of the company. Exhibit 2 provides
financial details for each of these

four segments.
The General Insurance segment consisted of multiple companies
that provided a wide
range of commercial and personal lines of insurance. These
included commercial and industrial
property insurance, personal auto insurance, coverage for high-
net-worth individuals, mortgage
guaranty insurance, and international reinsurance. From 2003 to
2006, the General Insurance
segment accounted for, on average, 43% of AIG’s total revenues
and 31% of its total profits. The
Life Insurance and Retirement Services segment primarily
offered individual and group life
insurance policies, fixed and variable annuities, endowment
policies, and accidental and health
3 Amir Efrati, “Greenberg Role Seen In AIG-Gen Re Case,”
Wall Street Journal, May 20, 2008.
4 James Freeman, “Eliot Spitzer and the Decline of AIG,” Wall
Street Journal, May 16, 2008.
5 Information in this section comes primarily from AIG’s 10-Ks
for the fiscal years ended December 31, 2008,
December 31, 2007, and December 31, 2006.
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policies. This segment averaged 45% of AIG’s revenues and
55% of profits from 2003 to 2006.
The Asset Management segment provided investment-related
products and services to both
institutional and individual clients. It accounted for an average
of 4% of AIG’s revenues and
11% of profits from 2003 to 2006. Finally, the Financial
Services segment was engaged in a
variety of markets including aircraft leasing, consumer finance,
and capital markets. It accounted
for an average of 8% of AIG’s revenues and 14% of profits from
2003 to 2006.
Financial Services segment6
The Financial Services segment was divided into three diverse
units: Aircraft Leasing,
Consumer Finance, and Capital Markets. Exhibit 3 provides
financial details for each of the
units within Financial Services. The Aircraft Leasing unit
operated as the International Lease
Finance Corporation and had a fleet of over 900 aircraft.
Revenues in this unit were primarily
generated through leasing contracts with foreign and domestic
airlines, fleet management, and
remarketing7 of its aircraft. The Consumer Finance unit
operated globally and derived its
revenues from finance charges by providing real estate and non-

real estate loans and retail sales
finance receivables. The Capital Markets unit included only the
AIG Financial Products (AIGFP)
group. AIGFP participated in a wide variety of financial
transactions to provide clients with risk
management products and hedging and investment
opportunities. AIGFP operated in a broad
range of markets, including commodities, credit, currencies,
equities, and interest rates. It was
AIGFP’s involvement in credit protection—particularly credit
default swaps—that caused most
of the $40.8 billion operating loss within Financial Services in
2008.
Financial Products group8
Started in 1987, AIGFP was the brainchild of three employees
at Drexel Burnham
Lambert (Drexel), a Wall Street firm well known for its
aggressive involvement in the high-risk,
high-yield “junk” bonds market. Outside of Drexel, however,
Howard Sosin, a “finance scholar,”
Randy Rackson, a “computer wizard,” and Barry Goldman, a
“genius for constructing financial
transactions,”9 had developed a business plan to provide a vast
array of long-term derivative
contracts. At the time, deals typically lasted a few years, but
Sosin, Rackson, and Goldman
envisioned deals that would last decades. They sought out AIG
because they wanted to work
under an AAA-rated institution, which would provide a source
of cheap credit, financial backing,
and confidence for potential clients. In negotiations with Hank
Greenberg, they set up AIGFP

like a hedge fund; AIGFP would keep 38% of profits, and AIG
would take 62%. Sosin also
requested operating independence, which was rarely granted by
AIG’s CEO. In return,
Greenberg insisted on assurances that AIG’s AAA credit rating
would stay intact. After striking
6 Information in this section comes primarily from AIG’s 10-Ks
for the fiscal year ended December 31, 2008.
7 Remarketing aircraft includes leasing excess capacity or
selling aircraft.
8 Information from this section comes primarily from Robert
O’Harrow Jr. and Brady Dennis, “Wall Street’s
Beautiful Machine: Origins of the Crash,” Washington Post,
January 4, 2009.
9 O’Harrow and Dennis, “Wall Street’s Beautiful Machine:
Origins of the Crash.”
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a deal, the trio left Drexel with a handful of colleagues,
including Joseph J. Cassano, who would

later lead AIGFP and be identified by Time magazine as one of
the top people to blame for the
financial crisis.10
It took six months for the group to develop computer models
they referred to as “the
system” that could value a variety of asset classes—bonds,
equities, loans, and all their
derivatives—that other firms tended to treat separately. The
group initially provided long-term
derivative contracts for clients to mitigate the effect of pricing
fluctuations in markets such as
commodities and interest rates. These contracts were
meticulously hedged to diminish risk and
insulate AIGFP from changes in the market. The group also
wanted to create a “culture of
skepticism” and “set up a committee to examine all transactions
at the end of each workday,
searching for flaws in logic, pricing, and hedging.”11 Tom
Savage, a mathematician who had
been among those employees who moved from Drexel to AIG
said, “It was everybody’s job to
criticize and double-check other people’s opinions about what
was appropriate business and what
wasn’t.”12
Despite the success of AIGFP over the next several years,
Greenberg never felt
comfortable with Sosin or the agreements they had made. One
particular point of dissatisfaction
was that AIGFP received its profits immediately after
conducting a transaction regardless of how
long the contract lasted. Greenberg’s uneasiness led to mistrust,
and after one sour deal, he was

ready to change the terms of their agreement. Sosin refused and
left the company with a
settlement worth over $150 million, of which his colleague
Rackson later received a portion.
Savage, who started at AIG in 1988, replaced Sosin as head of
AIGFP. Savage was
known for his strong quantitative skills and was committed to
Sosin’s procedures for risk
reduction and a culture of skepticism. The agreement with
Greenberg, however, was different.
AIGPF now kept 30% of its profits, providing 70% to AIG, and
the group’s employees had to
defer their compensation over several years. Greenberg also
insisted that Savage and his group
had to take more direction from him and reiterated, “You guys
at FP ever do anything to my
Triple A rating, and I’m coming after you with a pitchfork.”13
While Savage continued operating AIGFP using an approach
similar to Sosin’s, other
firms were entering the market and challenging AIGFP’s profit
margins. Savage started to push
the group into new products, markets, and services. The group
responded, providing more
complicated deals and new products such as guaranteed
investment contracts, wherein AIGFP
would borrow money from municipalities, pay a higher rate of
interest than treasury bonds or
bank accounts, and, in turn, use the capital for larger deals.
10 “25 People to Blame for the Financial Crisis,” Time
magazine online,

http://www.time.com/time/specials/packages/completelist/0,295
69,1877351,00.html (accessed May 24, 2011).
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Joseph Cassano, at this time, was head of the Transaction
Development Group, whose
deals involved corporate debt, which gave him considerable
voice in the company’s debate on
whether to enter into a new product called a credit default swap
(CDS).14 Cassano was one of the
biggest supporters of CDSs, but ultimately, Savage, Greenberg,
and AIG’s board allowed AIGFP
to enter into the deals. AIGFP continued to increase its business
in CDSs during Savage’s tenure,
which lasted until he retired at the end of 2001. During that
time, Cassano was making the firm a

substantial amount of money and rose to COO of AIGFP.
Cassano was chosen by the board to
replace Savage based on a recommendation from Savage and the
strong positive impression he
had made on Greenberg. Cassano was ambitious and had a
“strong drive to make money in the
derivatives field.” Greenberg also saw some of his own qualities
in Cassano—an intense
personal investment in AIG, a hot temper, and a dislike of
criticism. But above all, he followed
direction from Greenberg.15
Despite Cassano’s approval from above, his new subordinates
were not as
complementary. Cassano, unlike his predecessors, spent most of
his career in back-office
operations and did not have a strong background in analytics.
Many employees thought he did
not fully understand the models AIGFP used and therefore were
unsure if he could manage the
group effectively. He also did not welcome the skepticism and
debates that were held in such
high regard by Sosin and Savage. A trader working at AIGFP
who refused to provide his identity
was quoted saying, “The culture changed, the fear level was so
high that when we had these
morning meetings you presented what you did [in order] not to
upset him. And if you were
critical of the organization, all hell would break loose.”16
Credit Default Swaps
In 1998, J.P. Morgan approached AIGFP to help it sell a new

offering. J.P. Morgan was
selling diverse vehicles of debt on its balance sheet, including
loans, bonds, and securities, by
repackaging them into a security similar to a bond. These
securities would be layered into
various classes, where the top layer would be the least risky and
paid first if a default occurred.
Conversely, the bottom class was the most risky but paid the
highest rates. These types of
products evolved into collateralized debt obligations (CDOs).17
See Exhibit 4 for a description of
CDOs. Ultimately, J.P. Morgan wanted AIG to provide an
insurance-type product to provide
additional confidence to potential clients for its top-tier
securities. In response, AIGFP crafted a
CDS; for a periodic fee, AIGFP would guarantee payment if the
security defaulted.
14 A CDS is a type of credit derivative known as a swap
contract. For a fee, the contract provides protection in
case the underlying credit defaults. The purchaser of a CDS
pays the seller periodic payments, and the seller
provides a payoff if defaults occur.
15 Brady Dennis and Robert O’Harrow Jr., “A Crack in the
System,” Washington Post, December 30, 2008.
16 Michael Lewis, “The Man Who Crashed the World,” Vanity
Fair, August 2009.
17 CDOs are products where individual loans, such as corporate
debt or car loans, are repackaged into one
instrument. They are divided into tiers, rated by agencies, and
sold to investors on a secondary market. CDOs are
typically collateralized or backed by some form of asset, such

as a home or corporate property or inventory.
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Originally, the CDOs created by J.P. Morgan and other banks
were written primarily
against corporate debt, such as bonds or short-term notes. AIG
provided CDSs against these
securities with confidence because there was a considerable
amount of data on corporate bonds
that could be used to assess the risk of the CDOs. It was also
considered highly unlikely that
investment-grade companies all over the world spanning
different industries would default
simultaneously. CDOs, however, were not publicly traded and
thus were not regulated. This
allowed the loans to be financed with greater amounts of debt.
By around 2003, the composition of CDOs was beginning to
change dramatically. Banks
started packaging consumer debt such as mortgages, credit-card
debt, and car loans into these
securities. Despite consumer loans being drastically different

from corporate debt, AIGFP
seemed to apply the same rationale to it—that consumer debt
was substantially diverse and
chances of mass default were small.
As the housing boom ensued, mortgages began to make up a
larger portion of CDOs and
became known as “mortgage-backed securities,” which were
collateralized by real estate. There
was considerable demand for these mortgage-backed securities,
and institutions were hedging
them with CDSs. AIGFP’s revenue soared from $737 million in
1999 to $3.26 billion in 2005.18
In 2007, Cassano, who had led AIGFP since 2002, called his
group’s clients:
A broad global swath of mostly high-grade institutions, mostly
high-grade entities
around the world, and it includes banks and investment banks,
pension funds,
endowments, foundations, insurance companies, hedge funds,
money managers,
high-net-worth individuals, municipalities, and sovereigns and
super nationals.19
The CDSs provided a sense of security and fueled these clients
to purchase even more
CDOs. European banks could even use CDSs as a form of
collateral to free up capital that would
have normally been reserved in case of default.20

AIGFP was also able to avoid any regulation of its CDSs.
Derivatives, as a result of the
Commodity Futures Modernization Act of 2000, were not
regulated. Numerous government
officials concluded that regulation would stifle economic
growth and that the market had enough
safeguards to correct itself if necessary.21 Because AIGFP was
not considered an insurance
company, it did not have to answer to state insurance regulators
for its CDSs.22
AIG seemed to consider CDSs to be low risk. While speaking to
investors in 2007, Andy
Forster, head of global credit trading at AIG, explained, “Given
the conservatism that we’ve built
18 Gretchen Morgenson, “Behind Insurer’s Crisis, Blind Eye to
a Web of Risk,” New York Times, September 28,
2008.
19 Robert O’Harrow Jr. and Brady Dennis, “Downgrades and
Downfall,” Washington Post, December 31, 2008.
20 O’Harrow and Dennis, “Downgrades and Downfall.”
21 Dennis and O’Harrow, “A Crack in the System.”
22 AIGFP was reviewed by a federal regulator, the U.S. Office
of Thrift Supervision.
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-8- UVA-C-2322
[into] these portfolios, we haven’t had to do a huge amount of
hedging over the years.”23 AIG
only sold CDSs for the highest tier of CDOs and put each
through an extensive review process,
essentially selecting those that were the least risky. The
company also viewed the mortgage-
backed CDOs as safe because they were geographically diverse.
What AIG failed to realize was that during this time, subprime
mortgages began to make
up a large portion of the CDOs it was insuring. In 2004, interest
rates began to rise, which
conventionally causes consumer loans to decrease. Prime
mortgages, for example, decreased by
half from June 2004 to June 2005. Subprime mortgages,
however, did the opposite—they
increased24 (Exhibit 5).
One possible explanation for the dramatic increase in subprime
mortgages came from an
unnamed trader inside AIGFP. He believed Wall Street was so
eager to purchase these subprime
mortgage-backed securities because AIG was just as eager to
insure them and thus assume the
risk: “I’m convinced that our input into the system led to a
substantial portion of the increase in
housing prices in the U.S. We facilitated a trillion dollars in

mortgages. Just us.”25
Unfortunately for AIG, Cassano had offered his clients different
terms for CDSs on
subprime-mortgage CDOs than it had previously offered for
CDSs. For instance, if the value of
these CDOs happened to drop, AIG would have to post
collateral, and the counterparty—not
AIG—would determine the value of the security. In previous
agreements with purchasers of
CDSs, counterparties had to accept AIG’s AAA rating as
sufficient evidence that the company
could make any payments should they be necessary. But
Cassano now agreed to post collateral if
AIG’s AAA rating was downgraded. Sure enough, in March
2005, Fitch downgraded AIG to AA
as a result of Greenberg’s alleged involvement in an accounting
scandal and his resignation.26
AIG was forced to post $1.16 billion in collateral for these
deals.27
Toward the end of 2005, Eugene Park, who had worked at
AIGFP in the corporate credit-
derivative portfolio, was asked to replace a marketing executive
within AIGFP’s CDS business.28
Park, who had an analytical background and a deep
understanding of securities, decided to
investigate before accepting. Park discovered that subprime
mortgages made up approximately
95% of the consumer loans AIGFP had insured. Understandably,
Park declined the offer and
spoke with his colleagues working in the CDS group. According
to Park, Yale professor Gary
Gorton, who had helped create the model that was used to price

the CDSs, estimated subprime
mortgages made up no more than 10% of the CDOs insured; a
risk analyst in the group estimated
20%; and Al Frost, whom Park had been asked to replace, had
no idea. The fact that AIGFP was
insuring primarily subprime mortgages rather than general
consumer debt “was irrelevant [to
24 Lewis, “The Man Who Crashed the World.”
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Cassano]: for the bonds to default, U.S. house prices had to fall,
and Cassano didn’t believe
house prices could ever fall everywhere in the country at once.
After all, Moody’s and S&P still
rated this stuff AAA!”29

Over the next several weeks, Park and Cassano worked with
executives at AIGFP and
researchers at investment banks that were counterparties to
some of the AIGFP transactions.
Executives were surprised to learn how little analysis went into
the subprime mortgage securities
and that it was based on such a simple belief—that housing
prices would not fall simultaneously
across the country. Furthermore, the fact remained that the loan-
origination process for subprime
mortgages was inadequate and the AAA ratings of these
securities were highly questionable.
Cassano finally relented, and at the end of 2005, AIGFP stopped
issuing CDSs.
Despite AIGFP’s abrupt exit from the CDS market, another
division of AIG was
simultaneously aggressively investing in this market. AIG’s
Investments unit lent securities,
typically long-term corporate bonds held by AIG’s Retirement
Services and Insurance
subsidiaries, to banks and brokers in exchange for cash
collateral. The investment unit was then
investing the resulting cash in mortgage-backed securities
instead of a low-risk security such as a
treasury bond, which was typical for most lending security
businesses. This resulted in additional
subprime exposure for AIG in an area completely unrelated to
AIGFP.30
Housing Market Cools

In early 2007, the unthinkable began to happen—the housing
market was cooling,
borrowers were defaulting on loans throughout the United
States, and as a result, rating agencies
were beginning to downgrade mortgage-backed CDOs.
Goldman Sachs, one of AIG’s largest counterparties of CDSs,31
was the first to demand
collateral from AIG as part of its CDS contract.32 Despite the
request for $1.5 billion, AIG agreed
to post $450 million of collateral in August of 2007. Another
request in late October from
Goldman resulted in AIG posting a total of $1.5 billion in
collateral. Due to changes in U.S. SEC
requirements, AIG was also forced to value its CDSs on a mark-
to-market basis,33 and as a result,
30 Serena Ng and Liam Pleven, “An AIG Unit’s Quest to Juice
Profit,” Wall Street Journal, February 5, 2009.
31 “AIG Discloses Counterparties to CDS, GIA, and Security
Lending Transactions,” AIG press release, March
15, 2009, http://media.corporate-
ir.net/media_files/irol/76/76115/releases/031509.pdf (accessed
May 26, 2011).
32 Collateral was typically required to prove an institution had
funds available to cover in case of default. There
are two reasons a firm would have to post collateral for a CDS:
a reduced or low credit rating or a reduction in value
of the securities or assets the CDS was covering. With a high
credit rating, AIG was believed to have access to
inexpensive financing or have sufficient means to pay if

necessary.
33 As the value of the security that a CDS covered declined, the
value of the CDS had to be decreased as well.
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in the third quarter of 2007, AIG posted its first unrealized loss
of $352 million from its swap
portfolio.34
In its end-of-year filing on February 28, 2008, AIG disclosed
that it had recorded a total
unrealized loss on CDSs of $11.5 billion in 2007 and that it had
posted $5.3 billion in collateral.
The following day, the company announced the resignation of
Joseph Cassano; however, it did
not mention he would continue working for AIG as a consultant
for roughly $1 million per
month.35 By June 2008, CEO Martin Sullivan resigned as well
and was replaced by AIG
Chairman Robert B. Willumstad.36

In August, AIG disclosed in its second-quarter filing for 2008
that the total loss in the
CDS business amounted to $26.2 billion and that AIG had
posted a total of $16.5 billion in
collateral. On September 15, Fitch, S&P, and Moody’s all
downgraded AIG’s credit rating,
forcing it to post an additional $14.5 billion in collateral.37 At
this point, AIG had sold $441
billion worth of coverage through its CDSs, which backed $57.8
billion worth of subprime
mortgages.38
Although AIG had profitable businesses to sell to cover the
collateral, the economic crisis
was preventing quick sales. These lucrative businesses were
unrelated to AIGFP and normally
would have been valued at a premium; however, they were now
substantially undervalued. In
addition, potential buyers were having trouble securing the
funding required for purchase.
The Bailouts
After failing to secure a loan through a consortium of private
banks, AIG received a loan
for $85 billion from the U.S. Federal Reserve Bank on
September 16, 2008, a day after the
downgrade of its credit rating. In exchange for the loan, the
U.S. government received a 79.9%
equity stake in AIG. Federal Reserve Chairman Ben Bernanke,
New York Federal Reserve
President Timothy Geithner, and U.S. Treasury Secretary Henry

Paulson determined that a
declaration of bankruptcy by AIG would cause catastrophic
events throughout the banking
industry, from investment banks to money market funds.
Accordingly, they enacted a rarely used
Federal Reserve Act to lend money to nonbanks during an
“unusual and exigent” time and also
stipulated that in order to receive the funds, Willumstad had to
step down as CEO. He was
34 Paul Kiel, “AIG’s Spiral Downward: A Timeline,”
ProPublica, November 14, 2008,
http://www.propublica.org/article/article-aigs-downward-spiral-
1114 (accessed May 26, 2011).
35 http://www.propublica.org/article/article-aigs-downward-
spiral-1114.
36 Lilla Zuill, “AIG Chief Sullivan Resigns Amid Subprime
Losses,” Reuters, June 15, 2008
http://www.reuters.com/article/2008/06/15/us-aig-sullivan-
newsmaker-idUSN1335612520080615 (accessed May
26, 2011).
37 http://www.propublica.org/article/article-aigs-downward-
spiral-1114.
38 Mark Pittman, “Goldman, Merrill Collect Billions After
Fed’s AIG Bailout Loans,” Bloomberg, September
29, 2008.
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-11- UVA-C-2322
replaced by Edward Liddy, a former CEO of Allstate
Corporation who had experience in
divestures at Sears Roebuck and Co.39
By the beginning of October, AIG had already drawn down $61
billion of the $85 billion
loan, and it was clear that AIG would need more. The Federal
Reserve, on October 8, provided
an additional $37.8 billion in exchange for fixed-income
securities from AIG’s regulated life
insurance businesses.40
On November 10, AIG announced its total losses for the CDSs
had increased to $33.2
billion. As a result, the Federal Reserve revealed that it had
restructured its original $85 billion
loan and provided additional lines of credit and equity
investments to AIG. In particular, the
Federal Reserve purchased $40 billion in preferred shares
through the Troubled Asset Relief
Program and reduced the $85 billion loan to $60 billion with
reduced interest rates and
lengthened terms. It also provided $22.5 billion to purchase
mortgage-backed securities from its

securities lending business41 and $30 billion to purchase CDOs
covered by AIG’s CDSs. Both
transactions occurred under the Federal Reserve Act and
resulted in a total rescue package of
$152.5 billion.42
The bleeding continued. On March 2, 2009, AIG reported a $62
billion fourth-quarter
loss in 2008, the largest of any company in history. Credit
rating agencies were preparing to
drastically reduce AIG’s credit rating, which would inhibit
AIG’s ability to pay its debts and
increase capital calls; it would likely force bankruptcy.43 In
response, the Federal Reserve once
again provided an additional $30 billion in capital in exchange
for noncumulative preferred
shares, and for the second time, restructured the outstanding
loans. The Federal Reserve
eliminated the dividend payments on its $40 billion preferred
shares, reduced the interest rate on
the $60 billion loan, and reduced the principal of the loan to
“no less than $25 billion” in
exchange for shares of two AIG life insurance subsidiaries in
Asia valued at up to $26 billion. It
39 Matthew Karnitschnig, Deborah Solomon, Liam Pleven, and
Jon E. Hilsenrath, “U.S. to Take Over AIG in
$85 Billion Bailout; Central Banks Inject Cash as Credit Dries
Up,” Wall Street Journal, September 16, 2008.
40 Barry Meier and Mary Williams Walsh, “A.I.G. to Get
Additional $37.8 Billion,” New York Times, October
9, 2008.

41 When parties were returning securities to AIG’s Investments
unit, AIG could not pay its required
commitment because the mortgage-backed securities had
substantially declined in value and AIG was unable to sell
them to generate sufficient funds.
42 Federal Reserve Board, press release, November 10, 2008,
http://www.federalreserve.gov/newsevents/press/other/2008111
0a.htm (accessed May 26, 2011).
43 Andrew Ross Sorkin and Mary Williams Walsh, “U.S. Is
Said to Offer Another $30 Billion in Funds to
A.I.G.,” New York Times, March 2, 2009.
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-12- UVA-C-2322
also made available an $8.5 billion loan to AIG’s life insurance
subsidiaries.44 The resulting
package was estimated to be as high as $182 billion.45
The Bonuses

By March 16, 2009, two weeks after the government provided
its fourth bailout package
to AIG, the company set off a firestorm after it was revealed
that it had paid $165 million in
retention bonuses to employees within the Financial Products
group. The $165 million retention
payments were made to 418 people and ranged from $1,000 to
$6.4 million. Seventy-three
employees received payments greater than $1 million, and 52
individuals who had left the firm
received a combined total of $33.6 million.46,47
AIG had entered into the retention contracts with the Financial
Products group employees
in the spring of 2008, just after AIG announced the $11.5
billion unrealized loss for 2007. These
contracts guaranteed retention bonuses for 2008 and 2009 equal
to the 2007 total bonus levels for
nonsenior management employees and 75% of 2007 total bonus
levels for senior managers. The
retention payments were not tied to performance of the division,
and payment was only forfeited
if the employee resigned without good reason or was terminated
for just cause (such as fraud,
dishonesty, or conviction of a criminal offense). Additionally, if
an employee was dismissed in
2008 for performance reasons, he or she would still receive the
2008 retention bonus; however,
the 2009 bonus would be terminated.48 See Exhibit 6 for more
details on the bonus contract. In
total, these awards for 2008 and 2009 were valued at $450
million; $55 million was paid in
December 2008, $165 million was paid in March 2009, and
$230 million was reserved for work

completed in 2009.
The media later speculated that at the time AIG signed the
bonus contract, it knew a
significant economic downturn was imminent due to the
mortgage crisis. AIG believed,
however, that the key to surviving the crisis was retaining the
employees who were most
knowledgeable about the derivative positions and could unwind
them most efficiently.
Although Liddy was not employed at AIG when the contracts
were created, he had to
defend them. Liddy addressed Treasury Secretary Geithner in a
letter providing two main
44 “U.S. Treasury and Federal Reserve Board Announce
Participation in AIG Restructuring Plan,” Joint press
release, March 2, 2009,
http://www.federalreserve.gov/newsevents/press/other/2009030
2a.htm (accessed May 26,
2011).
45 David Goldman, “CNNMoney.com’s Bailout Tracker,”
CNNMoney, August 8, 2009,
http://money.cnn.com/news/storysupplement/economy/bailouttra
cker/ (accessed May 26, 2011).
46 Andrew Cuomo’s letter to Barney Frank (chairman of the
House Committee on Financial Services), March
17, 2009.

47 Edmund L. Andrews and Peter Baker, “Bonus Money at
Troubled A.I.G. Draws Heavy Criticism,” New York
Times, March 16, 2009.
48 “AIG Financial Products Corp. 2008 Employee Retention
Plan,” AIG,
http://www.house.gov/apps/list/press/financialsvcs_dem/employ
eeretentionplan.pdf, (accessed May 26, 2011).
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arguments for the disbursements: honoring contractual
commitments and retaining
knowledgeable employees to unwind the contracts. With advice
from outside counsel, Liddy
emphasized that “AIG’s hands are tied,” and “these are legal,
binding obligations of AIG, and
there are serious legal, as well as business, consequences for
not paying.”49 It was estimated that
AIG could face $330 million in payments and lawsuits, double
the cost of the bonuses, if they
did not honor the contracts.50 He also stressed that the bonuses
were crucial to retaining key
individuals that would ultimately ensure repayment of the

government loans.
Additionally, Liddy outlined the steps AIG had taken to reduce
future payments and
bonuses to employees. He promised to reduce retention
payments for 2009 by at least 30%. He
reduced salaries for the highest 25 contractual employees to $1
and salaries for the remaining
officers at AIG by 10%. Finally, he indicated that AIG was in
the process of changing 2008
corporate bonus proposals in keeping with the company’s
restructuring efforts and need to repay
the government.51
49 Edward Liddy’s letter to Treasury Secretary Timothy
Geithner, March 14, 2009.
50 Alice Gomstyn and Lauren Pearle, “Could AIG Bonus Mess
Balloon to $330M,” abc NEWS, September 8,
2009.
51 Liddy’s letter to Geithner, March 14, 2009.
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Exhibit 1
AMERICAN INTERNATIONAL GROUP, INC.—THE
FINANCIAL CRISIS
AIG Abbreviated Organizational Structure
Source: Created by case writer based on information in AIG’s
10-K for the fiscal year ended December 31, 2008.
AIG Financial
Products
Aircraft Leasing
Consumer
Finance
Capital Markets

General Insurance
Life Insurance &
Retirement
Services
Financial
Services
Asset
Management
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Exhibit 2
FINANCIAL CRISIS
Selected Financial Information by Operating Segment
(in millions of U.S. dollars)

Operating Segments
General
Insurance
Life
Insurance &
Retirement
Services
Financial
Services
Asset
Management
Other Total
Consolidation
and
Eliminations
Consolidated
2008
Total Revenues $44,676 $3,054 $(31,095) $(4,526) $(81)
$12,028 $(924) $11,104
Other-than-temporary impairment charges 4,533 38,731 127
7,276 138 50,805 - 50,805
Operating income (loss) before minority interest (5,746)
(37,446) (40,821) (9,187) (15,055) (108,255) (506) (108,761)
Year-end identifiable assets $165,947 $489,646 $167,061
$46,850 $168,762 $1,038,266 $(177,848) $860,418
2007

Total Revenues $51,708 $53,570 $(1,309) $5,625 $457
$110,051 $13 $110,064
Other-than-temporary impairment charges 276 2,798 650 835
156 4,715 - 4,715
Operating income (loss) before minority interest 10,526 8,186
(9,515) 1,164 (2,140) 8,221 722 8,943
$77,274 $126,874 $1,192,992 $(144,631) $1,048,361
2006
Total Revenues $49,206 $50,878 $7,777 $4,543 $483 $112,887
$500 $113,387
Other-than-temporary impairment charges 77 641 1 225 - 944 -
944
Operating income (loss) before minority interest 10,412 10,121
383 1,538 (1,435) 21,019 668 21,687
$78,275 $107,517 $1,106,238 $(126,828) $979,410
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Page 15 of 19
-16- UVA-C-2322

Exhibit 3
FINANCIAL CRISIS
Selected Financial Information of Financial Products Group by
Operating Segment
(in millions of U.S. dollars)
Aircraft
Leasing
Capital
Markets
Consumer
Finance
Other
Total
Reportable
Segment
Consolidation
and
Eliminations
Total
Financial
Services
2008

Total Revenues $5,075 $(40,333) $3,849 $323 $(31,086) $(9)
$(31,095)
Operating income (loss) 1,116 (40,471) (1,261) (205) (40,821) -
(40,821)
Year-end identifiable assets $47,426 $77,846 $34,525 $(2,354)
$57,443 $9,618 $167,061
2007
Total Revenues $4,694 $(9,979) $3,655 $1,471 $(159) $(1,150)
$(1,309)
Operating income (loss) 873 (10,557) 171 (2) (9,515) - (9,515)
Year-end identifiable assets $44,970 $105,568 $36,822 $17,357
$204,717 $(10,742) $193,975
2006
Total Revenues $4,082 $(186) $3,587 $320 $7,803 $(26) $7,777
Operating income (loss) 578 (873) 668 10 383 - 383
Year-end identifiable assets 41,975 121,243 32,702 12,368
$208,288 (5,803) $202,485
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Page 16 of 19
-17- UVA-C-2322

Exhibit 4
FINANCIAL CRISIS
Collateralized Debt Obligations
CDOs are products where individual loans, such as corporate
debt or car loans, are repackaged into one instrument. They are
divided into tiers, rated by agencies, and sold to investors on a
secondary market. CDOs are typically collateralized or backed
by some form of asset, such as a home or corporate property or
inventory.
Source: Created by case writer.
Super-Senior Debt
(usually rated
AAA)

Mezzanine-Level
Debt
Lowest-Level or
Equity-Level Debt
(usually not rated)
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Pooling of Debt
(Typically under a Special Purpose
Vehicle, SPV)
Corporate Debt
Subprime
Mortgages
2005
1998
Consumer Debt
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Page 17 of 19

1
Center for Respon
AMERI
sible Lending, “Su
ICAN INTERN
Total Su
ubprime Lending: A
NATIONAL GR
ubprime Mortga
A Net Drain on Hom
-18-
Exhibit 5
ROUP, INC.—
ages Originated
meownership,” CR

—THE FINANC
(1998–2006)1
RL Issue Paper No.
CIAL CRISIS
14, March 27. 200
UV
07.
VA-C-2322
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Page 18 of 19
-19- UVA-C-2322
Exhibit 6

FINANCIAL CRISIS
Summary of “AIG Financial Products Corp. 2008 Employee
Retention Plan”
This document sets forth the terms of “AIG Financial Products
Corp. 2008 Employee Retention
Plan,” effective December 1, 2007. The Plan sets out the 2008
and 2009 Guaranteed Retention Awards to
be provided hereunder to certain employees and consultants of
AIG-FP (which term includes
subsidiaries).
The objectives of the plans are:
1. To provide incentives for AIG-FP’s employees and
consultants to continue developing,
promoting, and executing AIG-FP’s business;
2. To recognize the uncertainty that the unrealized market
valuation losses in AIG-FP’s
super senior credit derivatives and originally rated AAA cash
CDO portfolios have
created for AIG-FP’s employees and consultants;
3. To ensure that AIG-FP’s and its employees’ and consultants’
interests continue to be
aligned with those of AIG and AIG’s shareholders;
4. To continue to build and maintain the formation of capital to
AIG-FP; and
5. To show the support by AIG of the on-going business of

AIG-FP by implementing a
meaningful employee retention plan.
2008 and 2009 Retention Awards.
1. Covered persons who are not members of the Senior
Management Team for the 2008 and
2009 Compensation Year, shall be awarded a Guaranteed
Retention Award for each of
those Compensation Years equal to 100% of such Covered
Person’s 2007 Total
Economic Award.
2. Covered Persons who are members of the Senior Management
Team for the 2008 and
2009 Compensation Year, shall be awarded a Guaranteed
Retention Award for each of
those Compensation years equal to 75% of such Covered
Person’s 2007 Total Economic
Award.
Effect on Bonus Pool of Mark-to-Market and Realized Losses.
1. The Bonus Pool for any Compensation Year beginning with
the 2008 Compensation Year
will not be affected by the incurrence of any mark-to-market
losses (or gains) or
impairment charges (or reversals thereof) arising from (i) the
CDO portfolio or (ii) super
senior credit derivative transactions that are not part of the
CDO Portfolio.
2. The Bonus Pool for any Compensation Year beginning with
the 2008 Compensation Year

will not be affected by the incurrence of any Realized Losses
(or gains) arising from any
source, subject to limitations set forth in Section 3.07.
Source: Created by case writer based on “AIG Financial
Products Corp. 2008 Employee Retention Plan,”
http://www.house.gov/apps/list/press/financialsvcs_dem/employ
eeretentionplan.pdf (accessed May 26, 2011).
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Page 19 of 19
Part I (worth 70 pts): For each quotation, identify the author
and title of the work and provide a short explanation of the
quote’s significance. Connect the quote to the theme(s) of the
work.
“Lot of people offering her the stuff didn’t think no-arms-no-
legs people had a right to their very own Philosophy and should
be grateful for all that hardware which was going to make their
pitiful amputated lives that much more bearable.”
“You’re better off without it. Drive it out or drown it out, that’s
the sensible thing to do.”

“Isn’t life just one big, long emergency, happening very, very
slowly?”
“When you correct others don’t humiliate them. Show them new
tenderness; then they will humble themselves.”
“You think that would have changed things? The answer is of
course, and for a while, and never.”
“As it goes on, you’re expecting this zen, wholegrain feeling to
steal over you…but what you actually get is…just a different
kind of noise.”
“When the doctors came they said she had died of heart
disease—of the joy that kills.”
Part II (worth 30 pts): Answer three of the five questions below.
Include in your answer as much specific evidence from the
plays as you can.
Explain the irony of the title of Susan Glaspell’s Trifles.
Explain the symbolism of the bird in Trifles.
In what way is the Christmas tree from A Doll’s House
symbolic?
Compare and contrast the relationship between Krogstad and

Mrs. Linde with the Helmers’ relationship.
What is the “miracle” that Nora keeps waiting for in A Doll’s
House, but gives up on when she leaves?

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