My two-cents worth of AIG understanding …

AIG was going great guns under the leadership of Maurice ‘Hank’ Greenberg. The ambitious, political-climber, NY State Attorney General Eliot Spitzer (D.) brought various criminal fraud charges against Hank and AIG starting in 2005. By March 2005 Greenberg was forced to resign. A year later criminal charges were dropped and civil charges then filed, those court room acrobatics are on-going.

While these charges were distracting the AIG leadership, the AIG London Office began writing Credit Default Swaps BIG time, they put AIG on the hook for $2 Trillion (that’s a T not a B). CDS’s are a form of ‘insurance’ that is not regulated (but were given the blessing of Alan Greenspan and Robert Rubin as ‘necessary financial instruments’ when they were in a position to do something about regulating them).

Anyhow … this London office was virtually a rogue outfit and worked way out of the parameters of normal AIG offices. Their CDS commitments have ruined AIG. They priced the CDS premiums too cheaply and ‘insured’ too much money from losses they didn’t foresee. With the downturn of the world economy policy holders called to collect (remember that $2 Trillion figure above) and AIG as we know it ceased to exist.

Curiously, these London Office operators also worked ‘bonus money’ into their working contracts. It is to the London Office that most of this contentious bonus money is being paid. To withhold this money would be trouble in court where punitive fines could be levied against AIG if a judgment came down against. So the current leadership paid.