1. A.I.

G was the largest United States underwriter of industrial and commercial insurance and the largest independent broker dealer organization in the United States. Insurance is the core of the business but financial services such as retirement, financial and asset management are offered to commercial, institutional, and individual customers. A.I.G has a centralized structure as decision making power is concentrated at the top (the executive), the lines of authority flows from top to bottom. Tight controls are exercised over departments and divisions. A.I.G was considered as a systematic risk, this problem stemmed from a too-interconnected to fail ideology. The organization was interconnected with the monoline insurers, by providing massive unregulated financial guarantee insurance, when housing prices began decreasing at such a rapid rate the credit market collapsed, the effects caused losses within the company which were in turn passed back to its counterparties. The counterparties making a loss would then have to sell their assets which would be downgraded to obtain funds. So if this passes onto another financial institution and that fails then those counterparties would also be put at risk. Therefore, it can be said that if a major company like A.I.G. was to fail and lead to the failure of another company, then the counterparty risk transfers and causes more damage to the financial market. 2. American International Group Capital Market, the holding company of A.I.G, was an unregulated noninsurance entity, which took drastically high risks including credit default swaps. These investors eventually defaulted and AIG was forced to take on the responsibility of covering their clients. This resulted in $40.5 billion in operating losses with A.I.G Capital Market out of a total loss of $100 billion.

The executive leadership were compensated on investment banking standards instead of the insurance community standards. They were paid millions of dollars through bonuses on a yearly basis to which could have led to them potentially increasing risk taking due to these incentives.

A.I.G offered financial services through their financial products division and this was lightly regulated with great risk. For a period of time, A.I.G Financial Products offered and sold insurance against bad investments, which includes protection against interest rate changes or other economic problems, but in the late 1990s they discovered a new way to make money which was collateralized debt obligation. The collateralized debt obligation eventually lost value and AIG received a downgrading of their credit rating.

A.I.G invested in subprime mortgage backed securities and the failure of the subprime market meant that compensation had to be given to holders that were returning their securities. The mortgage backed securities could not be sold and the Federal Reserve assisted AIG in the necessary funding required for repayment to holders.

The executive leadership of A.I.G focused on short-term profits and unrealistic financial gains in front of ethics and transparency to the stakeholders in society. This, in essence, contributed to the collapse of A.I.G and the eventual financial crisis.

Additional quest Counterparty risk is the risk of either party defaulting in an OTC derivative contract (or portfolio of contracts). This is the native form of credit risk, which aects any OTC transaction between two parties, as opposed to reference credit risk which is present in the cash-ows of credit derivatives. Investopedia defines counterparty as the risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract. According to http://cris-creditrisk.com/counterparty-risk.php there was no check and balance system that guaranteed that AIG would have the money for pay outs, so there was not a set aside budget allotted for them. Institutions like Goldman, Barclays, Deutsche Bank, ect,was in a Counterparty risk stalemate with AIG, since the money was owed by AIG but there now was none.