According to SEC filings, at all times relevant to this action, AIG engaged in the residential mortgage market in at least four significant ways. First, AIG acted as a mortgage originator through its subsidiary American General Finance, Inc., which originated mortgages, including first-lien and second-lien residential sub-prime mortgages. Second, AIG's insurance and financial subsidiaries invested in CDOs and mortgage-backed securities which utilize residential mortgage loans as collateral. Third, AIG acted as a securitizer of sub-prime mortgages, which it packages into various securities, including CDOs, that it marketed to investors . Fourth, AIG, through its subsidiaries, acted as an insurer for investors looking to hedge risk on debt instruments tied to the residential mortgage market.
For example, as early as the summer of 2007, MarketWatch reported that “AIG shares dropped more than 8% in July as investors worried the giant insurer could be hit by losses from declines in the value of subprime mortgages.” Paul Newsome, an analyst at A.G.Edwards, observed that “AIG's shares have fallen significantly in past days. Why we don't exactly know, but investors are telling us that it has something to do with the potential for AIG to suffer significant losses from subprime mortgages.”
Thereafter, on November 7, 2007, AIG filed its Form 10-Q for the third quarter of 2007 ("2007 Third Quarter 10-Q) after the close of the market. In the 2007 Third Quarter Form 10-Q, AIG disclosed that the credit and mortgage crises had resulted in a third quarter loss in its credit default swap portfolio of $352 million and projected higher losses during the fourth quarter of $550 million, of the company’s approximately $500 billion in total exposure.
At or about this same time, Robert Lewis, AIG’s Senior Vice President and. Chief Risk Officer, revealed to investors that: “As of June 30 this year, AIG had a total net exposure across all asset classes of $465 billion.”
Subsequently, on December 5, 2007, AIG held an investor meeting for the purpose of discussing the Company’s exposure to the residential mortgage market. During this meeting, AIG disclosed that the value of its super senior credit default swap portfolio had declined between $1.05 and $1.15 billion since September 30, 2007.
These disclosures, together with the prior disclosures of losses in the 2007 Third Quarter 10-Q, revealed that the total decline in value of AIG's "super senior" credit default swap portfolio November 2007 was between $1.4 and $1.5 billion. AIG later confirmed this disclosure in its Form 8-K/A filed with the SEC on December 7, 2007.
As investors would eventually discover, AIG, through AIGFP, was the counterparty on credit default swaps hedging the risk of failure to pay or other credit condition for at least $527 billion in debt, including over $78 billion in CDOs as of December 31, 2007.