AIGCorporate failures do not come much bigger than the once-mighty AIG. Envied in the insurance world for its consistently big increases in premium income and profit, it was only one of two major players in the sector to enjoy a coveted AAA rating.AIG grew with breathtaking speed to become the world's largest insurance group, reaching a peak market capitalisation of $213 billion in 2001. At the end of the third quarter in 2007, AIG's consolidated assets were $1.072 trillion and shareholders' equity was $104.07 billion; in early 2008, it was the 18th largest public company in the world.Less than a year later it had notched up annual losses of nearly $100 billion and had to be rescued by the US government with a lending facility of $182.5 billion, meaning that it had effectively been nationalised.AIG's weaknesses stemmed in large measure from risk blindness and the overriding need to grow the company and its profits by 15% per year in an often extremely competitive environment.It all started to go wrong when then New York Attorney General Eliot Spitzer accused the company of bid-rigging with insurance brokers. Although nothing was ever proven against AIG, another even more serious allegation was substantiated: that AIGhad produced misleading accounts and used spurious reinsurance policies to inflate profitsOne executive went to jail, and the company paid out $1.6 billion to settle civil charges, while former Chairman Maurice "Hank" Greenberg himself paid $15 million to settle SEC charges that he had altered AIG's records to boost results between 2000 and 2005.The resulting fall in share price and, above all, reduced security ratings were a blow to the company's financial products operation in London. When the AAA rating disappeared, it became more expensive for the company to post cash collateral for its derivative products, destroying profit. And worse was to follow.The really devastating news came next in the shape of the subprime crisis, which destroyed AIG's credit default swap portfolio. An apparently risk-free source of wealth turned almost overnight into a liability of almost unimaginable proportions This is a classic example of risk blindness caused by a desire to pursue profit at any cost. Lessons to be learnt include:•Have strong and independent nonexecutive directors. AIG's NEDs were, overwhelmingly, personal friends of the chairman or loyal colleagues or senior politicians and officials not chosen for their understanding of insurance.•Beware complexity. AIG's structure, like some if its products, was extraordinarily intricate.•Ensure that risk and remuneration are correctly aligned. As with some banks, traders in the financial products division made a killing when profits were high, but (apart from losing some of their bonus money) were not liable when the risks they took went sour. Question 1 What risk events contributed to the problems of AIG?