AIG shows how bad lending infected U.S. financials

As poor lending decisions continue to hurt the economy, one company might show us how bad thing really are as we start 2009. That company is AIG, which has new financial problems. A.I.G. declined to provide details of its new financial problems, citing the “quiet period” just before it issues fourth-quarter results. But some people familiar with A.I.G.’s negotiations said it was on the brink of reporting one of the biggest year-end losses in American history.

Such losses lead to a bigger problem. A further credit rating downgrade would force the company to raise more capital, according to a person involved in the negotiations. The losses appeared to be across the board, unlike the insurer’s losses of last September, which were confined mostly to derivative contracts called credit-default swaps.

A.I.G. has not been writing new credit-default swap contracts, and had tried to put the swaps disaster behind it.

Poor lending decisions were based on what Wall Street was buying, not what made sense, nor what people could afford. As underpinnings give way AIG is left holding part of the empty bag.