AIG Chief Faces the Music

In yet another sign of how AIG's risk management team was blindsided by its mortgage-related losses, the company announced in March 2007 that it would take on more leverage to ramp up its share repurchases. From then until mid-February of this year, AIG bought back about $6 billion worth of its shares, and now it has suspended the buyback and it's raising all that and far more in new equity offerings.

On Thursday, Sullivan conceded in a statement that the company misjudged market conditions.

"The severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," he wrote, adding that the first-quarter results "do not reflect the underlying strengths and potential of AIG."

Winans adds that "there was a pretty dramatic change in market conditions and clearly the environment in which we launched the share buyback program was dramatically different than the environment we're in now."

Meanwhile, the company reported that its insurance business is also struggling. In the first quarter, AIG paid out a greater amount on losses and expenses in its property and casualty operations than it brought in with premiums. Its combined ratio rose to 96.9% in the period, up from 87.5% last year.

The results led ratings agency Standard & Poor's to downgrade AIG's credit rating, suggesting that raising dividend payments to shareholders may wind up costing them more in borrowing costs in the future. Fitch Ratings also knocked down AIG's credit rating.