UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨      No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer ¨         Accelerated filer ¨          Non-accelerated filer þ         Smaller reporting company ¨

(Do not check if a smaller

reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨      No þ

The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

At November 9, 2009, there were 10,160,012 shares of the registrant’s common stock, $.50 par value, outstanding.

TABLE OF CONTENTS

AVAILABLE INFORMATION

American General Finance Corporation (AGFC) files annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the SEC). The SEC’s website, www.sec.gov, contains these reports and other information that registrants (including AGFC) file electronically with the SEC.

The following reports are available free of charge through our website, www.agfinance.com, as soon as reasonably practicable after we file them with or furnish them to the SEC:

·

Annual Reports on Form 10-K;

·

Quarterly Reports on Form 10-Q;

·

Current Reports on Form 8-K; and

·

amendments to those reports.

The information on our website is not incorporated by reference into this report. The website addresses listed above are provided for the information of the reader and are not intended to be active links.

2

Part I – FINANCIAL INFORMATION

Item 1.  Financial Statements

AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(dollars in thousands)	2009	2008	2009	2008
Revenues Finance charges	$ 520,842	$   652,109	$1,662,025	$1,957,214
Insurance	33,888	39,581	102,926	120,275
Mark to market provision on finance receivables held for sale originated as held for investment	(15,761)	-	(94,170)	-
Investment	12,071	(13,242)	35,449	9,674
Loan brokerage fees	1,887	5,711	4,979	21,850
Net service fees from affiliates	16,516	10,979	19,818	55,854
Other	20,696	(863)	(64,298)	(64,131)
Total revenues	590,139	694,275	1,666,729	2,100,736
Expenses Interest expense	273,890	297,997	791,354	895,092
Operating expenses: Salaries and benefits	100,790	119,424	325,747	377,502
Other operating expenses	75,398	523,540	237,716	740,133
Provision for finance receivable losses	252,315	305,420	859,734	716,619
Insurance losses and loss adjustment expenses	14,237	22,268	47,506	54,841
Total expenses	716,630	1,268,649	2,262,057	2,784,187
Loss before benefit from income taxes	(126,491)	(574,374)	(595,328)	(683,451)
Benefit from Income Taxes	(357,936)	(78,697)	(358,974)	(125,215)
Net Income (Loss)	$ 231,445	$ (495,677)	$ (236,354)	$ (558,236)

See Notes to Condensed Consolidated Financial Statements.

3

AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30,	December 31,
(dollars in thousands)	2009	2008
Assets Net finance receivables: Real estate loans	$14,606,116	$17,727,445
Non-real estate loans	3,301,042	3,969,347
Retail sales finance	1,360,282	2,147,024
Net finance receivables	19,267,440	23,843,816
Allowance for finance receivable losses	(1,341,630)	(1,126,233)
Net finance receivables, less allowance for finance receivable losses	17,925,810	22,717,583
Finance receivables held for sale	804,243	960,432
Investment securities	715,826	696,338
Cash and cash equivalents	1,966,900	844,865
Notes receivable from parent and affiliate	1,905,356	331,473
Other assets	1,231,726	527,801
Total assets	$24,549,861	$26,078,492
Liabilities and Shareholder’s Equity Long-term debt	$19,173,063	$20,482,271
Short-term debt: Note payable to affiliate	-	422,001
Other short-term debt	2,050,000	2,293,672
Insurance claims and policyholder liabilities	359,883	393,583
Other liabilities	388,040	385,090
Accrued taxes	7,875	7,395
Total liabilities	21,978,861	23,984,012
Shareholder’s equity: Common stock	5,080	5,080
Additional paid-in capital	2,120,095	1,517,392
Accumulated other comprehensive loss	(38,598)	(129,145)
Retained earnings	484,423	701,153
Total shareholder’s equity	2,571,000	2,094,480
Total liabilities and shareholder’s equity	$24,549,861	$26,078,492

See Notes to Condensed Consolidated Financial Statements.

4

AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

5

AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(dollars in thousands)	2009	2008	2009	2008
Net income (loss)	$231,445	$(495,677)	$(236,354)	$(558,236)
Other comprehensive gain (loss): Cumulative effect of change in accounting principle	-	-	(29,792)	-
Net unrealized gains (losses) on: Investment securities on which other-than- temporary impairments were taken	22	-	1,056	-
All other investment securities and securities lending	40,097	(55,564)	63,067	(122,015)
Swap agreements	8,890	(18,956)	44,223	(32,930)
Foreign currency translation adjustments	(4,452)	(7,195)	10,054	(7,840)
Income tax effect: Cumulative effect of change in accounting principle	-	-	10,427	-
Net unrealized (gains) losses on: Investment securities on which other-than- temporary impairments were taken	(7)	-	(369)	-
All other investment securities and securities lending	(14,034)	19,448	(22,073)	42,706
Swap agreements	(3,111)	6,635	(15,478)	11,526
Valuation allowance on deferred tax assets for: Investment securities	1,085	-	10,190	-
Swap agreements	3,111	-	15,478	-
Other comprehensive gain (loss), net of tax, before reclassification adjustments	31,601	(55,632)	86,783	(108,553)
Reclassification adjustments included in net income (loss): Realized losses on: Investment securities and securities lending	1,352	35,503	5,791	61,474
Swap agreements	-	598	-	1,793
Income tax effect: Realized losses on: Investment securities and securities lending	(473)	(12,426)	(2,027)	(21,516)
Swap agreements	-	(210)	-	(628)
Reclassification adjustments included in net income (loss), net of tax	879	23,465	3,764	41,123
Other comprehensive gain (loss), net of tax	32,480	(32,167)	90,547	(67,430)
Comprehensive income (loss)	$263,925	$(527,844)	$(145,807)	$(625,666)

See Notes to Condensed Consolidated Financial Statements.

6

AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009

Note 1.  Basis of Presentation

American General Finance Corporation will be referred to as “AGFC” or collectively with its subsidiaries, whether directly or indirectly owned, as the “Company”, “we”, or “our”. AGFC is a wholly owned subsidiary of American General Finance, Inc. (AGFI). AGFI is a direct wholly owned subsidiary of AIG Capital Corporation, a direct wholly owned subsidiary of American International Group, Inc. (AIG).

We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States (GAAP). These statements are unaudited. The statements include the accounts of AGFC and its subsidiaries, all of which are wholly owned. We eliminated all material intercompany accounts and transactions. We made estimates and assumptions that affect amounts reported in our financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from our estimates. We evaluated the effects of and the need to disclose events that occurred subsequent to the balance sheet date through November 9, 2009, the date that we filed our financial statements with the SEC. You should read these statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. To conform to the 2009 presentation, we reclassified certain items in the prior period.

GOING CONCERN CONSIDERATION

In the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, we disclosed the conditions and events that led management to conclude that we would have adequate liquidity to finance and operate our business and repay our obligations for at least the next twelve months.

Liquidity of the Company and AIG

Since the events of September 2008 and through the filing of this report, our traditional borrowing sources, including our ability to issue debt in the capital markets, have remained unavailable, and management does not expect them to become available to us in the near future. Our liquidity concerns, dependency on AIG, results of our operations and the uncertainty regarding the availability of support from AIG have impacted our credit ratings.

In light of AIG’s current financial situation, AIG has been dependent on the facility (the FRBNY Facility) provided by the Federal Reserve Bank of New York (FRBNY) under the Credit Agreement, dated as of September 22, 2008 (as amended, the FRBNY Credit Agreement), between AIG and the FRBNY, and other transactions with the FRBNY and the United States Department of the Treasury (the Department of the Treasury) as its primary sources of liquidity.

On March 2, 2009, the U.S. government issued a statement describing their commitment to continue to work with AIG to maintain its ability to meet its obligations as they become due.

7

In connection with the preparation of AIG’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, AIG management assessed AIG’s ability to continue as a going concern. Based on the U.S. government’s continuing commitment to AIG, AIG’s completed transactions and the other expected transactions with the FRBNY, and AIG management’s plans to stabilize its businesses and dispose of certain of its non-core assets, and after consideration of the risks and uncertainties of such plans, AIG management believes that AIG will have adequate liquidity to finance and operate its businesses, execute its asset disposition plan, and repay its obligations for at least the next twelve months.

It is possible that the actual outcome of one or more of AIG management’s plans could be materially different, or that one or more of AIG management’s significant judgments or estimates about the potential effects of the above-mentioned risks and uncertainties could prove to be materially incorrect or that AIG’s proposed transactions with the FRBNY will not be consummated or fail to achieve their desired objectives. If one or more of these possible outcomes is realized, AIG may need additional U.S. government support to meet its obligations as they become due. If additional support is not available in such circumstances, there could be substantial doubt about AIG’s ability to operate as a going concern. If AIG is not able to meet its obligations as they become due, it will have a negative impact on our business and results of operations and on our ability to borrow funds from AIG, to make our debt payments, and to issue new debt.

Progress on Management’s Plan for Stabilization of the Company and Repayment of Our Obligations as They Become Due

In addition to finance receivable collections, management is exploring additional initiatives to meet our financial and operating obligations. These initiatives include additional on-balance sheet securitizations, portfolio sales, and expense reductions. In addition, we may be able to improve our liquidity position by further reducing our originations of finance receivables. During the first nine months of 2009, we closed 170 branch offices, reduced retail sales financing operations, reduced our number of employees by approximately 1,200 through reductions in force and attrition, and sold $1.7 billion of finance receivables held for sale. In July 2009, we securitized $1.9 billion of real estate loans and received $967.3 million in initial cash proceeds including accrued interest after the sales discount but before expenses. If our sources of liquidity are not sufficient to meet our contractual obligations as they become due over the next twelve months, we will seek additional funding from AIG, which funding would be subject to AIG receiving the consent of the FRBNY. AIG intends to provide such support through November 15, 2010. However, we may implement further measures to preserve our liquidity and capital, including additional on-balance sheet securitizations, portfolio sales, expense reductions, branch closures, and reductions in finance receivable originations. The exact nature and magnitude of any additional measures will be driven by our available resources and needs, prevailing market conditions, and the results of our operations.

8

Management’s Assessment and Conclusion

In assessing our current financial position and developing operating plans for the future, management has made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:

·

the ability and intent of AIG to provide funding to the Company;

·

our ability to comply with our debt covenants;

·

the amount of cash expected to be received from our finance receivable portfolio through collections (including prepayments) and receipt of finance charges, which could be materially different than our estimates;

·

our ability to complete additional on-balance sheet securitizations and portfolio sales;

·

renewed access to debt or general credit markets;

·

adverse credit ratings actions on our debt;

·

the potential adverse effect on the Company relating to intercompany transactions with AIG, including derivatives and intercompany borrowings, if AIG’s liquidity position deteriorates or if AIG is not able to continue as a going concern;

·

constraints on our business resulting from the FRBNY Credit Agreement and other AIG agreements, including limitations on our ability to pursue (and retain proceeds from) certain funding sources, such as additional on-balance sheet securitizations and portfolio sales, without AIG receiving prior consent from the FRBNY;

·

the potential for declines in bond and equity markets;

·

the potential effect on the Company if the capital levels of our regulated and unregulated subsidiaries prove inadequate to support current business plans;

·

the potential loss of key personnel; and

·

the potential for additional unforeseen cash demands or accelerations of obligations.

After consideration of the above factors, primarily AIG’s intention to continue to support us, as expressed in AIG’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, based on our estimates and taking into account the risks and uncertainties of such plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations for at least the next twelve months.

It is possible that the actual outcome of one or more of our plans could be materially different than expected or that one or more of our significant judgments or estimates about the potential effects of the risks and uncertainties could prove to be materially incorrect.

Our condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, nor relating to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

Note 2.  Additional Significant Accounting Policies

INVESTMENT SECURITIES

Valuation

We currently classify substantially all of our investment securities as available-for-sale, which we record at fair value. We adjust related balance sheet accounts to reflect the current fair value of investment securities and record the adjustment, net of tax, in accumulated other comprehensive income (loss) in shareholder’s equity. We record interest receivable on certain investment securities in other assets.

9

We evaluate our investment securities for other-than-temporary impairment. The determination that an investment security has incurred an other-than-temporary impairment in value and the amount of any loss recognized requires the judgment of management and a continual review of our investment securities. We consider an investment security to be a candidate for other-than-temporary impairment if it meets any of the following criteria:

·

trading at a significant (25 percent or more) discount to par, amortized cost (if lower) or cost for an extended period of time (nine consecutive months or longer);

·

the occurrence of a discrete credit event resulting in the issuer defaulting on a material outstanding obligation, the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for court supervised reorganization of insolvent enterprises, or the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than the par value of their claims; or

·

we have determined that we may not realize a full recovery on our investment regardless of the occurrence of one of the foregoing events.

Impairment Policy - Effective April 1, 2009 and Thereafter. If we intend to sell a fixed-maturity security or it is more likely than not that we will be required to sell a fixed-maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to earnings. For all other fixed-maturity securities for which a credit impairment has occurred, the amortized cost is written down to the estimated recovery value with a corresponding charge to earnings. Changes in fair value compared to recovery value, if any, is charged to accumulated other comprehensive income (loss), because this is considered a non-credit impairment. When assessing our intent to sell a fixed-maturity security, or if it is more likely than not that we will be required to sell a fixed-maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sale of securities to meet cash flow needs and sales of securities to capitalize on favorable pricing. We consider severe price declines and the duration of such price declines in our assessment of potential credit impairments. We also modify our modeled outputs for certain securities when we determine that price declines are indicative of factors not comprehended by the cash flow models. In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed-maturity securities that is not foreign exchange related, we generally prospectively accrete into income the difference between the new amortized cost and the expected undiscounted recovery value over the remaining expected holding period of the security.

In assessing whether a credit impairment has occurred for a structured fixed-maturity security, we perform evaluations of expected future cash flows, as required by the authoritative guidance for the recognition of other-than-temporary impairments of fixed-maturity securities. Certain critical assumptions are made with respect to the performance of the securities. When estimating future cash flows for a structured fixed-maturity security (e.g. residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDO), and asset-backed securities (ABS)), management considers historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by asset class:

·

current delinquency rates;

·

expected default rates and timing of such defaults;

·

loss severity and timing of any such recovery;

·

expected prepayment speeds; and

·

ratings of securities underlying structured products.

10

For corporate fixed-maturity securities determined to be credit impaired, management considers the fair value as the recovery value when available information does not indicate that another value is more relevant or reliable. When management identifies information that supports a recovery value other than the fair value, the determination of a recovery value considers scenarios specific to the issue and the security, and may be based upon estimates of outcomes of corporate restructurings, the value of any secondary sources of repayment and the disposition of assets.

Impairment Policy – Prior to April 1, 2009. At each balance sheet date, we evaluated our investment securities holdings that had unrealized losses. When we did not intend to hold such securities until they had recovered their cost basis, based on the circumstances at the date of the evaluation, we recorded the unrealized loss in income. If a loss was recognized from a sale subsequent to a balance sheet date as a result of changes in circumstances, the loss was recognized in the period in which the intent to hold the investment securities to recovery no longer existed. Impairment criteria also considered circumstances of a rapid and severe market valuation decline, such as that recently experienced in the credit markets, in which we could not reasonably assert that the recovery period would be temporary (severity losses). In periods subsequent to the recognition of an other-than-temporary impairment charge for fixed-maturity investment securities which was not credit or foreign exchange related, we generally accreted the discount or amortized the reduced premium resulting from the reduction in cost basis over the remaining life of the investment security.

Revenue Recognition

We recognize interest on interest bearing fixed-maturity investment securities as revenue on the accrual basis. We amortize any premiums or accrete any discounts as a revenue adjustment using the effective interest method. We stop accruing interest revenue when the collection of interest becomes uncertain. We record dividends on equity securities as revenue on ex-dividend dates. We recognize income on mortgage-backed securities as revenue using a constant effective yield based on estimated prepayments of the underlying mortgages. If actual prepayments differ from estimated prepayments, we calculate a new effective yield and adjust the net investment in the security accordingly. We record the adjustment, along with all investment securities revenue, in investment revenues.

Realized Gains and Losses on Investment Securities

We specifically identify realized gains and losses on investment securities and include them in investment revenues.

DERIVATIVE FINANCIAL INSTRUMENTS

All of our derivatives are governed by International Swap and Derivatives Association, Inc. (ISDA) standard Master Agreements. The parties to an ISDA Master Agreement agree to net the amounts payable and receivable under all contracts governed by the ISDA Master Agreement in the event of a contract default by either one of the parties. The ISDA Master Agreement further defines “close-out” netting, or netting upon default, which is the netting of transactions stipulated in the ISDA Master Agreement in case either party is unable to fulfill its obligations going forward. The net exposure by counterparty is determined as the sum of the mid-market values, prior to consideration of non-performance risk, of the derivative transactions governed by a Master Agreement. If the net exposure is from the counterparty to us, we record the derivative asset in other assets on our consolidated balance sheet. If the net exposure is from us to the counterparty, we record the derivative liability in other liabilities on our consolidated balance sheet. We record net unrealized gains and losses on derivative transactions as adjustments to cash flows from operating activities on our consolidated statement of cash flows.

11

We recognize all derivatives on our consolidated balance sheet at their fair value. We estimate the fair value of our derivatives using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates, foreign exchange rates, and the contractual terms of the derivative transactions.

In compliance with the authoritative guidance for fair value measurements, our valuation methodology for derivatives incorporates the effect of our non-performance risk and the non-performance risk of our counterparties. Fair value measurements for derivative liabilities incorporate our own non-performance risk by determining the explicit cost for each counterparty to protect against its net exposure to us at the balance sheet date by reference to observable AGFC credit default swap (CDS) spreads. Fair value measurements for derivative assets incorporate counterparty non-performance risk by determining the explicit cost for us to protect against our net exposure to each counterparty at the balance sheet date by reference to observable counterparty CDS spreads. The cost of credit protection is determined under a discounted present value approach considering the market levels for CDS spreads, the mid market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to us by an independent third-party provider of aggregated broker quotes for CDS spreads. We utilize a London Interbank Offered Rate (LIBOR) based interest rate curve to derive our discount rates. A CDS is a derivative contract which allows the transfer of third party credit risk from one party to the other. The buyer of the CDS pays an upfront and/or annual premium to the seller. The seller’s payment obligation is triggered by the occurrence of a credit event under a specified reference security and is determined by the loss on that specified reference security. The present value of the amount of the annual and/or upfront premium, the CDS spread, therefore represents a market based expectation of the likelihood that the specified reference party will fail to perform on the reference obligation, a key market observable indicator of non-performance risk. While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, we believe this approach provides a reasonable estimate of the fair value of the derivative assets and liabilities, including consideration of the impact of non-performance risk.

We designate each derivative as:

·

a hedge of the variability of cash flows that we will receive or pay in connection with a recognized asset or liability (a “cash flow” hedge);

·

a hedge of the fair value of a recognized asset or liability (a “fair value” hedge); or

·

a derivative that does not qualify as either a cash flow or fair value hedge.

We record the effective portion of the changes in the fair value of a derivative that is highly effective and is qualified and designated as a cash flow hedge in accumulated other comprehensive income (loss), net of tax, until earnings are affected by the variability of cash flows of the hedged transaction. We record the effective portion of the changes in the fair value of a derivative that is highly effective and is qualified and designated as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, in current period earnings in other revenues. We record changes in the fair value of a derivative that does not qualify as either a cash flow or fair value hedge and changes in the fair value of hedging instruments measured as ineffectiveness in current period earnings in other revenues.

12

We formally document all relationships between derivative hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions and our method to assess ineffectiveness. We link all derivatives that we designate as cash flow or fair value hedges to specific assets and liabilities on the balance sheet. For certain types of hedge relationships meeting specific criteria, the FASB issued authoritative guidance which allows a “shortcut” method that provides for an assumption of zero ineffectiveness. Under this method, the periodic assessment of effectiveness is not required. The Company’s use of this method was limited to interest rate swaps that hedged certain borrowings, the last of which matured in mid-June 2008. For other AGFC cash flow and fair value hedges, we perform and document an initial prospective assessment of hedge effectiveness using regression analysis to demonstrate that the hedge is expected to be highly effective in future periods. Subsequently, on at least a quarterly basis or sooner if necessary, we perform a prospective hedge effectiveness assessment to demonstrate the continued expectation that the hedge will be highly effective in future periods and a retrospective hedge effectiveness assessment to demonstrate that the hedge was effective in the most recent period. For fair value hedges, ineffectiveness is the difference between the change in fair value included in the assessment of hedge effectiveness related to the gain or loss on the derivative and the change in the hedged item related to the risks being hedged. For cash flow hedges, ineffectiveness is the amount by which the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical derivative.

We discontinue hedge accounting prospectively when:

·

the derivative is no longer effective in offsetting changes in the cash flows or fair value of a hedged item;

·

we sell, terminate, or exercise the derivative and/or the hedged item or they expire; or

·

we change our objectives or strategies and designating the derivative as a hedging instrument is no longer appropriate.

For discontinued asset and liability fair value hedges, we begin amortizing the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level yield method. For cash flow hedges that are discontinued for reasons other than the forecasted transaction is not probable of occurring, we begin reclassifying the accumulated other comprehensive income (loss) adjustment to earnings when earnings are affected by the hedged item.

Note 3.  Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued an accounting standard that changed the accounting for business combinations in a number of ways, including broadening the transactions or events that are considered business combinations; requiring an acquirer to recognize 100 percent of the fair value of certain assets acquired, liabilities assumed, and noncontrolling (i.e., minority) interests; and recognizing contingent consideration arrangements at their acquisition-date fair values with subsequent changes in fair value generally reflected in income, among other changes. We adopted the new business combination standard for business combinations for which the acquisition date is on or after January 1, 2009. Our adoption of the new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows, but will affect the future accounting for business combinations, if any, as well as goodwill impairment assessments.

In March 2008, the FASB issued an accounting standard that requires enhanced disclosures about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect our consolidated financial condition, results of operations, and cash flows. We adopted the new standard on January 1, 2009. See Notes 2 and 10 for related disclosures.

13

In April 2009, the FASB issued an accounting standard that requires companies to disclose in interim financial statements information about the fair value of financial instruments (including methods and significant assumptions used). The standard also requires the disclosure of summarized financial information for interim reporting periods. We adopted the new standard on April 1, 2009. See Note 17 for these disclosures.

In April 2009, the FASB issued an accounting standard that requires a company to recognize the credit component of an other-than-temporary impairment of a fixed-maturity security in income and the non-credit component in accumulated other comprehensive income when the company does not intend to sell the security or it is more likely than not that the company will not be required to sell the security prior to recovery. The standard also changed the threshold for determining when an other-than-temporary impairment has occurred on a fixed-maturity security with respect to intent and ability to hold until recovery. The standard does not change the recognition of other-than-temporary impairment for equity securities. The standard requires additional disclosures in interim and annual reporting periods for fixed- maturity and equity securities. See Note 7 for the expanded disclosures. We adopted the new standard on April 1, 2009 and recorded an after-tax cumulative effect adjustment to increase retained earnings by $19.6 million with an offsetting increase to accumulated other comprehensive loss as of April 1, 2009. The cumulative effect adjustment resulted in an increase of approximately $30.2 million in the amortized cost of bonds, which has the effect of significantly reducing the accretion of investment income over the remaining life of the underlying bonds, beginning in the second quarter of 2009.

In April 2009, the FASB issued an accounting standard that provides guidance for estimating the fair value of assets and liabilities when the volume and level of activity for an asset or liability have significantly decreased and for identifying circumstances that indicate a transaction is not orderly. The new standard also requires extensive additional fair value disclosures. The adoption of the new standard on April 1, 2009, did not have a material effect on our consolidated financial condition, results of operations, or cash flows. See Note 17 for the enhanced disclosures.

In May 2009, the FASB issued an accounting standard that requires disclosure of the date through which a company evaluated the need to disclose events that occurred subsequent to the balance sheet date and whether that date represents the date the financial statements were issued or were available to be issued. We adopted the new standard for the period ended June 30, 2009. The adoption of the new standard did not affect our consolidated financial condition, results of operations, or cash flows.

In June 2009, the FASB issued an accounting standard addressing transfers of financial assets that removed the concept of a qualifying special-purpose entity (QSPE) from the FASB Accounting Standards Codification (ASC) and removed the exception from applying the consolidation rules to QSPEs. The new standard is effective for interim and annual periods beginning on January 1, 2010 for us. Earlier application is prohibited. We are assessing the effect of the new standard on our consolidated financial condition, results of operations, and cash flows.

In June 2009, the FASB issued an accounting standard that amends the rules addressing consolidation of variable interest entities to an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly affect the entity’s economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The new standard also requires enhanced financial reporting by enterprises involved with variable interest entities. The new standard is effective for interim and annual periods beginning on January 1, 2010 for us. Earlier application is prohibited. We are assessing the effect of the new standard on our consolidated financial condition, results of operations, and cash flows.

In August 2009, the FASB issued an accounting standards update to clarify how the fair value measurement principles should be applied to measuring liabilities carried at fair value. The update explains how to prioritize market inputs in measuring liabilities at fair value and what adjustments to market inputs are appropriate for debt obligations that are restricted from being transferred to another

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obligor. The update was effective beginning October 1, 2009 for us. We are assessing the effect of adopting the update on our consolidated financial condition, results of operations, and cash flows.

Note 4.  Finance Receivables

Components of net finance receivables by type were as follows:

September 30, 2009	Real	Non-Real	Retail
(dollars in thousands)	Estate Loans	Estate Loans	Sales Finance	Total
Gross receivables	$14,609,172	$3,565,568	$1,504,313	$19,679,053
Unearned finance charges and points and fees	(169,659)	(338,639)	(165,069)	(673,367)
Accrued finance charges	96,884	42,024	18,394	157,302
Deferred origination costs	18,180	29,822	-	48,002
Premiums, net of discounts	51,539	2,267	2,644	56,450
Total	$14,606,116	$3,301,042	$1,360,282	$19,267,440

December 31, 2008	Real	Non-Real	Retail
(dollars in thousands)	Estate Loans	Estate Loans	Sales Finance	Total
Gross receivables	$17,723,654	$4,301,707	$2,353,395	$24,378,756
Unearned finance charges and points and fees	(201,908)	(431,989)	(244,195)	(878,092)
Accrued finance charges	119,351	53,690	34,155	207,196
Deferred origination costs	22,030	40,961	-	62,991
Premiums, net of discounts	64,318	4,978	3,669	72,965
Total	$17,727,445	$3,969,347	$2,147,024	$23,843,816

Included in the September 30, 2009 table above are finance receivables associated with the securitization that remain on our balance sheet totaling $1.9 billion at September 30, 2009. See Note 5 and Note 10 for further discussion regarding our securitization transaction.

Unused credit limits extended to customers by the Company or by AIG Federal Savings Bank (AIG Bank), a non-subsidiary affiliate (whose private label finance receivables are fully participated to the Company), totaled $182.7 million at September 30, 2009 and $6.5 billion at December 31, 2008. All unused credit limits, in part or in total, can be cancelled at the discretion of the Company or AIG Bank. During the nine months ended September 30, 2009, our active retail merchant relationships declined from 21,500 to 329 reflecting the suspension of dealer operating agreements, which may be reactivated in the future. As a result of this reduction, our unused credit limits decreased significantly in the second and third quarters of 2009.

Due to the significant disruption in the U.S. residential mortgage and credit markets, AIG’s liquidity issues, and our reduced liquidity, we are pursuing sales of certain finance receivables as an alternative funding source. During the three and nine months ended September 30, 2009, we transferred $427.4 million and $1.7 billion, respectively, of real estate loans from finance receivables to finance receivables held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future. As of September 30, 2009, it is more likely than not that we will hold the remainder of the finance receivable portfolio for the foreseeable future, as management’s intent is to focus on alternative funding sources, including on-balance sheet securitizations.

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Information regarding troubled debt restructuring (TDR) finance receivables (which are all real estate loans) was as follows:

September 30,
(dollars in thousands)	2009	2008
TDR net finance receivables	$1,247,601	$346,471
TDR net finance receivables that have a valuation allowance	$1,247,601	$346,471
Allowance for TDR finance receivable losses	$   157,760	$  20,060

We have no commitments to lend additional funds on these TDR finance receivables.

TDR average net receivables and finance charges recognized on TDR finance receivables when compared to the same periods for the previous year were as follows:

Three Months Ended September 30,
(dollars in thousands)	2009	2008
TDR average net receivables	$1,229,887	$294,670
TDR finance charges recognized	$     15,388	$    3,966

Nine Months Ended September 30,
(dollars in thousands)	2009	2008
TDR average net receivables	$1,044,071	$156,787
TDR finance charges recognized	$     39,790	$    5,976

On March 4, 2009, the United States Department of the Treasury issued uniform guidance for loan modifications to be utilized by the mortgage industry in connection with the Home Affordable Modification Program (HAMP). The HAMP is designed to assist certain eligible homeowners who are at risk of foreclosure by applying loan modification requirements in a stated order of succession until their monthly payments are lowered to a specified percentage target of their monthly gross income. The modification guidelines require the servicer to use a uniform loan modification process to provide a borrower with sustainable monthly payments.

As part of a Securities Purchase Agreement between AIG and the United States Department of the Treasury dated April 17, 2009, AIG agreed that its subsidiaries that were eligible would join the HAMP and would comply with the HAMP guidelines. On July 17, 2009, MorEquity, Inc. (MorEquity), a direct subsidiary of AGFC, entered into a Commitment to Purchase Financial Instrument and Servicer Participation Agreement (the Agreement) with the Federal National Mortgage Association as financial agent for the United States, which provides for participation in the HAMP. MorEquity entered into the Agreement as the servicer with respect to our centralized real estate finance receivables, with an effective date of September 1, 2009, in order for MorEquity to prepare its systems to implement the HAMP.

During third quarter 2009, MorEquity began soliciting customers who may be eligible to be considered for loan modifications pursuant to the HAMP. As of September 30, 2009, no HAMP modifications have been completed due to MorEquity’s recent entry into the HAMP.

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Our historical loan modification approach has been to determine whether and what type of modification is warranted on an individual loan basis.  In third quarter 2009, MorEquity made modifications on mortgage loans with outstanding principal balances totaling $77.0 million and our branch business segment made modifications on mortgage loans with outstanding principal balances totaling $68.6 million pursuant to our historical approach. In contrast to our historical loan modification approach, the HAMP utilizes a prescriptive approach. With MorEquity’s entry into the HAMP, our historical loan modification approach became a secondary program for MorEquity customers who do not qualify for a modification pursuant to HAMP. MorEquity’s participation in the HAMP will increase our expenses to the extent that MorEquity’s costs to modify loans pursuant to the HAMP are higher than they would be pursuant to our historical loan modification approach. These amounts may be partially offset by fees that the United States Department of the Treasury pays to MorEquity, to the extent that MorEquity qualifies for those fees. We also anticipate increased servicing expenses in connection with the HAMP to accommodate the processing of HAMP modifications, and to comply with HAMP reporting, escrow and other requirements.

Our branch operations are preparing to enter the HAMP in fourth quarter 2009, with a planned effective date in second quarter 2010. Our branch operations are making systems changes necessary to implement the HAMP in second quarter 2010.

Note 5.  On-Balance Sheet Securitization Transactions

The Company, as part of our overall funding strategy and as part of our efforts to support our liquidity from sources other than our traditional capital market sources, has transferred certain finance receivables into a variable interest entity (VIE) for a securitization transaction. This transaction closed on July 30, 2009. Our securitization transaction did not satisfy the requirements for accounting sale treatment because under ASC 860, Transfers and Servicing, the securitization trust did not meet the QSPE criteria and did not have the right to freely pledge or exchange the transferred assets. The securitization trust did not meet the QSPE criteria due to the significant discretion permitted for working out and disposing of defaulted real estate loans and disposing of any foreclosed real estate. Since the transaction did not meet all of the criteria for accounting sale treatment, the securitized assets and related liabilities are included in our financial statements and are accounted for as secured borrowings.

The Company has limited continued involvement with the finance receivables that have been included in the securitization transaction. The securitization transaction, discussed in more detail below, utilizes a third-party servicer to service the finance receivables. These finance receivables have been legally isolated and are only available for payment of the debt and other obligations issued or arising in the securitization transaction. The cash and cash equivalent balances relating to the securitization transaction are used only to support the on-balance sheet securitization transaction and are recorded as restricted cash in other assets. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in our securitization transaction. The asset-backed debt has been issued by a consolidated VIE. Refer to Note 10 for further discussion regarding this VIE and the related assets and liabilities included in our financial statements as part of our secured debt arrangement.

The securitization transaction included the sale of approximately $2.0 billion of our centralized real estate loans to a wholly-owned special purpose vehicle, Third Street Funding LLC (Third Street), that concurrently formed a trust to issue tranches of notes totaling $1.6 billion in initial principal balance of trust certificates to Third Street in exchange for the loans. Also in connection with the securitization, Third Street sold to a third party at a discount $1.2 billion of senior certificates with a 5.75% coupon. Third Street received initial cash proceeds, including accrued interest after the sales discount but before expenses, of $967.3 million and retained subordinated and residual interest trust certificates. As a result of the combination of over-collateralization and the retained subordinated and residual interest trust certificates, the Company has an economic interest in approximately 40% of the assets transferred.

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Initial pricing assumptions for the behavior of these servicing-released mortgage loans were a 10% annualized constant prepayment and a 3% annualized constant default rate. Based on the initial assumptions above, and the fact that the tranches of senior certificates were issued at various discounts, the yield on the senior certificates would range from 13.79% to 18.13% throughout the life of the transaction and the expected weighted average remaining life of the senior certificates would be 2.2 years.

Note 6.  Allowance for Finance Receivable Losses

Changes in the allowance for finance receivable losses were as follows:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(dollars in thousands)	2009	2008	2009	2008
Balance at beginning of period	$1,315,718	$ 794,377	$1,126,233	$ 593,532
Provision for finance receivable losses	252,315	305,420	859,734	716,619
Charge-offs	(233,915)	(151,497)	(662,331)	(385,847)
Recoveries	13,412	10,892	39,255	34,888
Transfers to finance receivables held for sale*	(5,900)	-	(21,261)	-
Balance at end of period	$1,341,630	$ 959,192	$1,341,630	$ 959,192

*

During the three months and nine months ended September 30, 2009, we decreased the allowance for finance receivable losses as a result of the transfers of real estate loans ($427.4 million and $1.7 billion, respectively) from finance receivables to finance receivables held for sale due to management’s intent to no longer hold these finance receivables for the foreseeable future.

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Note 7.  Investment Securities

Cost/amortized cost, unrealized gains and losses, and fair value of investment securities by type were as follows:

(a)

Represents the amount of other-than-temporary impairment losses in accumulated other comprehensive loss, which, starting April 1, 2009, were not included in earnings. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

(b)

Excludes interest in a limited partnership that we account for using the equity method ($1.4 million).

We adopted a new accounting standard on April 1, 2009 and recorded a cumulative effect adjustment to increase the cost/amortized cost of investment securities by $30.2 million.

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December 31, 2008	Cost/ Amortized	Unrealized	Unrealized	Fair
(dollars in thousands)	Cost	Gains	Losses	Value
Fixed maturity investment securities: Bonds: U.S. government and government sponsored entities	$    8,135	$  1,732	$    -	$  9,867
Obligations of states, municipalities, and political subdivisions	234,100	3,585	(8,891)	228,794
Corporate debt	423,155	4,505	(40,596)	387,064
Mortgage-backed, asset-backed, and collateralized: RMBS	23,070	56	(5,107)	18,019
CMBS	13,848	-	(1,364)	12,484
CDO/ABS	26,646	-	(4,280)	22,366
Total	728,954	9,878	(60,238)	678,594
Preferred stocks	5,000	-	(172)	4,828
Other long-term investments (a)	7,144	2,665	(230)	9,579
Common stocks	1,617	9	(109)	1,517
Total	$742,715	$12,552	$(60,749)	$694,518

(a)

Excludes interest in a limited partnership that we account for using the equity method ($1.8 million).

Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position at September 30, 2009 were as follows:

September 30, 2009	12 Months or Less			More Than 12 Months			Total
(dollars in thousands)	Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
Bonds: U.S. government and government sponsored entities	$     527	$       (26)		$      -	$      -		$       527	$       (26)
Obligations of states, municipalities, and political subdivisions	5,158	(12)		2,149	(50)		7,307	(62)
Corporate debt	14,031	(1,209)		90,321	(7,621)		104,352	(8,830)
RMBS	2,073	(2,479)		14,450	(3,696)		16,523	(6,175)
CMBS	6,775	(10,184)		4,859	(2,141)		11,634	(12,325)
CDO/ABS	10,259	(8,061)		8,859	(999)		19,118	(9,060)
Total	38,823	(21,971)		120,638	(14,507)		159,461	(36,478)
Other long-term investments	2,034	(638)		-	-		2,034	(638)
Common stocks	166	(70)		-	-		166	(70)
Total	$41,023	$(22,679)		$120,638	$(14,507)		$161,661	$(37,186)

Management reviews all securities in an unrealized loss position on a quarterly basis to determine the ability and intent to hold such securities to recovery, which could be maturity, if necessary, by performing an evaluation of expected cash flows. Management considers factors such as the Company's investment strategy, liquidity requirements, overall business plans, and recovery periods for securities in previous periods of broad market declines. For fixed-maturity securities with significant declines, management performed extended fundamental credit analysis on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other market available data.

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We did not recognize in earnings the unrealized losses on fixed-maturity securities at September 30, 2009, because management neither intends to sell the securities nor does it believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Furthermore, management expects to recover the entire amortized cost basis of these securities (that is, they are not credit impaired).

At September 30, 2009, the $7.6 million of unrealized losses on corporate securities exceeding 12 months were derived from 34 separate bonds from various asset class groups, including Investment Grade, Private Placement and High Yield bonds. The vast majority were rated investment grade. The market value to book value ratio of these securities was approximately 92% as of September 30, 2009. Only three securities were rated below investment grade. The book value on these securities was $15.6 million and the associated unrealized loss was $1.7 million. The Company did not consider these securities in an unrealized loss position to be credit impaired at September 30, 2009.

At September 30, 2009, of the five RMBS representing $3.7 million of unrealized losses exceeding 12 months, four securities were backed by prime jumbo collateral and one was a re-securitization of an Alt-A collateral-backed deal. Prior to the second quarter of 2009, the surveillance process indicated that there was no risk of credit impairment for these five securities. Since then, the performance of the RMBS market has worsened and the prime jumbo market has been hit especially hard by ongoing home price declines in California. The resulting increase in delinquencies combined with increasingly severe assumptions in our surveillance process have resulted in two of the five securities being classified as other-than-temporarily impaired as of June 30, 2009. Of the impaired securities, one is currently rated A by Standard & Poor’s (S&P) and the other is rated B by Fitch Ratings and BBB by S&P. All five securities’ estimated recovery values exceed September 30, 2009 market prices.

Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position at December 31, 2008 were as follows:

December 31, 2008	12 Months or Less			More Than 12 Months			Total
(dollars in thousands)	Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
Bonds: Obligations of states, municipalities, and political subdivisions	$114,264	$  (8,287)		$    7,434	$     (604)		$121,698	$  (8,891)
Corporate debt	176,740	(25,988)		92,821	(14,608)		269,561	(40,596)
RMBS	7,414	(1,104)		9,022	(4,003)		16,436	(5,107)
CMBS	5,959	(1,275)		1,922	(89)		7,881	(1,364)
CDO/ABS	10,570	(2,092)		5,390	(2,188)		15,960	(4,280)
Total	314,947	(38,746)		116,589	(21,492)		431,536	(60,238)
Preferred stocks	4,828	(172)		-	-		4,828	(172)
Other long-term investments	299	(230)		-	-		299	(230)
Common stocks	258	(109)		-	-		258	(109)
Total	$320,332	$(39,257)		$116,589	$(21,492)		$436,921	$(60,749)

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Fair value and unrealized losses on investment securities by type and length of time in a continuous unrealized loss position for which an other-than-temporary impairment was recognized and only the amount related to a credit loss was recognized in earnings, were as follows:

September 30, 2009	12 Months or Less			More Than 12 Months			Total
(dollars in thousands)	Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
Bonds: RMBS	$   817	$(2,048)		$4,855	$(1,215)		$5,672	$(3,263)
CMBS	1,741	(4,634)		-	-		1,741	(4,634)
Total	$2,558	$(6,682)		$4,855	$(1,215)		$7,413	$(7,897)

The net realized gains (losses) on investment securities and securities lending were as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2009	2008		2009	2008
Total other-than-temporary impairment losses	$(2,527)	$  (4,960)		$(5,761)	$(30,812)
Portion of loss recognized in accumulated other comprehensive loss	1,372	-		1,334	-
Net impairment losses recognized in net income (loss)	(1,155)	(4,960)		(4,427)	(30,812)
Other net realized gains (losses) on investment securities and securities lending	(197)	(30,543)		(1,364)	(30,662)
Total net realized gains (losses) on investment securities and securities lending	$(1,352)	$(35,503)		$(5,791)	$(61,474)

Credit impairments recognized in earnings on investment securities for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive loss were as follows:

Three Months Ended September 30, 2009	Three Months Ended	April 1, 2009 to
(dollars in thousands)	September 30, 2009	September 30, 2009 (a)
Balance at beginning of period	$4,184	$3,845
Additions: Due to other-than-temporary impairments: Not previously recognized	(215)	124
Previously recognized	360	360
Reductions: Realized due to sales	(101)	(101)
Realized due to intention to sell	-	-
Due to increase in expected cash flows	-	-
Balance at end of period	$4,228	$4,228

(a)

We adopted a new accounting standard on April 1, 2009 that requires us to recognize the credit component of an other-than-temporary impairment in earnings.

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The fair values of investment securities sold or redeemed and the resulting realized gains, realized losses, and net realized gains (losses) were as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2009	2008		2009	2008
Fair value	$1,779	$136,325		$44,742	$173,327
Realized gains	$     49	$    2,044		$  2,090	$    2,672
Realized losses	-	(1,098)		(3,207)	(1,658)
Net realized gains (losses)	$     49	$       946		$ (1,117)	$    1,014

Contractual maturities of fixed-maturity investment securities were as follows:

September 30, 2009	Fair	Amortized
(dollars in thousands)	Value	Cost
Fixed maturities, excluding mortgage-backed securities: Due in 1 year or less	$  12,596	$  12,359
Due after 1 year through 5 years	131,398	127,971
Due after 5 years through 10 years	235,347	229,680
Due after 10 years	253,647	245,516
Mortgage-backed securities	67,407	94,415
Total	$700,395	$709,941

Actual maturities may differ from contractual maturities since borrowers may have the right to prepay obligations. The Company may sell investment securities before maturity to achieve corporate requirements and investment strategies.

Bonds on deposit with insurance regulatory authorities had fair values of $12.1 million at September 30, 2009 and $12.5 million at December 31, 2008.

Note 8.  Other Assets

Other assets include restricted cash of $19.5 million relating to the securitization transaction (see Note 5) and $156.3 million which was deposited in a trust to be used to pay off certain debt coming due in October 2009.

Note 9.  Related Party Transactions

On March 24, 2009, AGFC made a loan of $800.0 million to AIG under a demand note agreement between AGFC and AIG dated March 24, 2009. On August 11, 2009, AGFC made an additional loan of $750.0 million to AIG under the March 24, 2009 demand note agreement. Interest is payable monthly, and principal and interest also are payable on demand at any time, provided that notice of demand is delivered to AIG at least one business day prior to the date payment is demanded. AIG may repay principal and interest at any time without penalty. The cash used to fund these loans came from asset sale and securitization proceeds, operations, insurance subsidiary dividends, and the AIG capital contribution received in March 2009. These loans are subject to a subordination agreement in favor of the FRBNY and were made as short-term investment sources for excess cash and to facilitate AIG’s obligation to manage its excess cash and excess cash held by its subsidiaries under the FRBNY Facility. At September 30,

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2009, notes receivable from AIG totaled $1.6 billion. Interest revenue on these notes receivable from AIG totaled $2.3 million and $3.9 million for the three months and nine months ended September 30, 2009, respectively.

Notes receivable from AGFI totaled $354.4 million at September 30, 2009, and $331.5 million at December 31, 2008. Interest revenue on notes receivable from AGFI totaled $3.5 million and $10.2 million for the three months and nine months ended September 30, 2009, respectively.

In addition, we are party to cost sharing agreements, including tax sharing arrangements, with AIG. Generally, these agreements provide for the allocation of corporate costs based upon a proportional allocation of costs to all AIG subsidiaries. We also reimburse AIG Bank for costs associated with the remediation program related to a Supervisory Agreement with the Office of Thrift Supervision (OTS) dated June 7, 2007 (the Supervisory Agreement). See Note 16 for further information on the Supervisory Agreement.

All of our derivative financial instruments are with AIG Financial Products Corp. (AIGFP), a non-subsidiary affiliate that receives credit support from AIG, its parent. See Note 11 for further information on these derivatives.

Note 10.  VIEs

ASC 810, Consolidations, includes guidance for determining when to consolidate certain entities that do not have sufficient equity that is at risk to allow the entity to finance its activities without additional subordinated financial support. A VIE is consolidated by its primary beneficiary, which is the party or group of related parties that absorbs a majority of the expected losses of the VIE, receives the majority of the expected residual returns of the VIE, or both. We determine whether we are the primary beneficiary based on a qualitative assessment of the VIE. This includes a review of the VIE’s capital structure, contractual relationships and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued, and our interests in the entity that either create or absorb variability. We evaluate the design of the VIE, and the related risks the entity was designed to expose to the variable interest holders, in determining whether to consolidate.

Consolidated VIE. We used a special purpose entity to issue asset-backed securities in a securitization transaction to investors. The asset-backed securities are backed by the expected cash flows from securitized real estate loans. These real estate loans are available only for payment of the debt issued in connection with the securitization transaction. We recorded this transaction as an “on-balance sheet” secured financing because the transfer of these real estate loans to the trust did not qualify as a sale under ASC 860, Transfers and Servicing. We evaluated the securitization trust under ASC 810, determined that this entity is a VIE of which we are the primary beneficiary, and therefore consolidated such entity. We retained interests in our securitization transaction, including senior and subordinated securities issued by the VIE, rights to cash held for the benefit of the securitization investors, and residual interests. We retained credit risk in our securitization because our retained interests include the most subordinated interest in the securitized assets, which are the first to absorb credit losses on the securitized assets. These retained interests are primarily comprised of $786.3 million, or 40%, of the assets transferred in connection with the on-balance sheet securitization completed on July 30, 2009. We expect that any credit losses in the pool of securitized assets would likely be limited to our retained interests. We generally have no obligation to repurchase or replace securitized assets that subsequently become delinquent or are otherwise in default. See Note 5 for further discussion regarding the securitization transaction.

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Finance receivables that collateralize the secured debt of the VIE remain on our balance sheet and therefore are not included in the VIE assets shown in the following table. These finance receivables totaled $1.9 billion at September 30, 2009. The total consolidated VIE assets and liabilities associated with our securitization transaction were as follows:

(dollars in thousands)	September 30, 2009	December 31, 2008
Assets:
Cash and cash equivalents (a)	$  19,525	$      -
Liabilities
Long-term debt	$937,318	$      -

(a)

The cash and cash equivalent balances relating to the securitization transaction are used only to support the on-balance sheet securitization transaction and are recorded in other assets.

We had no off-balance sheet exposure associated with our variable interests in our consolidated VIE. No additional support to this VIE beyond what was previously contractually required has been provided during the year. Consolidated interest expense related to this VIE for the three and nine months ended September 30, 2009 was $30.9 million.

Unconsolidated VIEs. We also have variable interests in VIEs, primarily related to debt issuance, of which we are not the primary beneficiary, and therefore did not consolidate such entities. We calculate our maximum exposure to loss primarily to be the amount of debt issued to or equity invested in the VIE. Our on-balance sheet maximum exposure to loss associated with these VIEs was $349.3 million at September 30, 2009 and December 31, 2008. Our off-balance sheet maximum exposure to loss associated with these VIEs was zero at September 30, 2009 and December 31, 2008.

Note 11.  Derivative Financial Instruments

AGFC uses derivative financial instruments in managing the cost of its debt by mitigating its exposures (interest rate and currency) in conjunction with specific long-term debt issuances and has used them in managing its return on finance receivables held for sale, but is neither a dealer nor a trader in derivative financial instruments. AGFC’s derivative financial instruments consist of interest rate, cross currency, cross currency interest rate, and equity-indexed swap agreements.

While all of our interest rate, cross currency, cross currency interest rate, and equity-indexed swap agreements mitigate economic exposure of related debt, not all of these swap agreements currently qualify as cash flow or fair value hedges under GAAP. At September 30, 2009, equity-indexed debt and related swaps were immaterial.

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Fair value of derivative instruments presented on a gross basis (excludes the effect of master netting arrangements) by type and the effect of master netting arrangements were as follows:

September 30, 2009	Notional	Hedging	Non-Designated Hedging
(dollars in thousands)	Amount	Instruments	Instruments
Derivatives – Other Assets:
Cross currency and cross currency interest rate	$1,870,500	$ 176,802	$127,344
Equity-indexed	13,772	-	1,521
Total excluding effect of master netting arrangements	1,884,272	176,802	128,865
Effect of master netting arrangements	N/A*	(72,069)	(51,908)
Total	N/A	$ 104,733	$  76,957
Derivatives – Other Liabilities: Interest rate	$1,000,000	$   79,216	$       -
Cross currency and cross currency interest rate	622,300	44,761	446
Total excluding effect of master netting arrangements	1,622,300	123,977	446
Effect of master netting arrangements	N/A	(123,977)	-
Total	N/A	$        -	$      446

* not applicable

The amount of gain (loss) for cash flow hedges recognized in accumulated other comprehensive loss (effective portion), reclassified from accumulated other comprehensive loss into other revenues (effective portion), and recognized in other revenues (ineffective portion) were as follows:

Three Months Ended September 30, 2009	Effective			Ineffective
(dollars in thousands)	AOCL*	From AOCL to Revenues		Revenues
Interest rate	$  3,576	$  1,499		$   (848)
Cross currency and cross currency interest rate	35,065	28,252		(6,171)
Total	$38,641	$29,751		$(7,019)

* accumulated other comprehensive loss

Nine Months Ended September 30, 2009	Effective			Ineffective
(dollars in thousands)	AOCL*	From AOCL to Revenues		Revenues
Interest rate	$30,991	$ 10,972		$  (2,646)
Cross currency and cross currency interest rate	12,977	(11,227)		(20,694)
Total	$43,968	$    (255)		$(23,340)

* accumulated other comprehensive loss

We immediately recognize the portion of the gain or loss in the fair value of a derivative instrument in a cash flow hedge that represents hedge ineffectiveness in current period earnings. We recognized losses related to ineffectiveness of $7.0 million for the three months ended September 30, 2009 and $23.3 million for the nine months ended September 30, 2009 in other revenues. We recognized losses related to ineffectiveness of $7.2 million for the three months ended September 30, 2008 and $34.5 million for the nine months ended September 30, 2008. We included all components of each derivative’s gain or loss in the assessment of hedge effectiveness.

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At September 30, 2009, we expect $6.2 million of the deferred net loss on cash flow hedges in accumulated other comprehensive loss to be reclassified to earnings during the twelve months ending September 30, 2010. For the nine months ended September 30, 2009, there were no instances in which we reclassified amounts from accumulated other comprehensive loss to earnings as a result of a discontinuance of a cash flow hedge due to it becoming probable that the original forecasted transaction would not occur at the end of the originally specified time period.

The amount recognized in other revenues for the fair value hedge that no longer qualifies for hedge accounting, the related hedged item, and the non-designated hedging instruments were as follows:

Three Months Ended September 30, 2009	Fair Value Hedge			Non-Designated Hedging
(dollars in thousands)	Derivative	Hedged Item		Instruments
Cross currency and cross currency interest rate	$      -	$      -		$52,168
Equity-indexed	-	-		76
Total	$      -	$      -		$52,244

Nine Months Ended September 30, 2009	Fair Value Hedge			Non-Designated Hedging
(dollars in thousands)	Derivative	Hedged Item		Instruments
Cross currency and cross currency interest rate	$(13,641)	$14,926		$41,093
Equity-indexed	-	-		197
Total	$(13,641)	$14,926		$41,290

Due to the de-designation of our fair value hedge on April 1, 2009, we recorded a derivative adjustment gain of $48.8 million, partially offset by a foreign exchange loss of $29.9 million for the three months ended September 30, 2009 and a derivative adjustment gain of $75.6 million, partially offset by a foreign exchange loss of $68.6 million for the nine months ended September 30, 2009. We recognized net gains of $1.3 million during the nine months ended September 30, 2009 in other revenues related to the ineffective portion of our fair value hedging instruments. We recognized net gains related to the ineffective portion of our fair value hedging instruments of $1.7 million during the three months ended September 30, 2008 and $2.7 million during the nine months ended September 30, 2008 in other revenues. We included all components of each derivative’s gain or loss in the assessment of hedge effectiveness.

AGFC is exposed to credit risk if counterparties to swap agreements do not perform. AGFC regularly monitors counterparty credit ratings throughout the term of the agreements. AGFC’s exposure to market risk is limited to changes in the value of swap agreements offset by changes in the value of the hedged debt. Our valuation methodology for derivatives incorporates the effect of our non-performance risk and the non-performance risk of our counterparties. We recorded a $3.4 million credit valuation adjustment gain in other revenues on our non-designated derivative and a $0.4 million credit valuation adjustment gain in other comprehensive income on our cash flow hedges for the three months ended September 30, 2009. We recorded a $33.5 million credit valuation adjustment loss in other revenues on our fair value derivative that no longer qualifies for hedge accounting and a $46.4 million credit valuation adjustment loss in other comprehensive income on our cash flow hedges for the nine months ended September 30, 2009.

In third quarter 2008, we recognized a cumulative benefit in other revenues of $27.6 million resulting from the correction of an accounting error. In connection with the January 1, 2008 implementation of the authoritative guidance for the fair value measurements for derivatives, we recorded a loss in other revenues of $39.4 million in first quarter 2008 and a gain of $4.9 million in second quarter 2008 for the credit valuation adjustments on our fair value and cash flow hedges. Upon further review, we concluded

27

that the credit valuation adjustments on our cash flow hedges should have been recorded to accumulated other comprehensive income. Therefore, in third quarter 2008, we increased other revenues by $27.6 million ($30.5 million loss recorded in first quarter 2008 and $2.9 million gain recorded in second quarter 2008) and decreased accumulated other comprehensive income by $17.9 million. The impact of this error did not have a material effect on our financial condition or results of operations for the previously reported periods in 2008.

We recorded a credit valuation adjustment gain of $10.1 million in other revenues for the three months ended September 30, 2008. The credit valuation adjustment gain of $10.1 million includes the cumulative benefit of $27.6 million, partially offset by a loss of $17.5 million on fair value hedges. We recorded a $6.9 million credit valuation adjustment loss on our fair value hedges and a $27.6 million credit valuation adjustment loss on our cash flow hedges for the nine months ended September 30, 2008, of which $13.3 million represented the transition amount at January 1, 2008, from the adoption of the authoritative guidance for the fair value measurements for derivatives. If we do not exit these derivatives prior to maturity and no counterparty defaults occur, the credit valuation adjustment will result in no impact to earnings over the life of the agreements. We do not anticipate exiting these derivatives prior to maturity. In addition, these derivatives were with AIGFP, a non-subsidiary affiliate that receives credit support from AIG, its parent.

See Note 17 for information on how we determine fair value on our derivative financial instruments.

Note 12.  Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss were as follows:

	September 30,	December 31,
(dollars in thousands)	2009	2008
Net unrealized (losses) gains on: Swap agreements	$(34,094)	$  (78,317)
Investment securities	4,942	(31,328)
Foreign currency translation adjustments	(6,388)	(16,442)
Retirement plan liabilities adjustment	(3,058)	(3,058)
Accumulated other comprehensive loss	$(38,598)	$(129,145)

As of September 30, 2009, we have recognized $4.8 million in accumulated other comprehensive loss related to investment securities for which the credit-related portion of an other-than-temporary impairment has been recognized in earnings. In addition, accumulated other comprehensive loss related to investment securities includes a valuation allowance of $10.2 million against the related deferred tax assets.

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Note 13.  Income Taxes

Benefit from income taxes increased for the three and nine months ended September 30, 2009 when compared to the same periods in 2008 reflecting (1) AIG’s projection that it will have sufficient taxable income in 2009 to use our current year estimated tax losses; and (2) a tax return election made by certain of the Company’s affiliates. As a result, the Company reclassified $362.8 million of deferred tax assets related to the 2009 net operating losses to a current tax receivable and the valuation allowance related to these deferred tax assets was reversed. This receivable will be settled with AIG in accordance with our tax sharing agreement. AIG’s projection of taxable income depends on its anticipated completion of specific transactions in fourth quarter 2009. Our benefit from income taxes could materially change if the AIG transactions are not completed in fourth quarter 2009. We do not anticipate cash receipts due to us for calendar year 2009 under the AIG tax sharing agreement to be paid until late 2010.

As of September 30, 2009, we had a deferred tax asset valuation allowance of $420.8 million to reduce net deferred tax assets to amounts we considered more likely than not (a likelihood of more than 50 percent) to be realized. After the valuation allowance, we had a net deferred tax asset of $10.0 million, which reflected the net deferred tax asset of our Puerto Rico subsidiary and the tax effect of unrealized losses on certain of our available-for-sale investment securities, which management believes is more likely than not of being realized because of our intent and ability to hold these securities until the unrealized losses are recovered. Realization of our net deferred tax asset depends on the ability of the subsidiary to generate sufficient taxable income of the appropriate character within the carryforward periods of the jurisdictions in which the net operating and capital losses, deductible temporary differences and credits were generated.

Note 14.  Supplemental Cash Flow Information

Supplemental disclosure of non-cash activities was as follows:

Nine Months Ended September 30,
(dollars in thousands)	2009	2008
Transfer of finance receivables held for investment to finance receivables held for sale (prior to deducting allowance for finance receivable losses)	$1,732,943	$       -

Note 15.  Segment Information

We have three business segments:  branch, centralized real estate, and insurance. We define our segments by types of financial service products we offer, nature of our production processes, and methods we use to distribute our products and to provide our services, as well as our management reporting structure.

In our branch business segment, we:

·

originate secured and unsecured non-real estate loans;

·

originate real estate loans secured by first or second mortgages on residential real estate, which may be closed-end accounts or open-end home equity lines of credit and are generally considered non-conforming;

·

purchase retail sales contracts and provide revolving retail sales financing services arising from the retail sale of consumer goods and services by retail merchants; and

·

purchase private label finance receivables originated by AIG Bank under a participation agreement.

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To supplement our lending and retail sales financing activities, we have historically purchased portfolios of real estate loans, non-real estate loans, and retail sales finance receivables originated by other lenders. We also offer credit and non-credit insurance and ancillary products to all eligible branch customers.

In our centralized real estate business segment, we:

·

service a portfolio of residential real estate loans generated through:

·

portfolio acquisitions from third party lenders;

·

our mortgage origination subsidiaries;

·

refinancing existing mortgages;

·

advances on home equity lines of credit; or

·

correspondent relationships;

·

originate and have historically acquired residential real estate loans for transfer to the centralized real estate servicing center;

·

originated residential real estate loans directly with consumers for sale to investors with servicing released to the purchaser; and

·

originated residential real estate loans through mortgage brokers for sale to investors with servicing released to the purchaser.

In our insurance business segment, we write and reinsure credit life, credit accident and health, credit-related property and casualty, and credit involuntary unemployment insurance covering our customers and the property pledged as collateral through products that the branch business segment offers to its customers. We also offer non-credit insurance products.

The following tables display information about the Company’s segments as well as reconciliations to the condensed consolidated financial statement amounts.

Three Months Ended September 30, 2009	Branch	Centralized Real Estate	Insurance	All		Consolidated
(dollars in thousands)	Segment	Segment	Segment	Other	Adjustments	Total
Revenues: External: Finance charges	$425,047	$ 99,727	$      -	$  (3,932)	$       -	$ 520,842
Insurance	119	-	33,784	(15)	-	33,888
Other	(9,191)	7,400	15,165	24,252	(2,217)	35,409
Intercompany	17,226	455	(13,436)	(4,245)	-	-
Pretax (loss) income	(17,629)	(71,850)	15,207	(50,442)	(1,777)	(126,491)

Three Months Ended September 30, 2008	Branch	Centralized Real Estate	Insurance	All		Consolidated
(dollars in thousands)	Segment	Segment	Segment	Other	Adjustments	Total
Revenues: External: Finance charges	$ 495,734	$ 157,803	$      -	$  (1,428)	$      -	$ 652,109
Insurance	134	-	38,740	707	-	39,581
Other	(6,457)	4,099	23,501	16,945	(35,503)	2,585
Intercompany	19,212	567	(15,429)	(4,350)	-	-
Pretax (loss) income	(181,552)	(134,890)	5,567	(226,526)	(36,973)	(574,374)

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Nine Months Ended September 30, 2009	Branch	Centralized Real Estate	Insurance	All		Consolidated
(dollars in thousands)	Segment	Segment	Segment	Other	Adjustments	Total
Revenues: External: Finance charges	$1,321,688	$ 350,903	$      -	$(10,566)	$       -	$1,662,025
Insurance	367	-	102,488	71	-	102,926
Other	(27,605)	(82,927)	44,503	(25,537)	(6,656)	(98,222)
Intercompany	52,176	1,813	(40,791)	(13,198)	-	-
Pretax (loss) income	(187,944)	(266,664)	40,544	(177,206)	(4,058)	(595,328)

Nine Months Ended September 30, 2008	Branch	Centralized Real Estate	Insurance	All		Consolidated
(dollars in thousands)	Segment	Segment	Segment	Other	Adjustments	Total
Revenues: External: Finance charges	$1,482,716	$ 488,012	$      -	$(13,514)	$      -	$1,957,214
Insurance	409	-	117,283	2,583	-	120,275
Other	(15,744)	36,341	75,632	(11,508)	(61,474)	23,247
Intercompany	57,800	1,585	(46,701)	(12,684)	-	-
Pretax (loss) income	(125,690)	(194,091)	58,762	(356,783)	(65,649)	(683,451)

The “All Other” column includes:

·

corporate revenues and expenses such as management and administrative revenues and expenses and derivatives adjustments and foreign exchange gain or loss on foreign currency denominated debt that are not considered pertinent in determining segment performance; and

·

revenues from our foreign subsidiary, Ocean Finance and Mortgages Limited (Ocean), which we acquired in January 2007.

The “Adjustments” column includes:

·

realized gains (losses) on investment securities, securities lending, and commercial mortgage loans;

·

interest expense related to re-allocations of debt among business segments; and

·

provision for finance receivable losses due to redistribution of amounts provided for the allowance for finance receivable losses.

Note 16.  Supervisory Agreement

As disclosed in AGFC’s Current Report on Form 8-K dated June 7, 2007, AIG Bank, Wilmington Finance, Inc. (WFI) (a wholly owned subsidiary of AGFC), and AGFI entered into the Supervisory Agreement with the OTS on June 7, 2007. The Supervisory Agreement pertains to certain mortgage loans originated in the name of AIG Bank by WFI from July 2003 through early May 2006 pursuant to a mortgage services agreement between WFI and AIG Bank. The mortgage services agreement was terminated in February 2006.

Pursuant to the terms of the Supervisory Agreement, AIG Bank, WFI, and AGFI implemented a financial remediation program whereby certain borrowers may be provided loans on more affordable terms and/or reimbursed for certain fees. Pursuant to the requirements of the Supervisory Agreement, we engaged the services of an external consultant to monitor, evaluate, and periodically report to the OTS on our

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compliance with the remediation program. The Supervisory Agreement will remain in effect until terminated, modified or suspended in writing by the OTS. Failure to comply with the terms of the Supervisory Agreement could result in the initiation of formal enforcement action by the OTS.

AIG Bank, WFI, and AGFI also made a commitment to donate a total of $15 million over a three-year period to certain not-for-profit organizations to support their efforts to promote financial literacy and credit counseling. As of September 30, 2009, we have donated $8.8 million to this cause.

In accordance with WFI’s surviving obligations under the mortgage services agreement with AIG Bank, we established a reserve of $128 million (pretax) as a reduction to net service fees from affiliates as of March 31, 2007, reflecting management’s then best estimate of the expected costs of the remediation program. After completion of discussions with the OTS and the execution of the Supervisory Agreement, we recorded an additional reserve of $50 million, inclusive of the $15 million donation commitment, in second quarter 2007. As of September 30, 2009, we have made reimbursements of $58.1 million for payments made by AIG Bank to refund certain fees to customers pursuant to the terms of the Supervisory Agreement. As of September 30, 2009, we have also reduced the reserve by $84.6 million ($17.6 million in 2009, $66.6 million in 2008, and $0.4 million in 2007 as an addition to net service fees from affiliates) resulting from our subsequent evaluations of our loss exposure. As the estimate is based on judgments and assumptions made by management, the actual cost of the remediation program may differ from our estimate.

Note 17.  Fair Value Measurements

The fair value of a financial instrument is the amount that would be received if an asset were to be sold or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The degree of judgment used in measuring the fair value of financial instruments generally correlates with the level of pricing observability. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments traded in other-than-active markets or that do not have quoted prices have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. An other-than-active market is one in which there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the asset or liability being valued. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is listed on an exchange or traded over-the-counter or is new to the market and not yet established, the characteristics specific to the transaction, and general market conditions.

Management is responsible for the determination of the value of the financial assets and financial liabilities carried at fair value and the supporting methodologies and assumptions. Third party valuation service providers are employed to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When the valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a quote, which is generally non-binding, or by employing widely accepted internal valuation models.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates, and other market-observable information as of the measurement date as well as the specific attributes of the security being valued, including its term interest rate, credit rating, industry sector, and other issue or issuer-specific information. When market transactions or other market

32

observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, we may validate the reasonableness of fair values by comparing information obtained from the valuation service providers to other third party valuation sources for selected securities. We also validate prices for selected securities obtained from brokers through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.

FAIR VALUE HIERARCHY

Beginning January 1, 2008, we measure and classify assets and liabilities recorded at fair value in the consolidated balance sheet in a hierarchy for disclosure purposes consisting of three “Levels” based on the observability of inputs available in the market place used to measure the fair values. In general, we determine the fair value measurements classified as Level 1 based on inputs utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. We generally obtain market price data from exchange or dealer markets. We do not adjust the quoted price for such instruments. Assets measured using Level 1 inputs include certain investment securities (including certain actively traded listed common stock).

We determine the fair value measurements classified as Level 2 based on inputs utilizing other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets and liabilities measured on a recurring basis using Level 2 inputs include certain investment securities (including certain government and agency securities, most investment-grade and high-yield corporate bonds, certain asset-backed securities, and state and municipal obligations), certain cash equivalents, short-term investments, and derivative assets and liabilities. We outsource the investment of our liquid assets to AIG, which, as agent, invests the liquid assets of the Company together with other AIG subsidiaries and maintains these assets in common pools. Our interest in these jointly owned investments that are disclosed in the fair value table represents negotiable instruments, predominantly commercial paper. The prices for trades of similar and identical instruments are observable and therefore are consistent with Level 2 in the fair value hierarchy.

Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Assets measured using Level 3 inputs include certain investment securities (including certain corporate debt, asset-backed securities, and private equity investments), finance receivables held for sale, and real estate owned.

In certain cases, the inputs we use to measure the fair value of an asset may fall into different levels of the fair value hierarchy. In such cases, we determine the level in the fair value hierarchy within which the fair value measurement in its entirety falls based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

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Fair Value Measurements – Recurring Basis

On a recurring basis, we measure the fair value of investment securities, cash and cash equivalents, short-term investments, and derivative assets and liabilities. The following tables present information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 and indicate the fair value hierarchy based on the levels of inputs we utilized to determine such fair value. Fair value measurements on a recurring basis were as follows:

September 30, 2009	Fair Value Measurements Using			Counterparty	Total Carried
(dollars in thousands)	Level 1	Level 2	Level 3	Netting	At Fair Value
Assets Investment securities: Bonds: U.S. government and government sponsored entities	$     -	$    9,526	$     -	$       -	$    9,526
Obligations of states, municipalities, and political subdivisions	-	237,345	-	-	237,345
Corporate debt	-	323,486	62,631	-	386,117
RMBS	-	31,821	303	-	32,124
CMBS	-	4,201	8,461	-	12,662
CDO/ABS	-	6,943	15,678	-	22,621
Total	-	613,322	87,073	-	700,395
Preferred stocks	-	3,991	-	-	3,991
Other long-term investments	-	-	7,099	-	7,099
Common stocks	2,714	255	6	-	2,975
Total	2,714	617,568	94,178	-	714,460
Cash and cash equivalents in AIG pools	-	41,023	-	-	41,023
Short-term investments	-	221	-	-	221
Derivatives	-	304,146	1,521	(123,977)	181,690
Total	$2,714	$962,958	$95,699	$(123,977)	$937,394
Liabilities
Derivatives	$     -	$124,423	$       -	$(123,977)	$       446

December 31, 2008	Fair Value Measurements Using			Counterparty	Total Carried
(dollars in thousands)	Level 1	Level 2	Level 3	Netting	At Fair Value
Assets Investment securities: Bonds	$     -	$615,572	$63,022	$      -	$678,594
Preferred stocks	-	4,828	-	-	4,828
Other long-term investments	-	-	9,579	-	9,579
Common stocks	1,510	-	7	-	1,517
Total	1,510	620,400	72,608	-	694,518
Cash and cash equivalents in AIG pools	-	85,041	-	-	85,041
Short-term investments	-	169	-	-	169
Derivatives	-	213,392	1,341	(199,902)	14,831
Total	$1,510	$919,002	$73,949	$(199,902)	$794,559
Liabilities
Derivatives	$     -	$206,740	$    -	$(199,902)	$    6,838

Other long-term investments exclude our interest in a limited partnership that we account for using the equity method ($1.4 million at September 30, 2009 and $1.8 million at December 31, 2008).

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The following tables present changes during the three and nine months ended September 30, 2009 and 2008 in Level 3 assets and liabilities measured at fair value on a recurring basis:

Three Months Ended September 30, 2009		Net (losses) gains included in:
(dollars in thousands)	Balance at beginning of period	Other revenues	Other comprehensive income	Purchases sales, issuances, settlements	Transfers in (out) of Level 3 (a)	Other	Balance at end of period
Investment securities: Bonds: Corporate debt	$68,515	$    (1)	$ 5,752	$     (439)	$(11,196)	$ -	$62,631
RMBS	326	(2)	230	(35)	(220)	4	303
CMBS	9,578	(11)	(1,081)	(38)	-	13	8,461
CDO/ABS	13,809	(109)	2,371	(474)	-	81	15,678
Total	92,228	(123)	7,272	(986)	(11,416)	98	87,073
Other long-term investments	6,504	(129)	876	(152)	-	-	7,099
Common stocks	7	-	(1)	-	-	-	6
Total investment securities	98,739	(252)	8,147	(1,138)	(11,416)	98	94,178
Derivatives	831	678	-	12	-	-	1,521
Total assets	$99,570	$ 426	$ 8,147	$(1,126)	$(11,416)	$98	$95,699

(a)

During the three months ended September 30, 2009, we transferred from Level 3 to Level 2 approximately $11.4 million of bonds for which the significant inputs used to measure their fair value became observable.

Three Months Ended September 30, 2008		Net (losses) gains included in:
(dollars in thousands)	Balance at beginning of period	Other revenues	Other comprehensive income	Purchases sales, issuances, settlements	Transfers in (out) of Level 3	Balance at end of period
Investment securities	$  85,949	$    (24)	$(2,668)	$  (1,081)	$ 4,117	$86,293
Securities lending	22,288	8,755	(3,297)	(25,663)	(2,083)	-
Derivatives	877	(331)	-	54	-	600
Total assets	$109,114	$8,400	$(5,965)	$(26,690)	$ 2,034	$86,893
Derivatives	$     -	$    -	$    -	$     -	$    -	$    -
Total liabilities	$     -	$    -	$    -	$     -	$    -	$    -

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Nine Months Ended September 30, 2009		Net (losses) gains included in:
(dollars in thousands)	Balance at beginning of period	Other revenues	Other comprehensive income	Purchases sales, issuances, settlements	Transfers in (out) of Level 3 (a)	Other (b)	Balance at end of period
Investment securities: Bonds: Corporate debt	$47,323	$     48	$ 12,533	$   (553)	$  3,280	$    -	$62,631
RMBS	394	(15)	(509)	(35)	(220)	688	303
CMBS	9,633	41	(6,615)	(338)	-	5,740	8,461
CDO/ABS	5,672	(1,665)	(12,835)	(1,709)	12,563	13,652	15,678
Total	63,022	(1,591)	(7,426)	(2,635)	15,623	20,080	87,073
Other long-term investments	9,579	88	(2,199)	(369)	-	-	7,099
Common stocks	7	-	(1)	-	-	-	6
Total investment securities	72,608	(1,503)	(9,626)	(3,004)	15,623	20,080	94,178
Derivatives	1,341	106	-	74	-	-	1,521
Total assets	$73,949	$(1,397)	$  (9,626)	$(2,930)	$15,623	$20,080	$95,699

(a)

During the nine months ended September 30, 2009, we transferred from Level 2 to Level 3 approximately $15.8 million of bonds for which the significant inputs used to measure their fair value became unobservable.

(b)

We adopted a new accounting standard on April 1, 2009 and recorded a cumulative effect adjustment to increase the cost/amortized cost of level 3 investment securities by $20.0 million.

Nine Months Ended September 30, 2008		Net (losses) gains included in:
(dollars in thousands)	Balance at beginning of period	Other revenues	Other comprehensive income	Purchases sales, issuances, settlements	Transfers in (out) of Level 3 (a)	Balance at end of period
Investment securities	$67,823	$     58	$(6,919)	$  (2,591)	$27,922	$86,293
Securities lending	27,212	-	-	(27,212)	-	-
Derivatives	839	(222)	-	(17)	-	600
Total assets	$95,874	$  (164)	$(6,919)	$(29,820)	$27,922	$86,893
Derivatives	$     563	$2,712	$    -	$  (3,275)	$    -	$    -
Total liabilities	$     563	$2,712	$    -	$  (3,275)	$    -	$    -

(a)

During the nine months ended September 30, 2008, we transferred from Level 2 to Level 3 approximately $27.9 million of investment securities, primarily bonds, for which the significant inputs used to measure their fair value became unobservable.

There were no unrealized gains or losses recognized in earnings on instruments held at September 30, 2009 or 2008.

We used observable and/or unobservable inputs to determine the fair value of positions that we have classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category presented in the table above may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

36

Fair Value Measurements – Nonrecurring Basis

We measure the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. These assets include real estate owned and finance receivables held for sale.

At September 30, 2009, we had assets measured at fair value on a non-recurring basis on which we recorded impairment charges during the three and nine months ended September 30, 2009 as follows: