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 12, 2010, there were 10,160,012 shares of the registrant’s common stock, $.50 par value, outstanding.

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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

·

any 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.

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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)	2010	2009	2010	2009
Revenues Finance charges	$ 444,414	$ 520,842	$1,365,274	$1,662,025
Insurance	30,753	33,888	93,634	102,926
Finance receivables held for sale originated as held for investment	-	(3,485)	20,418	(86,420)
Investment	12,965	12,071	31,231	35,449
Other	24,562	26,823	107,627	(47,251)
Total revenues	512,694	590,139	1,618,184	1,666,729
Expenses Interest expense	277,577	273,890	800,956	791,354
Operating expenses: Salaries and benefits	123,111	100,790	320,450	325,747
Other operating expenses	95,819	75,398	262,598	237,716
Provision for finance receivable losses	119,227	252,315	358,802	859,734
Insurance losses and loss adjustment expenses	9,304	14,237	36,134	47,506
Total expenses	625,038	716,630	1,778,940	2,262,057
Loss before benefit from income taxes	(112,344)	(126,491)	(160,756)	(595,328)
Benefit from Income Taxes	(90,585)	(357,936)	(195,682)	(358,974)
Net (Loss) Income	$  (21,759)	$ 231,445	$     34,926	$ (236,354)

See Notes to Condensed Consolidated Financial Statements.

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AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

	September 30,	December 31,
(dollars in thousands)	2010	2009
Assets Net finance receivables: Real estate loans (includes loans of consolidated VIEs of $2.7 billion in 2010 and $1.9 billion in 2009)	$13,667,039	$14,001,905
Non-real estate loans	2,803,688	3,128,886
Retail sales finance	624,919	1,084,582
Net finance receivables	17,095,646	18,215,373
Allowance for finance receivable losses (includes allowance of consolidated VIEs of $161.8 million in 2010 and $70.3 million in 2009)	(1,403,980)	(1,516,298)
Net finance receivables, less allowance for finance receivable losses	15,691,666	16,699,075
Finance receivables held for sale	-	687,969
Investment securities	797,277	733,263
Cash and cash equivalents	467,205	1,292,621
Notes receivable from parent and affiliate	1,274,731	2,002,810
Restricted cash (includes restricted cash of consolidated VIEs of $34.6 million in 2010 and $20.4 million in 2009)	251,706	50,497
Other assets	1,391,009	1,121,362
Total assets	$19,873,594	$22,587,597
Liabilities and Shareholder’s Equity Long-term debt (includes debt of consolidated VIEs of $1.2 billion in 2010 and $900.1 million in 2009)	$16,725,418	$17,475,107
Short-term debt	-	2,050,000
Insurance claims and policyholder liabilities	323,317	350,874
Other liabilities	376,435	329,698
Accrued taxes	6,706	6,304
Total liabilities	17,431,876	20,211,983
Shareholder’s equity: Common stock	5,080	5,080
Additional paid-in capital	2,141,777	2,121,777
Accumulated other comprehensive income	13,024	1,846
Retained earnings	281,837	246,911
Total shareholder’s equity	2,441,718	2,375,614
Total liabilities and shareholder’s equity	$19,873,594	$22,587,597

See Notes to Condensed Consolidated Financial Statements.

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AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended September 30,
(dollars in thousands)	2010	2009
Cash Flows from Operating Activities Net income (loss)	$     34,926	$   (236,354)
Reconciling adjustments: Provision for finance receivable losses	358,802	859,734
Depreciation and amortization	114,499	94,435
Deferral of finance receivable origination costs	(27,903)	(25,550)
Deferred income tax charge (benefit)	347	(1,501)
Origination of finance receivables held for sale	-	(4,319)
Sales and principal collections of finance receivables originated as held for sale	-	7,448
Net loss on mark to market provision and sales of finance receivables originated as held for sale	-	548
Mark to market provision on finance receivables held for sale originated as held for investment	-	94,170
Net loss on sales of finance receivables held for sale originated as held for investment	-	16,246
Net realized losses on investment securities	7,740	5,791
Change in other assets and other liabilities	(53,434)	(107,548)
Writedowns and net loss on sales of real estate owned	32,369	41,653
Change in insurance claims and policyholder liabilities	(27,557)	(33,700)
Change in taxes receivable and payable	(201,777)	(375,271)
Change in accrued finance charges	30,522	42,168
Change in restricted cash	(6,970)	951
Other, net	848	7,825
Net cash provided by operating activities	262,412	386,726
Cash Flows from Investing Activities Finance receivables originated or purchased	(1,089,316)	(1,708,175)
Principal collections on finance receivables	2,446,708	3,643,092
Affiliates contributed by AGFI to AGFC	466	-
Net cash paid in acquisition of Ocean Finance and Mortgages Limited	-	(29,535)
Sales and principal collections on finance receivables held for sale originated as held for investment	37,764	1,755,202
Investment securities purchased	(74,942)	(32,211)
Investment securities called and sold	45,973	71,878
Investment securities matured	5,070	5,610
Change in notes receivable from parent and affiliate	728,079	(1,573,883)
Change in restricted cash	(194,262)	(19,525)
Proceeds from sales of real estate owned	164,180	165,679
Other, net	(6,587)	(16,013)
Net cash provided by investing activities	2,063,133	2,262,119
Cash Flows from Financing Activities Proceeds from issuance of long-term debt	3,413,968	952,005
Repayment of long-term debt	(4,243,831)	(2,438,249)
Change in short-term debt	(2,342,201)	(643,137)
Capital contributions from parent	21,929	602,580
Net cash used for financing activities	(3,150,135)	(1,526,801)
Effect of exchange rate changes	(826)	(9)
(Decrease) increase in cash and cash equivalents	(825,416)	1,122,035
Cash and cash equivalents at beginning of period	1,292,621	844,865
Cash and cash equivalents at end of period	$   467,205	$1,966,900

See Notes to Condensed Consolidated Financial Statements.

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AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(dollars in thousands)	2010	2009	2010	2009
Net (loss) income	$(21,759)	$231,445	$ 34,926	$(236,354)
Other comprehensive (loss) gain: Cumulative effect of change in accounting principle	-	-	-	(29,792)
Net unrealized gains (losses) on: Investment securities on which other-than- temporary impairments were taken	1,365	22	8,289	1,056
All other investment securities	12,323	40,097	32,387	63,067
Swap agreements	(31,736)	8,890	(29,682)	44,223
Foreign currency translation adjustments	6,595	(4,452)	(3,877)	10,054
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	(478)	(7)	(2,901)	(369)
All other investment securities	(4,312)	(14,034)	(11,335)	(22,073)
Swap agreements	11,108	(3,111)	10,389	(15,478)
Foreign currency translation adjustments	3,656	-	3,656	-
Valuation allowance on deferred tax assets for: Investment securities	5,014	1,085	13,266	10,190
Swap agreements	(11,108)	3,111	(10,389)	15,478
Foreign currency translation adjustments	(3,656)	-	(3,656)	-
Other comprehensive (loss) gain, net of tax, before reclassification adjustments	(11,229)	31,601	6,147	86,783
Reclassification adjustments included in net (loss) income: Realized losses on: Investment securities	637	1,352	7,740	5,791
Income tax effect: Realized losses on: Investment securities	(223)	(473)	(2,709)	(2,027)
Reclassification adjustments included in net (loss) income, net of tax	414	879	5,031	3,764
Other comprehensive (loss) gain, net of tax	(10,815)	32,480	11,178	90,547
Comprehensive (loss) income	$(32,574)	$263,925	$ 46,104	$(145,807)

See Notes to Condensed Consolidated Financial Statements.

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AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholder’s Equity

(Unaudited)

Nine Months Ended September 30,
(dollars in thousands)	2010	2009
Common stock Balance at beginning of period	$       5,080	$       5,080
Balance at end of period	5,080	5,080
Additional paid-in capital Balance at beginning of period	2,121,777	1,517,392
Capital contributions from parent and other	20,000	602,704
Balance at end of period	2,141,777	2,120,096
Accumulated other comprehensive income (loss) Balance at beginning of period	1,846	(129,145)
Change in net unrealized gains (losses): Investment securities and securities lending	44,737	55,635
Swap agreements	(29,682)	44,223
Foreign currency translation adjustments	(3,877)	10,054
Cumulative effect of change in accounting principle, net of tax	-	(19,365)
Other comprehensive gain, net of tax	11,178	90,547
Balance at end of period	13,024	(38,598)
Retained earnings Balance at beginning of period	246,911	701,153
Net income (loss)	34,926	(236,354)
Cumulative effect of change in accounting principle, net of tax	-	19,623
Balance at end of period	281,837	484,422
Total shareholder’s equity	$2,441,718	$2,571,000

See Notes to Condensed Consolidated Financial Statements.

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AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2010

Note 1.  Basis of Presentation

American General Finance Corporation (AGFC, or collectively with its subsidiaries, whether directly or indirectly owned, the Company, we, or our) 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 of America (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 condensed consolidated 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 12, 2010, 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, 2009. To conform to the 2010 presentation, we reclassified certain items in the prior period.

In third quarter 2010, we recorded out of period adjustments in salaries and benefits related to prior quarters and years, which increased operating expenses by $20.5 million for the three months ended September 30, 2010 and $19.1 million for the nine months ended September 30, 2010. These adjustments related to $14.6 million for the three and nine months ended September 30, 2010 of certain pension costs under a non-qualified plan covering certain of our employees for the service period of 2001 to 2010 and $5.9 million for the three months ended September 30, 2010 and $4.5 million for the nine months ended September 30, 2010 of certain medical expenses relating to our self-insured medical plans for 2009 and 2010.

In second and third quarters of 2010, we recorded out of period adjustments related to prior quarters and years, which decreased change in benefit reserves by $2.8 million for the three and six months ended June 30, 2010, $4.9 million for the three months ended September 30, 2010, and $7.7 million for the nine months ended September 30, 2010. These adjustments related to the correction of a valuation error related to an assumed block of annuities.

In the first quarter of 2010, we re-examined our accounting for a second quarter 2009 de-designated trade and determined that our method for amortizing the debt basis adjustments related to hedge accounting for this second quarter 2009 de-designated trade contained two errors. The debt basis adjustment to be amortized incorrectly included an accounting adjustment on the hedged debt. Secondly, the amortization method did not take into account all cash flows on the debt when calculating the effective yield amortization. In addition, we did not record the foreign exchange translation on the unamortized debt basis. As a result of these errors, we recorded an out-of-period adjustment in the first quarter of 2010, which reduced other revenues by $8.2 million during the three months ended March 31, 2010.

After evaluating the quantitative and qualitative aspects of these corrections, management has determined that our current and prior period financial statements were not materially misstated. Furthermore, management believes that these adjustments will not be material to our consolidated results of operations for the year ended December 31, 2010.

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In third quarter 2010, we revised our condensed consolidated statement of cash flows to change the classification of the change in real estate owned. We had historically included the change in real estate owned in cash flows from investing activities. After further review, management concluded that the appropriate reporting was to: (1) exclude the properties acquired from principal collections on finance receivables in cash flows from investing activities; (2) include the cash proceeds from the sale or disposition of properties in cash flows from investing activities; and (3) include the writedowns and net loss on the sales of real estate owned in cash flows from operating activities. This revision had the effect of increasing the previously reported cash flows provided by operating activities by $40.3 million for the nine months ended September 30, 2009, $53.0 million for the year ended December 31, 2009, $4.5 million for the three months ended March 31, 2010, and $14.2 million for the six months ended June 30, 2010 and decreasing the previously reported cash flows provided by investing activities by the same amounts.

In third quarter 2010, we also revised our condensed consolidated statement of cash flows to change the classification of deferred debt issue costs. We had historically included deferred debt issue costs in cash flows from investing activities in change in premiums on finance receivables purchased and deferred charges. After further review, management concluded that the appropriate reporting was to include this item in cash flows from financing activities as a net component of proceeds from issuance of long-term debt. This revision had the effect of increasing the previously reported cash flows provided by investing activities by $9.9 million for the nine months ended September 30, 2009, $10.4 million for the year ended December 31, 2009, $3.1 million for the three months ended March 31, 2010, and $4.7 million for the six months ended June 30, 2010 and increasing the previously reported cash flows used for financing activities by the same amounts.

In second quarter 2010, we revised our condensed consolidated statement of cash flows to change the classification of restricted cash related to our securitization transactions. We had historically included restricted cash related to our securitization transactions as a change in other assets and other liabilities in cash flows from operating activities. After further review, management concluded that the appropriate reporting was to include this item in cash flows from investing activities as a change in restricted cash. This revision had the effect of increasing the previously reported cash flows provided by operating activities by $19.5 million for the nine months ended September 30, 2009, $20.4 million for the year ended December 31, 2009, and $26.2 million for the three months ended March 31, 2010 and decreasing the previously reported cash flows provided by investing activities by the same amounts. (The operating and investing sections of our condensed consolidated cash flow statement for the six months ended June 30, 2009 were not revised because the 2009 securitization occurred in July 2009.)

Management evaluated the effects of these revisions and concluded that they were not material to any of our previously issued quarterly or annual consolidated financial statements.

GOING CONCERN CONSIDERATION

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 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.

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Sale of 80% of AGFI

On August 10, 2010, AIG entered into a Stock Purchase Agreement (the Purchase Agreement) with FCFI Acquisition LLC (the Acquiror), an affiliate of Fortress Investment Group LLC. Under the Purchase Agreement, among other things, the Acquiror will indirectly acquire 80% of AGFI, and AIG will retain a 20% economic interest in AGFI. The parties expect that this transaction (the FCFI Transaction) will close by the end of 2010, subject to regulatory approvals and customary closing conditions. The potential effects of the FCFI Transaction on the Company’s financial position and results of operations cannot be determined at this time.

Liquidity of the Company

Since the events of September 2008 and through the filing of this report, our access to capital markets has been limited and obtained primarily through funding structures different than our more traditional borrowing transactions prior to 2008. This alternative funding approach was due to a combination of the challenges facing AIG, our operating results, downgrades of our debt credit ratings, and market concerns as to our available sources of funding following the turmoil in the capital markets beginning in 2008. While overall credit markets and our near-term liquidity position each have improved compared to late 2008 and much of 2009, we cannot determine to what extent access to our more traditional borrowing sources will be available to us again.

In addition to finance receivable collections, we have engaged in other efforts to support our liquidity and raise capital to meet our financial and operating obligations. These efforts have included additional borrowings, on-balance sheet securitizations, portfolio sales, expense reductions, and branch closures, while continuing to limit our new lending. The exact nature and magnitude of any additional measures needed to support our liquidity or raise capital will be driven by our available resources and needs, prevailing market conditions, and the results of our operations.

During 2010, we continued to manage liquidity and generated additional funding through two significant transactions. In March 2010, we securitized $1.0 billion of real estate loans and sold $501.3 million in senior certificates (while retaining subordinated notes for possible future sale) and separately received AIG’s repayment of its $1.6 billion in demand promissory notes to us. In April 2010, we executed and fully drew down on a $3.0 billion five-year secured term loan. AGFC and AGFI used a portion of the proceeds from these transactions to repay the $2.450 billion one-year term loans in March 2010 ($2.050 billion repaid by AGFC and $400.0 million repaid by AGFI) and the AGFC $2.125 billion multi-year credit facility in April 2010, both prior to their due dates in July 2010. With these repayments, there are no remaining AGFC or AGFI debt agreements that require AGFC to maintain a minimum specified dollar amount of AGFC consolidated net worth, or require AIG to maintain majority ownership of AGFC or AGFI. Based upon our estimates and taking into account the risks and uncertainties of operating plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations as they become due for at least the next twelve months.

As disclosed in AIG’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, based on our level of liquidity and expected future sources of funding, including future cash flows from operations, AIG expects that we will be able to meet our existing obligations as they become due for at least the next twelve months in the event that the FCFI Transaction does not close.

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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 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;

·

the potential for declining financial flexibility and reduced income should we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales;

·

reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios;

·

our ability to complete on favorable terms, as needed, additional borrowings, on-balance sheet securitizations, portfolio sales, or other transactions to improve liquidity, and the costs associated with these funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability;

·

our ability to comply with our debt covenants;

·

our significant reliance upon debt to fund our operations;

·

our access to unsecured debt markets and other sources of funding, and the potential increased cost of funding sources as compared to historic borrowing rates;

·

adverse credit ratings actions on our debt;

·

constraints on our business until the closing of the FCFI Transaction resulting from AIG’s credit agreement (as amended, the FRBNY Credit Agreement) with the Federal Reserve Bank of New York (FRBNY) 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;

·

potential costs for our United Kingdom subsidiaries resulting from the retroactive imposition of guidelines by the United Kingdom Financial Services Authority for sales of payment protection insurance, including possible refunds to customers;

·

the potential for increased costs related to our foreclosure practices and procedures as a result of heightened regulatory scrutiny of foreclosure practices in the industry generally nationwide;

·

potential liability relating to real estate loans which we have sold or securitized if it is determined that there was a breach of a warranty made in connection with the transaction;

·

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

·

reduced income due to loan modifications where the borrower’s interest rate is reduced, principal payments are deferred, or other concessions are made;

·

the potential for declines in bond and equity markets;

·

the potential effect on us 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 undetermined effects of the FCFI Transaction (whether or not consummated), including the availability of support from our new ownership and the effect of any changes to our operations, capitalization, and business strategies.

In our going concern assessment, we assumed that there will be no support required from AIG and no material change in our current liquidity sources and capitalization management.

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 as they become due for at least the next twelve months.

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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 these risks and uncertainties could prove to be materially incorrect. If one or more of these possible outcomes is realized and third party financing is not available, there could exist substantial doubt about our ability to continue as a going concern.

Note 2.  Additional Significant Accounting Policies

VARIABLE INTEREST ENTITIES

An entity is a variable interest entity (VIE) if the entity does not have sufficient equity at risk for the entity to finance its activities without additional financial support or has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated into the financial statements of its primary beneficiary. When we have a variable interest in a VIE, we qualitatively assess whether we have a controlling financial interest in the entity and, if so, whether we are the primary beneficiary. In applying the qualitative assessment to identify the primary beneficiary of a VIE, we are determined to have a controlling financial interest if we have (1) the power to direct the activities that most significantly impact the economic performance of the VIE, and (2) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We consider the VIE’s purpose and design, including the risks that the entity was designed to create and pass through to its variable interest holders. Determining a VIE’s primary beneficiary is an ongoing assessment.

Note 3.  Recent Accounting Standards

We adopted the following accounting standards in 2010:

Accounting for Transfers of Financial Assets

In June 2009, the Financial Accounting Standards Board (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 and removed the exception that exempted transferors from applying the consolidation rules to QSPEs. The new standard was effective for interim and annual periods beginning on January 1, 2010 for us. Earlier application was prohibited. The adoption of this new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows.

Consolidation of Variable Interest Entities

In June 2009, the FASB issued an accounting standard that amended the rules addressing consolidation of VIEs with an approach focused on identifying which enterprise has the power to direct the activities of a VIE 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 VIEs. We adopted the new standard on January 1, 2010. The adoption of this new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows.

In February 2010, the FASB issued an update to the aforementioned accounting standard that deferred the revised consolidation rules for VIEs with attributes of, or similar to, an investment company or money market fund. The adoption of this update did not have a material effect on our consolidated financial condition, results of operations, or cash flows.

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Accounting for Embedded Credit Derivatives

In March 2010, the FASB issued an accounting standard that amends the accounting for embedded credit derivative features in structured securities that redistribute credit risk in the form of subordination of one financial instrument to another. The new standard clarifies how to determine whether embedded credit derivative features are considered to be embedded derivatives that should be analyzed for potential bifurcation and separate accounting, or alternatively, for fair value accounting in connection with the application of the fair value option to the entire hybrid instrument. We adopted the new standard on July 1, 2010. The adoption of this new standard did not have a material effect on our consolidated financial condition, results of operations, or cash flows.

We will adopt the following accounting standard in the future:

Disclosures about Credit Quality of Finance Receivables and Allowance for Finance Receivable Losses

In July 2010, the FASB issued an accounting standard that amends the rules for disclosures that an entity provides about the credit quality of its finance receivables and the related allowance for finance receivable losses. The new standard requires us to disaggregate, by portfolio segment or class of finance receivable, certain existing disclosures and provide certain new disclosures about our finance receivables and related allowance for finance receivable losses. The new standard is effective for interim and annual periods ending on or after December 15, 2010 for us. Because the new standard only requires additional disclosures about finance receivables and the related allowance for finance receivable losses, it will have no effect on our consolidated financial condition, results of operations, or cash flows.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued an accounting standard update that amends the accounting for costs incurred by insurance companies that can be capitalized in connection with acquiring or renewing insurance contracts. The new standard clarifies how to determine whether the costs incurred in connection with the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. The new standard is effective for interim and annual periods beginning on January 1, 2012 with early adoption permitted. Prospective or retrospective application is permitted. The adoption of this new standard will not have a material effect on our consolidated financial condition, results of operations, or cash flows.

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Note 4.  Finance Receivables

Components of net finance receivables by type were as follows:

	Real	Non-Real	Retail
(dollars in thousands)	Estate Loans	Estate Loans	Sales Finance	Total
September 30, 2010 Gross receivables	$13,751,137	$3,046,882	$   682,087	$17,480,106
Unearned finance charges and points and fees	(151,758)	(304,905)	(63,351)	(520,014)
Accrued finance charges	81,542	34,425	4,369	120,336
Deferred origination costs	16,552	26,594	-	43,146
Premiums, net of discounts	(30,434)	692	1,814	(27,928)
Total	$13,667,039	$2,803,688	$   624,919	$17,095,646
December 31, 2009 Gross receivables	$14,027,412	$3,385,715	$1,196,247	$18,609,374
Unearned finance charges and points and fees	(161,309)	(328,336)	(127,624)	(617,269)
Accrued finance charges	90,850	40,966	13,544	145,360
Deferred origination costs	17,402	28,843	-	46,245
Premiums, net of discounts	27,550	1,698	2,415	31,663
Total	$14,001,905	$3,128,886	$1,084,582	$18,215,373

Included in the table above are real estate finance receivables associated with the securitizations that remain on our balance sheet totaling $2.7 billion at September 30, 2010 and $1.9 billion at December 31, 2009. See Note 5 and Note 10 for further discussion regarding our securitization transactions. Also included in the table above are finance receivables totaling $7.5 billion at September 30, 2010 that have been pledged as collateral for our secured term loan.

Unused credit limits extended to customers by the Company totaled $168.1 million at September 30, 2010. All unused credit limits, in part or in total, can be cancelled at the discretion of the Company. At December 31, 2009, 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 were fully participated to us) totaled $148.7 million. Previously, AIG Bank sold its private label finance receivables to us under a participation agreement. On September 30, 2010, the participation agreement was terminated, and we purchased the remaining accounts from AIG Bank for $49,000. The increase in the unused credit limits at September 30, 2010 when compared to December 31, 2009 was primarily due to AGFI contributing two wholly-owned subsidiaries to AGFC effective January 1, 2010.

To support our liquidity, we have sold certain finance receivables as an alternative funding source. During 2009, we transferred $1.8 billion 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.

In February 2010, we transferred $170.7 million of real estate loans at the lower of cost or fair value from finance receivables held for sale back to finance receivables held for investment in preparation for an on-balance sheet securitization that was completed in March 2010. In June 2010, we transferred $484.9 million of real estate loans at the lower of cost or fair value from finance receivables held for sale back to finance receivables held for investment due to management’s intent to hold these finance receivables for the foreseeable future. As of September 30, 2010, management has both the intent and ability to hold the remainder of the finance receivable portfolio for the foreseeable future.

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

	September 30,	December 31,
(dollars in thousands)	2010	2009
TDR net finance receivables	$1,959,869	$1,381,561
TDR net finance receivables that have a valuation allowance	$1,959,869	$1,381,561
Allowance for TDR finance receivable losses	$   461,060	$   302,500

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 were as follows:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(dollars in thousands)	2010	2009	2010	2009
TDR average net receivables	$1,926,000	$1,229,887	$1,741,162	$1,044,071
TDR finance charges recognized	$     22,831	$     15,388	$     64,499	$     39,790

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. Effective April 5, 2010, a new program under the HAMP provided certain incentives to borrowers, servicers, and investors to encourage short sales and deeds in lieu of foreclosure as a way to avoid the foreclosure process. The HAMP guidelines are likely to be subject to additional changes and requirements as the United States Department of the Treasury makes adjustments to the program.

As part of a Securities Purchase Agreement and a Securities Exchange 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. In third quarter 2009, MorEquity, Inc. (MorEquity), a direct wholly-owned 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 Department of the Treasury, 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. As of September 30, 2010, MorEquity had completed 930 HAMP modifications and 260 trial HAMP modifications were in process.

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Note 5.  On-Balance Sheet Securitization Transactions

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, we have transferred certain finance receivables to VIEs for securitization transactions. These securitization transactions do not satisfy the requirements for accounting sale treatment because the securitization trusts do not have the right to freely pledge or exchange the transferred assets. We also have significant discretion for working out and disposing of defaulted real estate loans and disposing of any foreclosed real estate held by the VIEs. Since the transactions do not meet all of the criteria for sale accounting treatment, the securitized assets and related liabilities are included in our financial statements and are accounted for as secured borrowings.

We have limited continued involvement with the finance receivables that have been included in these securitization transactions. Our 2009 securitization transaction, which closed on July 30, 2009, utilizes a third-party servicer to service the finance receivables. We service the finance receivables for our other existing securitization transaction. In the case of each existing securitization transaction, the related finance receivables have been legally isolated and are only available for payment of the debt and other obligations issued or arising in the applicable securitization transaction. The cash and cash equivalent balances relating to securitization transactions are used only to support the on-balance sheet securitization transactions and are recorded as restricted cash. We hold the right to the excess cash flows not needed to pay the debt and other obligations issued or arising in our securitization transactions. The asset-backed debt has been issued by consolidated VIEs. Refer to Notes 2 and 10 for further discussion regarding these VIEs and the related assets and liabilities included in our financial statements as part of these secured debt arrangements.

Our 2010 securitization transaction, which closed on March 30, 2010, included the sale of approximately $1.0 billion of our centralized real estate loans to a wholly-owned consolidated special purpose vehicle, Sixth Street Funding LLC (Sixth Street), which concurrently formed a trust to issue trust certificates totaling $716.9 million in initial principal balance to Sixth Street in exchange for the loans. In connection with the securitization, Sixth Street sold to a third party $501.3 million of senior certificates with a 5.15% coupon. Sixth Street received cash proceeds, including accrued interest after the sales discount but before expenses, of $503.3 million and retained subordinated and residual interest trust certificates. As a result of the combination of over-collateralization and the initially retained subordinated and residual interest trust certificates, we received a subordinated economic interest in approximately 50% of the assets transferred.

Our on-balance sheet securitizations of real estate loans and the related debt were as follows:

(dollars in thousands)	Real Estate Loans	Long-term Debt
September 30, 2010 2009 securitization	$1,727,623	$779,234
2010 securitization	958,285	450,666
December 31, 2009 2009 securitization	$1,889,193	$900,143

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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)	2010	2009	2010	2009
Balance at beginning of period	$1,432,612	$1,315,718	$1,516,298	$1,126,233
Provision for finance receivable losses	119,227	252,315	358,802	859,734
Charge-offs	(163,282)	(233,915)	(535,593)	(662,331)
Recoveries	15,423	13,412	48,286	39,255
Affiliates contributed by AGFI to AGFC (a)	-	-	16,187	-
Transfers to finance receivables held for sale (b)	-	(5,900)	-	(21,261)
Balance at end of period	$1,403,980	$1,341,630	$1,403,980	$1,341,630

(a)

Effective January 1, 2010, AGFI contributed two of its wholly-owned subsidiaries to AGFC. The contribution included $16.2 million of allowance for finance receivable losses.

(b)

During the three 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.

We estimate our allowance for finance receivable losses primarily using the authoritative guidance for contingencies. We base our allowance for finance receivable losses primarily on historical loss experience using migration analysis and the Monte Carlo technique applied to sub-portfolios of large numbers of relatively small homogenous accounts. Both techniques are historically-based statistical techniques that attempt to predict the future amount of losses for existing pools of finance receivables. We adjust the amounts determined by migration and Monte Carlo for management’s estimate of the effects of model imprecision, any changes to its underwriting criteria, portfolio seasoning, and current economic conditions, including the levels of unemployment and personal bankruptcies.

We use our internal data of net charge-offs and delinquency by sub-portfolio as the basis to determine the historical loss experience component of our allowance for finance receivable losses. We use monthly bankruptcy statistics, monthly unemployment statistics, and various other monthly or periodic economic statistics published by departments of the U.S. government and other economic statistics providers to determine the economic component of our allowance for finance receivable losses.

We also establish reserves for TDR finance receivables, which are included in our allowance for finance receivable losses. The allowance for finance receivable losses related to our TDRs is calculated in homogeneous aggregated pools of impaired loans that have common risk characteristics. We establish our allowance for finance receivable losses related to our TDRs by calculating the present value (discounted at the loan’s effective interest rate prior to modification) of all expected cash flows less the recorded investment in the aggregated pool. We use certain assumptions to estimate the expected cash flows from our TDRs. The primary assumptions for our model are prepayment speeds, default rates, and severity rates.

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Note 7.  Investment Securities

Cost/amortized cost, unrealized gains and losses, and fair value of investment securities, which are classified as available-for-sale, by type were as follows:

(a)

Represents the amount of other-than-temporary impairment losses in accumulated other comprehensive income (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 at September 30, 2010 and December 31, 2009).

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

	12 Months or Less			More Than 12 Months			Total
(dollars in thousands)	Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
September 30, 2010 Bonds: Corporate debt	$     4,872	$       (51)		$11,298	$    (200)		$  16,170	$     (251)
RMBS	-	-		17,141	(2,478)		17,141	(2,478)
CMBS	-	-		9,930	(3,487)		9,930	(3,487)
CDO/ABS	-	-		13,991	(5,787)		13,991	(5,787)
Total	4,872	(51)		52,360	(11,952)		57,232	(12,003)
Other long-term investments	1,452	(547)		-	-		1,452	(547)
Common stocks	7	-		-	-		7	-
Total	$    6,331	$     (598)		$52,360	$(11,952)		$  58,691	$(12,550)
December 31, 2009 Bonds: U.S. government and government sponsored entities	$       480	$       (72)		$    -	$      -		$       480	$       (72)
Obligations of states, municipalities, and political subdivisions	20,394	(140)		2,075	(119)		22,469	(259)
Corporate debt	48,701	(1,139)		57,095	(4,770)		105,796	(5,909)
RMBS	51,025	(2,236)		14,576	(4,571)		65,601	(6,807)
CMBS	7,178	(8,747)		947	(1,890)		8,125	(10,637)
CDO/ABS	10,395	(7,870)		3,837	(696)		14,232	(8,566)
Total	138,173	(20,204)		78,530	(12,046)		216,703	(32,250)
Preferred stocks	3,644	(347)		-	-		3,644	(347)
Other long-term investments	2,201	(769)		-	-		2,201	(769)
Common stocks	136	(99)		-	-		136	(99)
Total	$144,154	$(21,419)		$78,530	$(12,046)		$222,684	$(33,465)

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 our 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 performs extended fundamental credit analysis on a security-by-security basis, which includes consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other market available data.

We did not recognize in earnings the unrealized losses on fixed-maturity securities at September 30, 2010, 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).

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As of September 30, 2010, unrealized losses on bond investments in an unrealized loss position of more than 50% for more than 12 months totaled $2.3 million relating to originally investment grade structured securities that are floating-rate or that have low fixed coupons relative to current market yields. As part of our credit evaluation procedures applied to these and other securities, we consider the nature of both the specific securities and the general market conditions for those securities. Current market spreads continue to be significantly wider for securities supported by real estate related assets, compared to spreads at the securities’ respective purchase date, largely due to the continued effects of the recession and the economic and market uncertainties regarding future performance of commercial and residential real estate. In addition, declining LIBOR rates have made floating-rate securities less attractive as a class.

We believe that the lack of demand for commercial and residential real estate collateral-based investments, low contractual coupons and interest rate spreads, and the deterioration in the level of collateral support due to real estate market conditions are the primary reasons for the securities trading at significant price discounts. Based on management’s analysis, we continue to believe the expected cash flows from these securities will be sufficient to recover the amortized cost of our investment. We continue to monitor these positions for potential credit impairments resulting from further deterioration in commercial and residential real estate fundamentals.

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:

	12 Months or Less			More Than 12 Months			Total
(dollars in thousands)	Fair Value	Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
September 30, 2010 Bonds: RMBS	$   -	$   -		$  9,172	$(2,172)		$  9,172	$(2,172)
CMBS	-	-		2,000	(503)		2,000	(503)
Total	$   -	$   -		$11,172	$(2,675)		$11,172	$(2,675)
December 31, 2009 Bonds: RMBS	$   502	$(1,152)		$  5,186	$(1,957)		$  5,688	$(3,109)
CMBS	1,821	(5,582)		-	-		1,821	(5,582)
Total	$2,323	$(6,734)		$  5,186	$(1,957)		$  7,509	$(8,691)

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

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2010	2009		2010	2009
Total other-than-temporary impairment losses	$(211)	$(2,527)		$(2,188)	$(5,761)
Portion of loss recognized in accumulated other comprehensive income (loss)	(440)	1,372		(4,502)	1,334
Net impairment losses recognized in net (loss) income	(651)	(1,155)		(6,690)	(4,427)
Other net realized gains (losses) on investment securities	14	(197)		(1,050)	(1,364)
Total net realized losses on investment securities	$(637)	$(1,352)		$(7,740)	$(5,791)

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

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
(dollars in thousands)	2010	2009	2010	2009
Balance at beginning of period	$9,016	$4,184	$3,150	$3,845
Additions: Due to other-than-temporary impairments: Not previously impaired/impairment not previously recognized	-	(215)	9	124
Previously impaired/impairment previously recognized	651	360	6,591	360
Reductions: Realized due to sales with no prior intention to sell	-	(101)	-	(101)
Realized due to intention to sell	-	-	-	-
Accretion of credit impaired securities	(18)	-	(101)	-
Balance at end of period	$9,649	$4,228	$9,649	$4,228

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)	2010	2009		2010	2009
Fair value	$25,941	$1,779		$163,720	$44,742
Realized gains	$       19	$     49		$         56	$  2,090
Realized losses	(6)	-		(139)	(3,207)
Net realized gains (losses)	$       13	$     49		$       (83)	$ (1,117)

Contractual maturities of fixed-maturity investment securities at September 30, 2010 were as follows:

September 30, 2010	Fair	Amortized
(dollars in thousands)	Value	Cost
Fixed maturities, excluding mortgage-backed securities: Due in 1 year or less	$    5,248	$    5,177
Due after 1 year through 5 years	152,173	141,597
Due after 5 years through 10 years	229,448	209,013
Due after 10 years	225,696	210,704
Mortgage-backed securities	169,375	177,882
Total	$781,940	$744,373

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

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Note 8.  Restricted Cash

Restricted cash at September 30, 2010 included funds related to our $3.0 billion secured term loan executed in April 2010, funds to be used for future debt payments relating to our securitization transactions (see Note 5), and escrow deposits. Restricted cash at December 31, 2009 included escrow deposits and funds to be used for future debt payments relating to our securitization transactions.

Note 9.  Related Party Transactions

AFFILIATE LENDING

On May 11, 2010, AGFC made a loan of $750.0 million to AIG under a demand note agreement between AGFC and AIG dated May 11, 2010. The cash used to fund the loan came from operations and AGFC’s secured term loan, which closed in April 2010. The interest rate for the unpaid principal balance is one-month London Interbank Offered Rate (LIBOR) plus 178 basis points. AIG may repay principal and interest at any time without penalty. At September 30, 2010, notes receivable from AIG totaled $750.0 million, which included interest receivable of $42,000.

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. 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. At December 31, 2009, notes receivable from AIG totaled $1.6 billion, which included interest receivable of $0.9 million. On March 25, 2010, AIG repaid these demand promissory notes of $1.6 billion, which included interest payable to AGFC of $0.7 million. The interest rate for the unpaid principal balance was LIBOR plus 50 basis points. (AIG could repay principal and interest at any time without penalty.)

Each of these loans 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 credit facility with the FRBNY, subject to a subordination agreement in favor of the FRBNY. Interest revenue on these notes receivable from AIG for the three and nine months ended September 30, 2010 totaled $4.0 million and $8.7 million, respectively. Interest revenue on these notes receivable from AIG for the three and nine months ended September 30, 2009 totaled $2.3 million and $3.9 million, respectively.

Notes receivable from AGFI totaled $524.7 million at September 30, 2010, and $451.9 million at December 31, 2009, which included interest receivable of $1.8 million and $1.5 million, respectively. The interest rate for the unpaid principal balance is prime plus 100 basis points. Interest revenue on notes receivable from AGFI totaled $5.6 million and $12.6 million for the three and nine months ended September 30, 2010, respectively. Interest revenue on these notes receivable from AGFI totaled $3.5 million and $10.2 million for the three and nine months ended September 30, 2009, respectively.

COST SHARING AGREEMENTS

In addition, we are party to cost sharing agreements, including tax sharing arrangements, with AIG. Generally, these agreements provide for the allocation of shared 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 the Supervisory Agreement with the Office of Thrift Supervision (OTS) dated June 7, 2007 (the Supervisory Agreement). See Note 13 for further information on the tax sharing arrangements and the Purchase Agreement and Note 16 for further information on the Supervisory Agreement.

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REINSURANCE AGREEMENTS

Merit Life Insurance Co. (Merit), a wholly-owned subsidiary of AGFC, enters into reinsurance agreements with non-subsidiary affiliated companies, for reinsurance of various group annuity, credit life, and credit accident and health insurance where Merit reinsures the risk of loss. The reserves for this business fluctuate over time and in some instances are subject to recapture by the insurer. Reserves on the books of Merit for reinsurance agreements with non-subsidiary affiliated companies totaled $47.4 million at September 30, 2010 and $50.1 million at December 31, 2009.

PARTICIPATION AGREEMENT

Previously, we purchased private label receivables originated by AIG Bank, a non-subsidiary affiliate, under a participation agreement. On September 30, 2010, the participation agreement was terminated, and we purchased the remaining accounts from AIG Bank for $49,000.

DERIVATIVES

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.

CONTRIBUTION OF SUBSIDIARIES TO AGFC

Effective January 1, 2010, AGFI contributed two of its wholly-owned subsidiaries to AGFC. The contribution included $300.3 million of finance receivables. At December 31, 2009, these subsidiaries owed an aggregate total of $278.9 million to AGFI under intercompany notes. As part of the January 1, 2010 transaction, AGFC established direct notes to the subsidiaries in the same amount and as a result, AGFI then reduced its intercompany borrowings from AGFC. Because the transaction was between entities under common control, we recorded the transaction by transferring the assets, liability, and equity from AGFI to AGFC at the carrying value that existed as of January 1, 2010.

Note 10.  VIEs

CONSOLIDATED VIES

We use special purpose entities (securitization trusts) to issue asset-backed securities in securitization transactions to investors. We evaluated the securitization trusts, determined that these entities are VIEs of which we are the primary beneficiary, and therefore consolidated such entities. We are deemed to be the primary beneficiaries of these VIEs because we have power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses and the right to receive benefits that are potentially significant to the VIE. We have consent power over sales of defaulted real estate loans, which is a significant loss mitigation procedure, and, therefore, a significant control, and our retained subordinated and residual interest trust certificates expose us to potentially significant losses and potentially significant returns.

The asset-backed securities are backed by the expected cash flows from securitized real estate loans. Payments from these real estate loans are not available to us until the repayment of the debt issued in connection with the securitization transactions has occurred. We recorded these transactions as “on-balance sheet” secured financings because the transfer of these real estate loans to the trusts did not qualify for sale accounting treatment. We retain interests in these securitization transactions, including senior and subordinated securities issued by the VIEs and residual interests. We retain credit risk in the

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securitizations 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. At September 30, 2010, these retained interests were primarily comprised of $1.3 billion, or 45%, of the assets transferred in connection with the on-balance sheet securitizations. We expect that any credit losses in the pools of securitized assets would likely be limited to our retained interests. We have no obligation to repurchase or replace qualified securitized assets that subsequently become delinquent or are otherwise in default. See Note 5 for further discussion regarding these securitization transactions.

The total consolidated VIE assets and liabilities associated with our securitization transactions were as follows:

(dollars in thousands)	September 30, 2010	December 31, 2009
Assets
Finance receivables	$2,685,908	$1,889,193
Allowance for finance receivable losses	161,791	70,312
Restricted cash	34,594	20,388
Liabilities
Long-term debt	$1,229,900	$   900,143

We had no off-balance sheet exposure associated with our variable interests in the consolidated VIEs. No additional support to these VIEs beyond what was previously contractually required has been provided by us. Consolidated interest expense related to these VIEs for the three and nine months ended September 30, 2010 totaled $43.7 million and $124.1 million, respectively. Consolidated interest expense related to these VIEs for the three and nine months ended September 30, 2009 totaled $30.9 million.

UNCONSOLIDATED VIE

We have established a VIE, primarily related to a debt issuance, of which we are not the primary beneficiary, and in which we do not have a variable interest. Therefore, we do not consolidate such entity. We calculate our maximum exposure to loss primarily to be the amount of debt issued to or equity invested in a VIE. Our on-balance sheet maximum exposure to loss associated with this unconsolidated VIE was $349.4 million at September 30, 2010 and $349.3 million at December 31, 2009. We had no off-balance sheet exposure to loss associated with this VIE at September 30, 2010 and December 31, 2009.

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, 2010, equity-indexed debt and related swaps were immaterial.

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In the first quarter of 2010, we re-examined our accounting for a second quarter 2009 de-designated trade and determined that our method for amortizing the debt basis adjustments related to hedge accounting for this second quarter 2009 de-designated trade contained two errors. The debt basis adjustment to be amortized incorrectly included an accounting adjustment on the hedged debt. Secondly, the amortization method did not take into account all cash flows on the debt when calculating the effective yield amortization. In addition, we did not record the foreign exchange translation on the unamortized debt basis. As a result of these errors, we recorded an out-of-period adjustment in the first quarter of 2010, which reduced other revenues by $8.2 million during the three months ended March 31, 2010. The impact of this error did not have a material effect on our financial condition or results of operations for previously reported periods.

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:

	Notional	Hedging	Non-Designated Hedging
(dollars in thousands)	Amount	Instruments	Instruments
September 30, 2010 Derivatives – Other Assets:
Cross currency and cross currency interest rate	$1,870,500	$ 116,585	$110,102
Equity-indexed	6,886	-	1,969
Total excluding effect of master netting arrangements	1,877,386	116,585	112,071
Effect of master netting arrangements	N/A*	(26,540)	(25,065)
Total	N/A	$   90,045	$  87,006
Derivatives – Other Liabilities: Interest rate	$   850,000	$   51,605	$        -
Equity-indexed	6,886	-	547
Total excluding effect of master netting arrangements	856,886	51,605	547
Effect of master netting arrangements	N/A	(51,605)	-
Total	N/A	$        -	$       547
December 31, 2009 Derivatives – Other Assets:
Cross currency and cross currency interest rate	$1,870,500	$ 184,826	$105,791
Equity-indexed	6,886	-	1,645
Total excluding effect of master netting arrangements	1,877,386	184,826	107,436
Effect of master netting arrangements	N/A	(70,740)	(40,490)
Total	N/A	$ 114,086	$  66,946
Derivatives – Other Liabilities: Interest rate	$1,000,000	$   72,183	$       -
Cross currency and cross currency interest rate	622,300	39,047	-
Equity-indexed	6,886	-	483
Total excluding effect of master netting arrangements	1,629,186	111,230	483
Effect of master netting arrangements	N/A	(111,230)	-
Total	N/A	$        -	$      483

* not applicable

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

	Effective			Ineffective
(dollars in thousands)	AOCI(L)*	From AOCI(L) to Other Revenues		Other Revenues
Three Months Ended September 30, 2010 Interest rate	$  (7,515)	$(10,075)		$    (741)
Cross currency and cross currency interest rate	(37,039)	(2,743)		21,360
Total	$(44,554)	$(12,818)		$ 20,619
Three Months Ended September 30, 2009 Interest rate	$  (9,344)	$(11,421)		$     (848)
Cross currency and cross currency interest rate	6,890	77		(6,171)
Total	$  (2,454)	$(11,344)		$  (7,019)
Nine Months Ended September 30, 2010 Interest rate	$(11,725)	$(32,190)		$  (2,316)
Cross currency and cross currency interest rate	24,030	74,177		(5,044)
Total	$ 12,305	$ 41,987		$  (7,360)
Nine Months Ended September 30, 2009 Interest rate	$(10,099)	$(30,118)		$  (2,646)
Cross currency and cross currency interest rate	22,117	(2,087)		(20,694)
Total	$ 12,018	$(32,205)		$(23,340)

* accumulated other comprehensive income (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 in other revenues. We included all components of each derivative’s gain or loss in the assessment of hedge effectiveness.

At September 30, 2010, we expect $38.9 million of the deferred net loss on cash flow hedges and a $12.0 million foreign exchange loss due to a maturity of foreign currency denominated debt to be reclassified from accumulated other comprehensive income to earnings during the twelve months ending September 30, 2011. For the nine months ended September 30, 2010, there were no instances in which we reclassified amounts from accumulated other comprehensive income (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.

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

	Fair Value Hedge			Non-Designated Hedging
(dollars in thousands)	Derivative	Hedged Item		Instruments
Three Months Ended September 30, 2010
Cross currency and cross currency interest rate	$      -	$      -		$75,675
Equity-indexed	-	-		79
Total	$      -	$      -		$75,754
Three Months Ended September 30, 2009
Cross currency and cross currency interest rate	$      -	$      -		$52,168
Equity-indexed	-	-		76
Total	$      -	$      -		$52,244
Nine Months Ended September 30, 2010
Cross currency and cross currency interest rate	$      -	$      -		$65,547
Equity-indexed	-	-		239
Total	$      -	$      -		$65,786
Nine Months Ended September 30, 2009
Cross currency and cross currency interest rate	$(13,641)	$14,926		$41,093
Equity-indexed	-	-		197
Total	$(13,641)	$14,926		$41,290

During the three months ended September 30, 2010, we recognized a mark to market gain of $70.6 million on our non-designated cross currency derivative. During the nine months ended September 30, 2010, we recognized a gain of $68.8 million on the release of other comprehensive income related to cash flow hedge maturities, partially offset by a mark to market loss of $25.1 million on our non-designated cross currency derivative. We recognized 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 included all components of each derivative’s gain or loss in the assessment of hedge effectiveness.

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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. 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.

Credit valuation adjustment gains (losses) recorded in other revenues for our non-designated derivative and in accumulated other comprehensive income (loss) for our cash flow hedges were as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2010	2009		2010	2009
Credit valuation adjustment gains (losses): Non-designated derivative	$  (4,332)	$3,357		$  8,533	$(33,456)
Cash flow hedges	$(11,158)	$   400		$17,889	$(46,374)

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 currently do not anticipate exiting these derivatives prior to maturity. These derivatives are 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 Income

Components of accumulated other comprehensive income were as follows:

	September 30,	December 31,
(dollars in thousands)	2010	2009
Net unrealized gains (losses) on: Investment securities	$ 49,988	$ 5,251
Swap agreements	(26,001)	3,681
Foreign currency translation adjustments	(8,797)	(4,920)
Retirement plan liabilities adjustment	(2,166)	(2,166)
Accumulated other comprehensive income	$ 13,024	$ 1,846

As of September 30, 2010, we have recognized losses of $1.4 million, compared to $5.6 million at December 31, 2009, in accumulated other comprehensive income 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 income related to investment securities as of September 30, 2010 includes a valuation allowance of $23.9 million against the related deferred tax assets, compared to $10.6 million at December 31, 2009.

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Note 13.  Income Taxes

Benefit from income taxes for the three and nine months ended September 30, 2010 reflected AIG’s projection that it will have sufficient taxable income in 2010 to utilize our current year estimated tax losses. AGFC files its federal income tax return as a member of AIG’s consolidated tax return group. Current income tax expense or benefit is allocated pro rata to AGFC, and other members of the AIG group, to the extent that AGFC’s income or loss is included in or reduces AIG’s current taxable income before use of tax carryforwards at the consolidated level. Deferred tax expense is determined on a separate company basis.

The income tax benefit of $195.7 million for the nine months ended September 30, 2010 principally relates to $185.2 million income tax receivable from AGFI (indirectly from AIG) and a $95.2 million change in net deferred tax assets offset by an equal release of the valuation allowance. On August 10, 2010, AIG entered into the Purchase Agreement with the Acquiror, an affiliate of Fortress Investment Group LLC. In connection with entering into the Purchase Agreement, AIG and AGFI have agreed to amend their tax sharing agreement, which will terminate on the closing of the FCFI Transaction, (i) to provide that, subject to the closing of the FCFI Transaction, the parties’ payment obligations under the tax sharing agreement shall be limited to the payments required to be made by AIG to AGFI with respect to the 2009 taxable year in accordance with the tax sharing agreement, and (ii) to include the terms of the promissory note to be issued by AIG in satisfaction of its 2009 taxable year payment obligation to AGFI. If the closing of the FCFI Transaction occurs, we do not expect to be reimbursed for our 2010 current tax benefit of $185.2 million by AGFI. Accordingly, if AGFC is not reimbursed for this income tax receivable, AGFC will record a distribution to AGFI, and AGFI will subsequently record a distribution to AIG, of the amount of the 2010 current tax benefit when the purchase closes.

As of September 30, 2010, we had a deferred tax asset valuation allowance of $445.8 million, compared to $521.3 million at December 31, 2009, 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 $5.1 million at September 30, 2010 and $9.1 million at December 31, 2009, which reflected the net deferred tax asset of our Puerto Rico subsidiary.

When making our assessment about the realization of our deferred tax assets, we consider all available evidence, including:

·

the nature, frequency, and severity of current and cumulative financial reporting losses;

·

the carryforward periods for the net operating and capital loss carryforwards;

·

the sources and timing of future taxable income, giving greater weight to discrete sources and to earlier future years in the forecast period; and

·

tax planning strategies that would be implemented, if necessary, to accelerate taxable amounts.

Realization of our net deferred tax asset depends on the ability of the relevant 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 of that subsidiary were generated.

At September 30, 2010, other assets included $663.4 million of net current federal income tax receivable, compared to $461.2 million at December 31, 2009. The net current federal income tax receivable at September 30, 2010 includes the $185.2 million current tax receivable due indirectly from AIG for 2010. As previously discussed above, we do not expect to be reimbursed for the 2010 tax receivable by AGFI if the FCFI Transaction occurs. Accordingly, if AGFC is not reimbursed for this income tax receivable, AGFC will record a distribution to AGFI, and AGFI will subsequently record a distribution to AIG, of the amount of the 2010 current tax benefit when the purchase closes. The net current federal income tax receivable at December 31, 2009 due indirectly from AIG will be reimbursed to us in accordance with the tax sharing agreement.

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In September 2010, we reclassified $57.7 million from deferred tax assets to current tax receivable due to AIG estimating the utilization of our existing net operating losses. The release of the valuation allowance associated with these net operating losses produced a $57.7 million tax benefit. In addition, we recorded a $49.5 million deferred tax asset, along with a full valuation allowance associated with the outside basis balance on our foreign subsidiaries.

Note 14.  Supplemental Cash Flow Information

Supplemental disclosure of non-cash activities was as follows:

Nine Months Ended September 30,
(dollars in thousands)	2010	2009
Transfer of finance receivables held for sale to finance receivables held for investment	$655,565	$         -
Transfer of finance receivables to real estate owned	$205,216	$   223,554
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

·

purchased private label finance receivables originated by AIG Bank under a participation agreement. See Note 4 for discussion regarding the termination of this participation agreement on September 30, 2010.

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.

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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;

·

originated 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.

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The following table presents information about our segments as well as reconciliations to our condensed consolidated financial statement amounts.

	Branch	Centralized Real Estate	Insurance	All		Consolidated
(dollars in thousands)	Segment	Segment	Segment	Other	Adjustments	Total
Three Months Ended September 30, 2010 Revenues: External: Finance charges	$   353,038	$  91,920	$     -	$    (544)	$     -	$   444,414
Insurance	99	-	30,651	3	-	30,753
Other	(7,480)	5,571	14,256	25,476	(296)	37,527
Intercompany	16,121	243	(12,202)	(4,162)	-	-
Pretax (loss) income	(50,723)	(55,826)	16,861	(23,343)	687	(112,344)
Three Months Ended September 30, 2009 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)
Nine Months Ended September 30, 2010 Revenues: External: Finance charges	$1,088,732	$ 278,749	$     -	$  (2,207)	$     -	$1,365,274
Insurance	305	-	93,233	96	-	93,634
Other	(9,012)	27,635	42,623	106,572	(8,542)	159,276
Intercompany	48,940	837	(37,117)	(12,660)	-	-
Pretax (loss) income	(12,739)	(161,506)	44,926	(31,247)	(190)	(160,756)
Nine Months Ended September 30, 2009 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)

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).

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The “Adjustments” column includes:

·

realized gains (losses) on investment securities 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 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, 2010, we have donated $13.5 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 (included in other revenues) 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, 2010, we have made reimbursements of $61.9 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, 2010, we have also reduced the reserve by $90.7 million as an addition to net service fees from affiliates (included in other revenues) resulting from our subsequent evaluations of our loss exposure. At September 30, 2010, this reserve totaled $3.9 million. 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

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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 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

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.

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. We outsource the investment of a portion of our liquid assets to AIG, which, as agent, invests our liquid assets 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. The carrying value of these negotiable instruments approximates fair value, as similar and identical instruments trade at price levels with a similar discount to par. 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.

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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 table presents information about our assets and liabilities measured at fair value on a recurring basis and indicates the fair value hierarchy based on the levels of inputs we utilized to determine such fair value:

	Fair Value Measurements Using			Counterparty	Total Carried
(dollars in thousands)	Level 1	Level 2	Level 3	Netting (a)	At Fair Value
September 30, 2010 Assets Investment securities: Bonds: U.S. government and government sponsored entities	$     -	$    9,849	$     -	$       -	$    9,849
Obligations of states, municipalities, and political subdivisions	-	229,804	-	-	229,804
Corporate debt	-	328,032	44,880	-	372,912
RMBS	-	134,007	2,059	-	136,066
CMBS	-	2,625	12,419	-	15,044
CDO/ABS	-	5,504	12,761	-	18,265
Total	-	709,821	72,119	-	781,940
Preferred stocks	-	4,506	-	-	4,506
Other long-term investments (b)	-	-	6,662	-	6,662
Common stocks (c)	2,248	-	5	-	2,253
Total	2,248	714,327	78,786	-	795,361
Cash and cash equivalents in AIG pools	-	15,676	-	-	15,676
Short-term investments	-	-	-	-	-
Derivatives: Cross currency and cross currency interest rate	-	226,687	-	(51,605)	175,082
Equity-indexed	-	-	1,969	-	1,969
Total	-	226,687	1,969	(51,605)	177,051
Total	$2,248	$956,690	$80,755	$  (51,605)	$988,088
Liabilities
Derivatives: Cross currency and cross currency interest rate	$     -	$  51,605	$     -	$  (51,605)	$          -
Equity-indexed	-	547	-	-	547
Total	$     -	$  52,152	$     -	$  (51,605)	$       547
December 31, 2009 Assets Investment securities: Bonds: U.S. government and government sponsored entities	$     -	$    9,184	$     -	$       -	$    9,184
Obligations of states, municipalities, and political subdivisions	-	234,252	-	-	234,252
Corporate debt	-	308,236	49,978	-	358,214
RMBS	-	79,242	449	-	79,691
CMBS	-	5,357	7,841	-	13,198
CDO/ABS	-	11,300	11,381	-	22,681
Total	-	647,571	69,649	-	717,220
Preferred stocks	-	3,644	-	-	3,644
Other long-term investments (b)	-	-	7,758	-	7,758
Common stocks	3,013	-	261	-	3,274
Total	3,013	651,215	77,668	-	731,896
Cash and cash equivalents in AIG pools	-	36,123	-	-	36,123
Derivatives	-	290,617	1,645	(111,230)	181,032
Total	$3,013	$977,955	$79,313	$(111,230)	$949,051
Liabilities
Derivatives	$     -	$111,713	$     -	$(111,230)	$       483

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(a)

Represents netting of derivative exposures covered by a qualifying master netting agreement in accordance with the authoritative guidance for certain contracts.

(b)

Other long-term investments excluded our interest in a limited partnership that we account for using the equity method of $1.4 million at September 30, 2010 and December 31, 2009.

(c)

Common stocks excluded stocks not carried at fair value of $0.6 million at September 30, 2010.

We had no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2010.

The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2010 and 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	Other	Balance at end of period
Three Months Ended September 30, 2010 Investment securities: Bonds: Corporate debt	$27,543	$      (1)	$   910	$   (94)	$ 16,522	$ -	$44,880
RMBS	573	(403)	416	-	1,473	-	2,059
CMBS	11,887	(81)	799	(186)	-	-	12,419
CDO/ABS	12,673	-	548	(460)	-	-	12,761
Total	52,676	(485)	2,673	(740)	17,995	-	72,119
Other long-term investments (a)	7,087	271	(383)	(313)	-	-	6,662
Common stocks	6	-	-	(1)	-	-	5
Total investment securities	59,769	(214)	2,290	(1,054)	17,995	-	78,786
Derivatives	1,839	(163)	-	293	-	-	1,969
Total assets	$61,608	$   (377)	$ 2,290	$   (761)	$ 17,995	$ -	$80,755
Three Months Ended September 30, 2009 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 (a)	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)

Other long-term investments excluded our interest in a limited partnership that we account for using the equity method of $1.4 million at September 30, 2010 and September 30, 2009.

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During the three months ended September 30, 2010, we transferred into Level 3 approximately $18.0 million of assets, consisting of certain private placement corporate debt and RMBS. Transfers into Level 3 for private placement corporate debt are primarily the result of our over-riding third party matrix pricing information downward to better reflect the additional risk premium associated with those securities that we believe were not captured in the matrix. Transfers into Level 3 for investments in RMBS are primarily due to a decrease in market transparency and downward credit migration of these securities.

Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable, or when a long-term interest rate significant to a valuation becomes short-term and thus observable. During the three months ended September 30, 2010, we did not transfer any assets out of Level 3. During the three months ended September 30, 2009, we transferred approximately $11.4 million of assets out of Level 3, consisting of certain private placement corporate debt and RMBS. Transfers out of Level 3 for private placement corporate debt are primarily the result of using observable pricing information or a third party pricing quote that appropriately reflects the fair value of those securities, without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market. Transfers out of Level 3 for RMBS investments are primarily due to increased usage of pricing from valuation service providers that are reflective of market activity, where previously an internally adjusted price had been used.

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The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2010 and 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	Other (a)	Balance at end of period
Nine Months Ended September 30, 2010 Investment securities: Bonds: Corporate debt	$49,978	$      (1)	$  2,837	$(3,665)	$ (4,269)	$    -	$44,880
RMBS	449	(401)	538	-	1,473	-	2,059
CMBS	7,841	(4,826)	5,784	(517)	4,137	-	12,419
CDO/ABS	11,381	(3)	1,080	(1,638)	1,941	-	12,761
Total	69,649	(5,231)	10,239	(5,820)	3,282	-	72,119
Other long-term investments (b)	7,758	132	150	(1,378)	-	-	6,662
Common stocks	261	(2)	2	300	(556)	-	5
Total investment securities	77,668	(5,101)	10,391	(6,898)	2,726	-	78,786
Derivatives	1,645	21	-	303	-	-	1,969
Total assets	$79,313	$(5,080)	$10,391	$(6,595)	$  2,726	$    -	$80,755
Nine Months Ended September 30, 2009 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 (b)	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)

We adopted a new accounting standard relating to the recognition and presentation of other-than-temporary impairments 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.

(b)

Other long-term investments excluded our interest in a limited partnership that we account for using the equity method of $1.4 million at September 30, 2010 and September 30, 2009.

During the nine months ended September 30, 2010, we transferred into Level 3 approximately $24.1 million of assets, consisting of certain private placement corporate debt, CMBS, CDO/ABS, and RMBS. Transfers into Level 3 for private placement corporate debt are primarily the result of our over-riding third party matrix pricing information downward to better reflect the additional risk premium associated with those securities that we believe were not captured in the matrix. Transfers into Level 3 for investments in CMBS, CDO/ABS, and RMBS are primarily due to a decrease in market transparency and downward credit migration of these securities. During the nine months ended September 30, 2009, we transferred into Level 3 approximately $15.8 million of assets, consisting of certain CDO/ABS and private placement corporate debt.

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Assets are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the asset, a specific event, one or more significant input(s) becoming observable, or when a long-term interest rate significant to a valuation becomes short-term and thus observable. During the nine months ended September 30, 2010, we transferred approximately $21.3 million of assets out of Level 3, consisting of certain private placement corporate debt and common stock. Transfers out of Level 3 for private placement corporate debt and common stock are primarily the result of using observable pricing information or a third party pricing quote that appropriately reflects the fair value of those securities, without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market. During the nine months ended September 30, 2009, we transferred approximately $0.2 million of assets out of Level 3, consisting of certain RMBS.

There were no unrealized gains or losses recognized in earnings on instruments held at September 30, 2010 or 2009.

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.

Fair Value Measurements – Non-recurring 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.

Impairment charges recorded on assets measured at fair value on a non-recurring basis were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
(dollars in thousands)	2010	2009	2010	2009
Real estate owned	$10,090	$  6,667	$27,695	$  26,141
Finance receivables held for sale	-	16,090	-	94,717
Total	$10,090	$22,757	$27,695	$120,858

Assets measured at fair value on a non-recurring basis on which we recorded impairment charges were as follows:

	Fair Value Measurements Using
(dollars in thousands)	Level 1	Level 2	Level 3	Total
September 30, 2010 Real estate owned	$   -	$   -	$180,114	$180,114
December 31, 2009 Real estate owned	$   -	$   -	$162,980	$162,980
Finance receivables held for sale	-	-	687,969	687,969
Total	$   -	$   -	$850,949	$850,949

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In accordance with the authoritative guidance for the accounting for the impairment of long-lived assets, we wrote down certain real estate owned reported in our branch and centralized real estate business segments to their fair value for the three and nine months ended September 30, 2010 and 2009 and recorded the writedowns in other revenues. The fair values disclosed in the tables above are unadjusted for transaction costs as required by the authoritative guidance for fair value measurements. The amounts recorded on the balance sheet are net of transaction costs as required by the authoritative guidance for accounting for the impairment of long-lived assets.

In accordance with the authoritative guidance for the accounting for certain mortgage banking activities, we wrote down certain finance receivables held for sale reported in our centralized real estate business segment to their fair value for the three and nine months ended September 30, 2009 and recorded the writedowns in other revenues. We did not record any impairment charges on our finance receivables held for sale during the nine months ended September 30, 2010.

Financial Instruments Not Measured at Fair Value

In accordance with the amended authoritative guidance for the fair value disclosures of financial instruments, we present the carrying values and estimated fair values of certain of our financial instruments below. Readers should exercise care in drawing conclusions based on fair value, since the fair values presented below can be misinterpreted since they were estimated at a particular point in time and do not include the value associated with all of our assets and liabilities.

	September 30, 2010		December 31, 2009
(dollars in thousands)	Carrying Value	Fair Value	Carrying Value	Fair Value
Assets Net finance receivables, less allowance for finance receivable losses	$15,691,666	$14,231,546	$16,699,075	$15,583,182
Cash and cash equivalents (excluding cash and cash equivalents in AIG pools and short-term investments)	451,529	451,529	1,256,498	1,256,498
Liabilities Long-term debt	16,725,418	15,317,313	17,475,107	14,674,482
Short-term debt	-	-	2,050,000	2,016,243
Off-balance sheet financial instruments Unused customer credit limits	-	-	-	-

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FAIR VALUE MEASUREMENTS –

VALUATION METHODOLOGIES AND ASSUMPTIONS

We used the following methods and assumptions to estimate fair value.

Finance Receivables

We estimated fair values of net finance receivables, less allowance for finance receivable losses using projected cash flows, computed by category of finance receivable, discounted at the weighted-average interest rates offered in the market for similar finance receivables at the balance sheet date. We based cash flows on contractual payment terms adjusted for delinquencies and estimates of finance receivable losses. The fair value estimates do not reflect the value of the underlying customer relationships or the related distribution systems.

Real Estate Owned

We initially based our estimate of the fair value on third party appraisals at the time we took title to real estate owned. Subsequent changes in fair value are based upon management’s judgment of national and local economic conditions to estimate a price that would be received in a then current transaction to sell the asset.

Finance Receivables Held for Sale

Originated as held for sale. We determined the fair value of finance receivables held for sale that were originated as held for sale by reference to available market indicators such as current investor yield requirements, outstanding forward sale commitments, or negotiations with prospective purchasers, if any.

Originated as held for investment. We determined the fair value of finance receivables held for sale that were originated as held for investment based on negotiations with prospective purchasers (if any) or by using projected cash flows discounted at the weighted-average interest rates offered for similar finance receivables. We based cash flows on contractual payment terms adjusted for estimates of prepayments and credit related losses.

Investment Securities

To measure the fair value of investment securities (which consist primarily of bonds), we maximized the use of observable inputs and minimized the use of unobservable inputs. Whenever available, we obtained quoted prices in active markets for identical assets at the balance sheet date to measure investment securities at fair value. We generally obtained market price data from exchange or dealer markets.

We estimated the fair value of fixed maturity investment securities not traded in active markets by referring to traded securities with similar attributes, using dealer quotations and a matrix pricing methodology, or discounted cash flow analyses. This methodology considers such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. For fixed maturity investment securities that are not traded in active markets or that are subject to transfer restrictions, we adjusted the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

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We initially estimated the fair value of equity instruments not traded in active markets by reference to the transaction price. We adjusted this valuation only when changes to inputs and assumptions were corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations, and other transactions across the capital structure, offerings in the equity capital markets, and changes in financial ratios or cash flows. For equity securities that are not traded in active markets or that are subject to transfer restrictions, we adjusted the valuations to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Cash and Cash Equivalents

We estimated the fair value of cash and cash equivalents using quoted prices where available and industry standard valuation models using market-based inputs when quoted prices were unavailable.

Short-term Investments

We estimated the fair value of short-term investments using quoted prices where available and industry standard valuation models using market-based inputs when quoted prices were unavailable.

Derivatives

Our derivatives are not traded on an exchange. The valuation model used to calculate fair value of our derivative instruments includes a variety of observable inputs, including contractual terms, interest rate curves, foreign exchange rates, yield curves, credit curves, measure of volatility, and correlations of such inputs. Valuation adjustments may be made in the determination of fair value. These adjustments include amounts to reflect counterparty credit quality and liquidity risk, as well as credit and market valuation adjustments. The credit valuation adjustment adjusts the valuation of derivatives to account for nonperformance risk of our counter-party with respect to all net derivative assets positions. The credit valuation adjustment also accounts for our own credit risk in the fair value measurement of all net derivative liabilities’ positions, when appropriate. The market valuation adjustment adjusts the valuation of derivatives to reflect the fact that we are an “end-user” of derivative products. As such, the valuation is adjusted to take into account the bid-offer spread (the liquidity risk), as we are not a dealer of derivative products.

Long-term Debt

Where market-observable prices are not available, we estimated the fair values of long-term debt using projected cash flows discounted at each balance sheet date’s market-observable implicit-credit spread rates for our long-term debt and adjusted for foreign currency translations.

Short-term Debt

We estimated the fair values of bank short-term debt using projected cash flows discounted at each balance sheet date’s market-observable implicit-credit spread rates for similar types of borrowings with maturities consistent with those remaining for the short-term debt being valued. The fair values of the remaining short-term debt approximated the carrying values.

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Unused Customer Credit Limits

The unused credit limits available to our customers have no fair value. The interest rates charged on our loan and retail revolving lines of credit are adjustable and reprice frequently. These amounts, in part or in total, can be cancelled at our discretion.

The unused credit limits available to the customers of AIG Bank, which sold private label receivables to us under a participation agreement, had no fair value. The interest rates charged on the private label lines of credit could have been changed at AIG Bank’s discretion. These amounts, in part or in total, could have been cancelled at the discretion of AIG Bank. See Note 4 for discussion regarding the termination of this participation agreement on September 30, 2010.

Note 18.  Legal Settlements

In March 2010, WFI and AIG Bank settled a civil lawsuit brought by the United States Department of Justice (DOJ) for alleged violations of the Fair Housing Act and the Equal Credit Opportunity Act. The DOJ alleged that WFI and AIG Bank allowed independent wholesale mortgage loan brokers to charge certain minority borrowers higher broker fees than were charged to certain other borrowers between 2003 and 2006. WFI and AIG Bank denied any legal violation, and maintained that at all times they conducted their lending and other activities in compliance with fair-lending and other laws. As part of the settlement, WFI and AIG Bank agreed to provide $6.1 million for borrower remediation. In March 2010, we paid $6.1 million into an escrow account pursuant to the terms of the settlement agreement with the DOJ. Upon completion of the remediation, all remaining funds will be distributed for consumer education purposes. In the event that the remaining funds do not total at least $1 million, AIG Bank and WFI have agreed to replenish the fund up to $1 million for distribution for educational purposes. In addition, AIG Bank and WFI will incur certain costs associated with administering the settlement.

In June 2010, MorEquity settled certain claims relating to the sale of mortgage loans by MorEquity. The opposing parties alleged that they had a binding contract to purchase such loans in 2008, while MorEquity claimed that no such contract existed. MorEquity paid $12.5 million to resolve the dispute.

Note 19.  Legal Contingencies

AGFC and certain of its subsidiaries are parties to various legal proceedings, including certain purported class action claims, arising in the ordinary course of business. Some of these proceedings are pending in jurisdictions that permit damage awards disproportionate to the actual economic damages alleged to have been incurred. Based upon information presently available, we believe that the total amounts, if any, that will ultimately be paid arising from these legal proceedings will not have a material adverse effect on our consolidated results of operations or financial position. However, the continued occurrences of large damage awards in general in the United States, including, in some jurisdictions, large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs, create the potential for an unpredictable result in any given proceeding.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and our other publicly available documents may include, and the Company’s officers and representatives may from time to time make, statements which may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only our belief regarding future events, many of which are inherently uncertain and outside of our control. These statements may address, among

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other things, our strategy for growth, product development, regulatory approvals, market position, financial results and reserves. Our actual results and financial condition may differ from the anticipated results and financial condition indicated in these forward-looking statements. The important factors, many of which are outside of our control, that could cause our actual results to differ, possibly materially, include, but are not limited to, the following:

·

our ability to access the capital markets or the sufficiency of our current sources of funds to satisfy our cash flow requirements;

·

changes in the rate at which we can collect or potentially sell our finance receivable portfolio;

·

the impacts of our on-balance sheet securitizations and borrowings;

·

our ability to comply with our debt covenants;

·

changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we can access capital and also invest cash flows from the insurance business segment;

·

changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels, and the formation of business combinations among our competitors;

·

the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or inability to repay;

·

shifts in collateral values, contractual delinquencies, and credit losses;

·

shifts in residential real estate values;

·

levels of unemployment and personal bankruptcies;

·

credit ratings actions on our debt;

·

constraints on our business until the closing of the FCFI Transaction resulting from the FRBNY Credit Agreement, including on our ability to pursue (and retain proceeds from) certain funding sources without AIG receiving prior consent from the FRBNY;

·

potential costs for our United Kingdom subsidiaries resulting from the retroactive imposition of guidelines by the United Kingdom Financial Services Authority for sales of payment protection insurance, including possible refunds to customers;

·

the potential for increased costs related to our foreclosure practices and procedures as a result of heightened regulatory scrutiny of foreclosure practices in the industry generally nationwide;

·

potential liability relating to real estate loans which we have sold or securitized if it is determined that there was a breach of a warranty made in connection with the transaction;

·

changes in laws, regulations, or regulatory policies and practices, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) discussed in “Regulation”, that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products, as well as changes that may result from increased regulatory scrutiny of the sub-prime lending industry;

·

the effects of our participation in the HAMP;

·

the costs and effects of any litigation or governmental inquiries or investigations involving us, particularly those that are determined adversely to us;

·

changes in accounting standards or tax policies and practices and the application of such new policies and practices to the manner in which we conduct business;

·

the undetermined effects of the FCFI Transaction (whether or not consummated), including the availability of support from our new ownership and the effect of any changes to our operations, capitalization, and business strategies;

·

our ability to maintain sufficient capital levels in our regulated and unregulated subsidiaries;

·

changes in our ability to attract and retain employees or key executives to support our businesses;

·

natural or accidental events such as earthquakes, hurricanes, tornadoes, fires, or floods affecting our customers, collateral, or branches or other operating facilities; and

·

war, acts of terrorism, riots, civil disruption, pandemics, or other events disrupting business or commerce.

We also direct readers to other risks and uncertainties discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in other documents we file with the SEC (including “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009). We are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.

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GOING CONCERN CONSIDERATION

Sale of 80% of AGFI

On August 10, 2010, AIG entered into the Purchase Agreement with the Acquiror, an affiliate of Fortress Investment Group LLC. Under the Purchase Agreement, among other things, the Acquiror will indirectly acquire 80% of AGFI, and AIG will retain a 20% economic interest in AGFI. The parties expect that the FCFI Transaction will close by the end of 2010, subject to regulatory approvals and customary closing conditions. The potential effects of the FCFI Transaction on the Company’s financial position and results of operations cannot be determined at this time.

Liquidity of the Company

Since the events of September 2008 and through the filing of this report, our access to capital markets has been limited and obtained primarily through funding structures different than our more traditional borrowing transactions prior to 2008. This alternative funding approach was due to a combination of the challenges facing AIG, our operating results, downgrades of our debt credit ratings, and market concerns as to our available sources of funding following the turmoil in the capital markets beginning in 2008. While overall credit markets and our near-term liquidity position each have improved compared to late 2008 and much of 2009, we cannot determine to what extent access to our more traditional borrowing sources will be available to us again.

In addition to finance receivable collections, we have engaged in other efforts to support our liquidity and raise capital to meet our financial and operating obligations. These efforts have included additional borrowings, on-balance sheet securitizations, portfolio sales, expense reductions, and branch closures, while continuing to limit our new lending. The exact nature and magnitude of any additional measures needed to support our liquidity or raise capital will be driven by our available resources and needs, prevailing market conditions, and the results of our operations.

During 2010, we continued to manage liquidity and generated additional funding through two significant transactions. In March 2010, we securitized $1.0 billion of real estate loans and sold $501.3 million in senior certificates (while retaining subordinated notes for possible future sale) and separately received AIG’s repayment of its $1.6 billion in demand promissory notes to us. In April 2010, we executed and fully drew down on a $3.0 billion five-year secured term loan. AGFC and AGFI used a portion of the proceeds from these transactions to repay the $2.450 billion one-year term loans in March 2010 ($2.050 billion repaid by AGFC and $400.0 million repaid by AGFI) and the AGFC $2.125 billion multi-year credit facility in April 2010, both prior to their due dates in July 2010. With these repayments, there are no remaining AGFC or AGFI debt agreements that require AGFC to maintain a minimum specified dollar amount of AGFC consolidated net worth, or require AIG to maintain majority ownership of AGFC or AGFI. Based upon our estimates and taking into account the risks and uncertainties of operating plans, we believe that we will have adequate liquidity to finance and operate our businesses and repay our obligations as they become due for at least the next twelve months.

As disclosed in AIG’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, based on our level of liquidity and expected future sources of funding, including future cash flows from operations, AIG expects that we will be able to meet our existing obligations as they become due for at least the next twelve months in the event that the FCFI Transaction does not close.

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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 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;

·

the potential for declining financial flexibility and reduced income should we use more of our higher performing assets for on-balance sheet securitizations and portfolio sales;

·

reduced income due to the possible deterioration of the credit quality of our finance receivable portfolios;

·

our ability to complete on favorable terms, as needed, additional borrowings, on-balance sheet securitizations, portfolio sales, or other transactions to improve liquidity, and the costs associated with these funding sources, including sales at less than carrying value and limits on the types of assets that can be securitized or sold, which will affect profitability;

·

our ability to comply with our debt covenants;

·

our significant reliance upon debt to fund our operations;

·

our access to unsecured debt markets and other sources of funding, and the potential increased cost of funding sources as compared to historic borrowing rates;

·

adverse credit ratings actions on our debt;

·

constraints on our business until the closing of the FCFI Transaction 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;

·

potential costs for our United Kingdom subsidiaries resulting from the retroactive imposition of guidelines by the United Kingdom Financial Services Authority for sales of payment protection insurance, including possible refunds to customers;

·

the potential for increased costs related to our foreclosure practices and procedures as a result of heightened regulatory scrutiny of foreclosure practices in the industry generally nationwide;

·

potential liability relating to real estate loans which we have sold or securitized if it is determined that there was a breach of a warranty made in connection with the transaction;

·

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

·

reduced income due to loan modifications where the borrower’s interest rate is reduced, principal payments are deferred, or other concessions are made;

·

the potential for declines in bond and equity markets;

·

the potential effect on us 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 undetermined effects of the FCFI Transaction (whether or not consummated), including the availability of support from our new ownership and the effect of any changes to our operations, capitalization, and business strategies.

In our going concern assessment, we assumed that there will be no support required from AIG and no material change in our current liquidity sources and capitalization management.

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 as they become due for at least the next twelve months.

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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 these risks and uncertainties could prove to be materially incorrect. If one or more of these possible outcomes is realized and third party financing is not available, there could exist substantial doubt about our ability to continue as a going concern.

CAPITAL RESOURCES AND LIQUIDITY

Capital Resources

Our capital has varied primarily with the amount of our net finance receivables. We have historically based our mix of debt and equity, or “leverage”, primarily upon maintaining leverage that supports cost-effective funding.