AIG is the great whodunit of the financial crisis. From the start, it was a surprise that the insurer was even among the firms in need of a rescue, having seemingly little in common with an investment bank. But AIG had essentially insured a vast swath of Wall Street’s riskiest bets — $441 billion in securities, $58 billion of which involved subprime loans, according to Bloomberg — which it would cover in case of an unlikely cataclysm. When the Lehman tsunami hit — sandbagging not just Lehman but most of the other big Wall Street firms — AIG was stretched too thin to backstop all those investments.
The New York Federal Reserve and the Treasury Department entered the fray, and the conspiracy theories began in earnest. Did they save AIG or sacrifice it? AIG got $182 billion in government loans, and in exchange Uncle Sam got 92% of the company.
While other firms kept their CEOs, then-head Robert Willumstad, who’d tried to get aid before Lehman’s bankruptcy, was removed. Employees were paid bonuses, as at all financial firms, but President Obama called AIG’s an “outrage.” Sen. Charles Grassley, an Iowa Republican, said executives should “resign or go commit suicide.” Death threats against employees rolled in. AIG didn’t kill the financial system, but it bore the brunt of the blame.
In secret, $66.1 billion whooshed out of AIG to honor contracts with troubled banks, and the government fought to hide the recipients. Goldman Sachs, a longtime object of fascination for tinfoil-hat wearers, got the most, $12.9 billion. It was as though Wall Street needed hearts and kidneys, and AIG was harvested for organs. Neil Barofsky, the special inspector general for TARP, criticized Treasury Secretary Tim Geithner for being so secretive, probed for cover-ups, and threatened recommending criminal charges, which never materialized.
AIG eventually paid back the government loans by selling off its healthiest divisions. The American public, which ultimately profited on the deal, made peace (mostly) with the idea that tax dollars had been used to bail out 80 companies and municipalities that had derivatives contracts with AIG. But a lawsuit filed in November 2011 shows that Hank Greenberg (above), AIG’s former CEO, is still suspicious of how his old company was dismantled. He accused the government of violating shareholders’ constitutional rights, to save the banks. Federal Reserve chairman Ben Bernanke was ordered to testify (a decision the government is appealing).
In an intriguing twist, Sue Reisinger, a journalist with American Lawyer Media, identified reports that could show the government looked on and did nothing as AIG became too big to fail. In 2004 the Justice Department forced the insurer to hire former federal prosecutor James Cole as an independent monitor because the department alleged that AIG had helped hide other companies’ troubled assets. Cole (now the deputy U.S. attorney general) did not respond to Fortune’s request for comment.
Did Cole not notice as AIG weaved a safety net beneath Wall Street that was doomed to fail, or did he turn a blind eye?
Reisinger began her quest for Cole’s findings in 2008, but her Freedom of Information Act request was denied. The reports, which had been seen by Congress and a few regulatory agencies, were placed under seal, a ruling upheld by a federal appeals court in February. Reisinger is still fighting, but the papers are set to be destroyed in early 2017. Maybe they’ll end up at Area 51, and we can continue to believe that AIG acted alone.
This story is from the September 16, 2013 issue of Fortune.