American International Group Inc., the largest insurer in the U.S., lost more than $5 billion in the fourth quarter as bad credit ate into its investments, the company said Thursday.

AIG has been thrust to the forefront of the credit crisis gripping financial markets by contracts known as credit default swaps.

These swaps pledge to cover missed payments on $579 billion in debt. AIG's swap portfolio lost $11.12 billion in value during the fourth quarter because decaying credit quality means the insured debt is less likely to be repaid.

AIG also lost more than $3 billion in its investment portfolio because of "significant, rapid declines" in the value of mortgage debt.

AIG lost $5.29 billion, or $2.08 per share, in the fourth quarter, compared with profit of $3.44 billion, or $1.31 per share, in the fourth quarter of 2006.

For all of 2007, AIG earned $6.2 billion, or $2.39 per share, compared with $14.05 billion, or $5.36 per share, in 2006.

"AIG's results in 2007 were clearly unsatisfactory," AIG's chief executive, Martin J. Sullivan, said in a statement. "This was a challenging year in which the deterioration of both the U.S. residential mortgage and credit markets significantly affected several of our operations and investments."

Donn Vickrey, an analyst with Gradient Analytics, said AIG's management is under pressure to demonstrate it grasps the risks the company has taken.

The deterioration in the value of the swaps is more than double an estimate the company made just two weeks ago. At the end of the third quarter, AIG thought the portfolio of swaps had lost $352 million in value.

"They definitely seem to be right in the cross-hairs," Vickrey said. "They're insuring a lot of the risks that are rapidly becoming problematic."

AIG claims the losses on the portfolio swaps are only on paper because the debt the swaps protect is still stellar — just the market value of the contracts has fallen. As long as the insured debt does not go into default, the losses on the swaps will reverse over time, the company said.

The company's general insurance division posted a 22 percent decline in income to $2.02 billion. The division's mortgage insurance business, United Guaranty, posted a steep loss because flagging home prices have squashed the incentive and means for borrowers to repay home loans.

The life insurance division posted a 51 percent drop in profit, to $1.29 billion, because of bad investments.

The lawsuit against the agency was filed by Virginia Delegate Robert G. Marshall, who was joined by the National Taxpayers Union and Loudoun County. They say the NVTA has no legal right to levy the taxes that it started collecting Jan. 1. The $326 million a year in new taxes the NVTA seeks to raise would be imposed on motorists, property sellers and hotel guests.

AIG has been thrust to the forefront of the credit crisis gripping financial markets by contracts known as credit default swaps.

These swaps pledge to cover missed payments on $579 billion in debt. AIG's swap portfolio lost $11.12 billion in value during the fourth quarter because decaying credit quality means the insured debt is less likely to be repaid.

AIG also lost more than $3 billion in its investment portfolio because of "significant, rapid declines" in the value of mortgage debt.

AIG lost $5.29 billion, or $2.08 per share, in the fourth quarter, compared with profit of $3.44 billion, or $1.31 per share, in the fourth quarter of 2006.

For all of 2007, AIG earned $6.2 billion, or $2.39 per share, compared with $14.05 billion, or $5.36 per share, in 2006.

"AIG's results in 2007 were clearly unsatisfactory," AIG's chief executive, Martin J. Sullivan, said in a statement. "This was a challenging year in which the deterioration of both the U.S. residential mortgage and credit markets significantly affected several of our operations and investments."

Donn Vickrey, an analyst with Gradient Analytics, said AIG's management is under pressure to demonstrate it grasps the risks the company has taken.

The deterioration in the value of the swaps is more than double an estimate the company made just two weeks ago. At the end of the third quarter, AIG thought the portfolio of swaps had lost $352 million in value.

"They definitely seem to be right in the cross-hairs," Vickrey said. "They're insuring a lot of the risks that are rapidly becoming problematic."

AIG claims the losses on the portfolio swaps are only on paper because the debt the swaps protect is still stellar — just the market value of the contracts has fallen. As long as the insured debt does not go into default, the losses on the swaps will reverse over time, the company said.

The company's general insurance division posted a 22 percent decline in income to $2.02 billion. The division's mortgage insurance business, United Guaranty, posted a steep loss because flagging home prices have squashed the incentive and means for borrowers to repay home loans.

The life insurance division posted a 51 percent drop in profit, to $1.29 billion, because of bad investments.

Faust Villazan of Western Springs pleaded guilty in May to one count of wire fraud and one count of mail fraud.

Villazan is the former owner of the since-dissolved Faustech Industries. The company qualified as a minority-owned business and allegedly posed as a 30% partner with the Siemens subsidiary when the larger company sought the $49 million contract.

The Siemens subsidiary was also ordered to pay $2.5 million in fines and restitution.

Bush's view of the economy was decidedly rosier than that of many economists, who say the country is nearing recession territory or may already be there.

The centerpiece of government efforts to brace the wobbly economy is a package Congress passed and Bush signed last month. It will rush rebates ranging from $300 to $1,200 to millions of people and give tax incentives to businesses.

On one issue particularly worrisome to American consumers, there are indications that paying $4 for a gallon of gasoline is not out of the question once the summer driving season arrives. Asked about that, Bush said "That's interesting. I hadn't heard that. ... I know it's high now."

Bush also used his news conference to press Congress to give telecommunications companies legal immunity for helping the government eavesdrop after the Sept. 11 terrorist attacks.

He continued a near-daily effort to prod lawmakers into passing his version of a law to make it easier for the government to conduct domestic eavesdropping on suspected terrorists' phone calls and e-mails. He says the country is in more danger now that a temporary surveillance law has expired.

The president and Congress are in a showdown over Bush's demand on the immunity issue.

Bush said the companies helped the government after being told "that their assistance was legal and vital to national security." "Allowing these lawsuits to proceed would be unfair," he said.

More important, Bush added, "the litigation process could lead to the disclosure of information about how we conduct surveillance and it would give al Qaida and others a roadmap as to how to avoid the surveillance."

The Senate passed its version of the surveillance bill earlier this month, and it provides retroactive legal protection for telecommunications companies that wiretapped U.S. phone and computer lines at the government's request and without court permission. The House version, approved in October, does not include telecom immunity.

The Michigan Supreme Court unanimously upheld two lower court rulings ordering the release of documents. They were made public hours after the ruling.

The papers pertain to an $8.4 million settlement between the city and two former police officers who alleged they were fired or forced to resign for investigating claims that Mayor Kwame Kilpatrick used his security unit to cover up extramarital affairs.

They include the initial settlement agreement between the city and the former officers, which makes reference to embarrassing and sexually explicit text messages between Kilpatrick and former Chief of Staff Christine Beatty. The unsealed documents do not include transcripts of the actual messages.

They also include a transcript of a Jan. 30 deposition of attorney Michael Stefani, who represented the two former officers in their lawsuit, by lawyers for two newspapers that sued to get the sealed documents, The Detroit Free Press and The Detroit News. In the deposition, Stefani said he thought Kilpatrick rejected an Oct. 17 settlement agreement because the Free Press had filed a Freedom of Information Act request for the settlement.

"I'm presuming, but don't know for a fact, that they — that is, Mayor Kilpatrick and perhaps Beatty, did not ... want the reference to the text messages in the settlement agreement," Stefani said.

After the mayor rejected that agreement, a separate confidentiality agreement detailing how the text messages would be kept secret was reached Nov. 1 between all parties.

City Corporation Counsel John Johnson said the city is disappointed by the ruling.

"Opening up settlement information to public view will most certainly put a chilling effect on parties trying to settle cases," Johnson said in a statement. "This ruling discourages the city from entering into the time honored and cost effective process of mediation."

The Detroit Free Press and The Detroit News sued the city to get the sealed documents. The city argued the documents should remain sealed because they involved communications between attorneys during court-ordered mediation, but the high court ruled "there is no FOIA exemption for settlement agreements," referring to the state's Freedom of Information Act.

The Free Press first reported last month about the text messages between the married mayor and Beatty, who also was married at the time. The newspaper has not said how it obtained the messages.

Both denied under oath having a physical relationship during the former officers' lawsuit, and the unsealed documents could be used in an ongoing perjury investigation of Kilpatrick. Wayne County Prosecutor Kym Worthy is investigating and has said she expects to have a decision by mid-March.

"This is complete vindication for the idea that public officials cannot lie under oath and go behind closed doors in secrecy to make decisions with so much public money in the balance," Free Press Editor Paul Anger said in a story posted on the paper's Web site. "The public's right to know has been upheld."

James E. Stewart, attorney for the News, said the public will soon "have access to their own records. These are public records involving the expenditure of millions of dollars of public money that the mayor has attempted to keep from the public and the City Council."

The Supreme Court yesterday gave the benefit of the doubt to a FedEx worker who claimed age discrimination, and said her case should not be thrown out because of mistakes made by the Equal Employment Opportunity Commission.

The court ruled 7 to 2 that Patricia Kennedy's suit could move forward, even though her employer had not been notified by the EEOC that Kennedy and others had made charges against it, as the Age Discrimination in Employment Act requires.

The act says that a formal charge must be made with the agency before a lawsuit can be filed, and that in that interim, the EEOC is to notify the company, investigate the claim and seek conciliation between the employer and employee before lawyers and judges become involved.

At oral argument, it became clear that the form Kennedy filed with the EEOC sometimes was considered by the agency to constitute a formal charge, and sometimes not. Justices criticized the government for the inconsistency, and it responded that it is changing its policies.

Justice Anthony M. Kennedy's opinion said that because of the lack of clarity on the part of EEOC, "both sides lost the benefits" of the informal dispute resolution process, and it again criticized the agency.

But the majority said that the form and documents Patricia Kennedy filed could be considered a formal charge and that she should be allowed to proceed with her lawsuit.

Justices Clarence Thomas and Antonin Scalia dissented, saying the court's "malleability" was wrong.

"Given the court's utterly vague criteria, whatever the agency later decides to regard as a charge is a charge -- and the statutorily required notice to the employer and conciliation process will be evaded in the future as it has been in this case," wrote Thomas, who was head of the EEOC for a time in the 1980s.

The decision was the court's second in two days regarding the age discrimination statute, both of them rather narrowly drawn. The case is Federal Express Corp. v. Holowecki