This case study will identify and discuss four recent risk management disasters related to the use of derivatives or financial innovation. Companies that will be discussed include AIG, Amaranth, Enron and Lehman Brothers. Its objective will be to delve into the phases of the disaster and the lessons learned. It will further critically analyze these lessons as they pertain to these companies. American International Group In late 2008, American International Group (AIG), a global insurance company, experienced the most difficult financial crisis in its history. AIG sold Credit Default Swaps (CDS) as insurance to cover financial instruments such as bonds that created and led to the housing crisis (Davidson, 2008). Most financial institutions would simultaneously buy and sell CDS protection (Davidson, 2008). . This meant that they were compensated and suffered no losses (Davidson, 2008). However, one of these insurance companies, AIG, has chosen to exclusively sell CDS on collateralized debt obligations (CDOs) (Davidson, 2008). Therefore, when CDOs began to decline, AIG was forced to pay without any returns (Davidson, 2008). Thus began the collapse of AIG which caused a drastic drop in share prices which in turn made it difficult to convince other companies to invest in them (Davidson, 2008). With the introduction of credit rating, property prices began to decline as many mortgage loans were rejected (Davidson, 2008). The decline in real estate prices has led to the decline in the market value of mortgage-backed securities (Paul, 2014). In order to implement rapid disclosure of investment losses, AIG reduced the value of its portfolio of mortgage-backed securities (Paul, 2014). Such a drastic move resulted in a reduction in AIG's capital... in the middle of the paper... A higher leverage ratio indicates higher risk. A higher leverage ratio should be used when the economy is stable and hedged when the economy becomes unstable (Niall Ferguson, 2008). Another option is to strengthen previous leverage regulations. Financial activities involved both real estate and leveraged assets. Lehman Brothers should have had a more diversified portfolio. Investments are a trade-off between risk and profits. Bonus incentives are a major cause of failure. It encourages management to take big risks. Many employees take greater risks to get bigger bonuses. Bankers act without worrying about the risk involved. Their attention is more on the bonus that will be received. Bonuses should not be given if stress tests involve high risks, even if profits are high. This however requires that the stress tests be performed by independent personnel.