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Case study analysis of Coping with Financial and Ethical Risks at American International Group (AIG)
Corporate Governance and Business Ethics
Submitted By: Manish Kumar Lodha M00103
Submitted To: Prof. Vivek Raina
.. 3-4 Question & Answer……………………………………………….Index:_________________________________________________________ Case summary……………………………………………………. 5-9 Conclusion……………………………………………………… 10-10 2|Page .
AIG had exposure to $64 billion in potential subprime mortgage losses. we trace the history of AIG as it evolved into one of the largest and most respected insurance companies in the world. While its dealings were risky. AIG had a market value of close to $200 billion in 2007. AIG Financial Products. and by 2009 this amount had fallen to a mere $3. the Financial Products unit became even more speculative in its activities Immediately before its collapse.5 billion.Case Summary When American International Group (AIG) collapsed in September 2008 and was subsequently saved by a government bailout. However. Nevertheless.000 employees. investments. was chiefly to blame. Only a government rescue of what has amounted to $180 billion in loans. Out of a firm of 116. estimates that only twenty to thirty people were directly involved in bringing down the company The AIG Financial Products unit specialized in derivatives and other complex financial contracts that were tied to subprime mortgages or commodities. one unit with around 500 employees. it became one of the most controversial players in the 2008–2009 financial crises. and financial injections prevented AIG from facing total bankruptcy in late 2008 3|Page . during his long tenure as CEO of AIG. after Greenberg resigned as chief executive of AIG in 2005. Since much of the speculation in the Financial Products unit was tied to derivatives. and the more recent events that led to its demise. the unit generated billions of dollars of profits for AIG. guarantees. The perfect storm formed with the subprime mortgage crisis and a sudden sharp downturn in the value of residential real estate in 2008. Maurice “Hank” Greenberg had been open about his suspicions of the AIG Financial Products unit. Current CEO Ed Liddy. The corporate culture at AIG had been involved in a high-stakes risk-taking scheme supported by managers and employees that appeared entirely focused on short-term financial rewards. who was summoned by former Treasury Secretary Hank Paulson. even small movements in the value of financial measurements could result in catastrophic losses In this case.
however. Finally. but to prevent the bankruptcies of many other global financial institutions that depended on AIG as counterparty on collateralized debt obligations.Saving AIG was not meant as a reward. Then it reviews the events that occurred in 2008. including the philosophy of top management and the corporate culture that set the stage for AIG’s demise. including ethical issues related to transparency and failed internal controls. taking 79. If AIG had been allowed to fail. the analysis looks at the role of the government and its decision to bail out AIG. The government rescued the company not to keep it from bankruptcy.9 percent ownership in a company that grossly mishandled its responsibility to its stakeholders 4|Page . it is possible that the financial meltdown that occurred in 2008 –2009 would have been worse This case first examines the events leading up to the 2008 meltdown.
Any hint of that and he. could be forced out. if any. he also serves as a director in C. Last fall. one unit with around 500 employees. (MMC). for deals it structured for outside clients that allegedly violated insurance accounting rules. who was summoned by former Treasury Secretary Hank Paulson. AIG Financial Products. but two of its executives plead guilty and left the company. Out of a firm of 116. estimates that only twenty to thirty people were directly involved in bringing down the company Investigators believe that AIG may have goosed its financial performance with dubious transactions and improper accounting. Is Greenberg out of the picture? 5|Page . who essentially hand-picked Sullivan as his replacement. in its downfall The corporate culture at AIG had been involved in a high-stakes risk-taking scheme supported by managers and employees that appeared entirely focused on short-term financial rewards. but regulators are looking for signs that he knew of or oversaw the dubious transactions. AIG has a highly unusual arrangement with three private entities.V. the insurer paid $126 million in fines to the Securities & Exchange Commission and Justice Dept. governed and controlled by Greenberg and other AIG executives. AIG admitted no wrongdoing. which led to the ouster of Hank's son Jeffrey as CEO there. Sullivan has not been accused of any wrongdoing. Discuss the role that AIG’s corporate culture played. The company also came under the glare of New York Attorney General Eliot Spitzer for its role in bid-rigging with broker Marsh & McLennan Cos. was chiefly to blame. Starr and SICO.000 employees. Current CEO Ed Liddy. although AIG admitted no wrongdoing.Question & Answer 1. An AIG spokesman says Sullivan has no comment on his future or the company's direction while AIG cooperates with investigators. Each serves a different purpose and raises unique concerns A close confidante of Greenberg. too.
The problem: AIG never assumed any of the risk associated with insurance underwriting. Ethical issues related to transparency and failed internal controls Nevertheless. (AIG) may have breathed a sigh of relief at the Mar. However. Greenberg strived for a steadily rising stock price. the company acknowledged that "the transaction documentation was improper" and should never have been classified as insurance premiums. But the complex $99 billion insurance and financial empire he leaves behind remains mired in turmoil. (MMC). and how a stronger ethics program might help the company to strengthen the ethics of its corporate culture. He used mechanisms now being revealed as deceptive and improper. Maurice “Hank” Greenberg had been open about his suspicions of the AIG Financial Products unit. the insurer paid $126 million in fines to the Securities & Exchange Commission and Justice Dept. although AIG admitted no wrongdoing.2. AIG admitted no wrongdoing. Last fall. the Financial Products unit became even more speculative in its activities Investors in embattled American International Group Inc. "Hank" Greenberg would step aside two weeks after being pressured to give up the chief executive's role. but two of its executives plead guilty and left the company. Investigators believe that AIG may have goosed its financial performance with dubious transactions and improper accounting. which led to the ouster of Hank's son Jeffrey as CEO there. Discuss the ethical conduct of AIG executives. The company also came under the glare of New York Attorney General Eliot Spitzer for its role in bid-rigging with broker Marsh & McLennan Cos. during his long tenure as CEO of AIG. says a source in Spitzer's office. 28 announcement that Chairman Maurice R. 30. On Mar. 6|Page . for deals it structured for outside clients that allegedly violated insurance accounting rules. after Greenberg resigned as chief executive of AIG in 2005.
Says North Carolina State Treasurer Richard H. rather than as a one-shot effort when it appears to be needed. It's owned and operated by AIG executives. Regulators believe SICO hides executive pay and takes away powers that should rightly lie with the compensation committee of the board.V.AIG has a highly unusual arrangement with three private entities. It has come under fire for doling out money for political causes and for giving $36. who oversees a stake in AIG worth more than $300 million: "I don't think you can have a publicly traded company that allows board members to own a private entity that does business with the publicly traded company. Moore. and decide who gets paid what. Greenberg and other AIG directors sit on the board. Futter joined AIG 's board. C. A stronger ethics program might help the company to strengthen the ethics of its corporate culture. Starr & Co. have large personal stakes. Benefits of Managing Ethics as a Program There are numerous benefits in formally managing ethics as a program. Ethics programs: 7|Page .. Each serves a different purpose and raises unique concerns. governed and controlled by Greenberg and other AIG executives. and can include extensive training and evaluating.5 million to the American Museum of Natural History shortly after museum President Ellen V. They provide guidance in ethical dilemmas. often using codes and policies to guide decisions and behavior. A charitable entity which Greenberg also chairs and which has a 2% share in AIG. on the other hand. The arrangement also creates endless possibilities for conflicts of interest. Ethics programs convey corporate values. depending on the organization. is a group of agencies that develops business and issues specialized policies for AIG.
a subset of AIG’s counterparties) 8|Page . the losses from an AIG default would have been concentrated at fewer banks (the members of the clearinghouse. they would have required them with a clearinghouse If anything. and it would almost certainly have made things worse by concentrating the risk on fewer systemically important banks. is based on an incomplete understanding of how clearing actually works. Establish organizational roles to manage ethics Schedule ongoing assessment of ethics requirements Establish required operating values and behaviors Align organizational behaviors with operating values Develop awareness and sensitivity to ethical issues Integrate ethical guidelines to decision making Structure mechanisms to resolving ethical dilemmas Facilitate ongoing evaluation and updates to the program Help convince employees that attention to ethics is not just a knee-jerk reaction done to get out of trouble or improve public image 3. A more complete analysis demonstrates that it is unlikely that clearing would have made a blow up less likely. and if these losses required a bailout without a clearinghouse. and the necessity of spending amounts of huge taxpayer dollars in a bailout. What could AIG have done differently to prevent its failure and subsequent bailout? Treasury Secretary Tim Geithner recommended the mandatory formation of a clearinghouse as a means for preventing future financial crises. This view that clearing could have prevented the AIG problem. Holding AIG’s positions constant. clearing would have not substantially affected the allocation of losses among its trading parties.
it is very plausible that these costs would not have been so large to have induced AIG to reduce substantially its positions.7 billion in AIG common stock is an important milestone. would clearing have had a material effect on the financial crisis During the financial crisis. That assistance was a critical part of a broad-based effort to break the back of an historic financial panic and prevent a second Great Depression. Treasury's offering this week of $20.have required a government bailout of these firms Only if clearing had led AIG to scale back its trading. since its counterparties were trading to hedge their exposures to structured products. losses that would have likely . given its estimation of how profitable they were Even if AIG had reduced its positions. the Treasury Department and the Federal Reserve committed a combined total of $182 billion to stabilize AIG. but the expected proceeds of this offering will mean that the overall $182 billion commitment made to stabilize AIG is fully recovered. and if this in turn had led to a substantial decline in the amount of subprime lending. and if such a scaling back of AIG’s trading had led to a substantial reduction in the issuance and holding of the securities that AIG’s counterparties were hedging through the insurer.Although clearing would have presumably raised the costs that AIG incurred to hold positions (due to margining). these counterparties would have incurred larger losses on these positions. Federal banking regulators bear significant responsibility for not recognizing the risk of allowing regulated banks to buy large amounts of credit protection from AIG 9|Page . That is because not only was the objective of stopping a financial panic accomplished.
and the subsequent collapse of this strategy are vastly overstated. The cause was the real estate bubble and the huge pyramid of structured finance built on top of it. A systemic event would have occurred if AIG didn’t exist. and required an even larger bailout. the Goldmans. AIG’s decisions were certainly a disaster for its shareholders. Without AIG. Although AIG arguably contributed to the size of that pyramid. and the other firms that traded with AIG–would have suffered even worse losses. AIG’s collapse was a symptom of the underlying systemic problem. 10 | P a g e .Conclusion In my view. the systemic implications of AIG’s original plunge into CDOs. not its cause. its shareholders absorbed a good deal of the blow resulting from its collapse. the major banks and investment banks–the Citis. and that crisis likely would have been more severe.
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