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