COPING WITH FINANCIAL AND ETHICAL

RISKS AT AMERICAN INTERNATIONAL

GROUP

Neptali Reyes
February 2020
 BACKGROUND OF THE CASE

American International Group is one of the renowned insurance

industry around the world. AIG was founded by
Cornelius Vander Starr in Shanghai, China. It
provided insurance risk coverage to insurance
companies to disperse company liabilities. AIG
charges insurance companies a premium in order to
allow them to spread the risk so that they can sell
insurance policies and grow rapidly. AIG in 2008
experienced a meltdown and bailed out by the
government. AIG did not have large enough collateral
to sustain the subprime mortgage collapse and could not pay the
counterparties default. The damage to the company is massive and
some critics wonder if it will ever recover, as its effects have rippled
globally.

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EVOLUTION:
1919 - American International Group (AlG) was founded by Cornelius Vander Starr.

1926 – Expansion across Asia and the United States, led to success of AIG.

1968 – Maurice Greenberg took over as CEO.

End of 1980’s – AIG became the largest underwriter of commercial and industrial
coverage in the United States and the leading international insurance
organization.

Early 2000’s – AIG is under investigation by Securities and Exchange Commission for
its “finite insurance deals.

2005 – CEO Greenberg was forced out after the SEC leveled charges of fraud.
Martin Sullivan succeeded him and held the position for three years, followed
by Robert Willumstad for three months. The current CEO is Edward Liddy.

2008 – AIG experience meltdown due subprime mortgage crisis and sudden sharp
downturn in the value of residential real estate. Subsequently, the government
bail out the company.

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TIME CONTEXT

September 2008

This is the time when the organization had the condition

existing and the time to take advantage of the
organizations strenghts to overcome its weaknesses and
neutralize the threats.

However, American International Group lack liquidity. AIG did

not have the capital to repay the investors asking for their
money back in the wake of the corporation’s meltdown

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VIEWPOINT

Edward Liddy, CEO

Appointed by the Secretary of the U.S. Department of the Treasury to

provide stability to U.S. financial firms and restructure AIG, keep the
company out of bankruptcy, repay all the money invested in the
company and keep the remaining business that would comprise AIG
vital and competitive.

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CENTRAL PROBLEM

American International Group used credit default swaps recklessly,

failing to assess systemic risk of counterparties and did not have
the capital reserve requirements to pay its obligation lead ing to
subprime mortgage collapse.

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AIG not measuring its exposures, the blame lies in business
placing too much trust in models (computers and academic
experts) with faulty assumptions. The government rescue
protected many of its policy holders and counterparties from
immediate losses on traditional insurance contracts, but the
speculative trades were not part of the government rescue.

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 STATEMENT OF OBJECTIVES

Must: Stop
STATEMENT OF the corporate culture of issuing credit default swaps
OBJECTIVES
recklessly, promising to pay institutions and counterparties
if the
Must: Stop the securities
corporate culturedefaulted.
of issuing credit default swaps
swaps
recklessly, promising to pay institutions and counterparties
counterparties
if the securities defaulted.
Want: To change our management
Want: To change our management
practices of reckless risk of selling
practices of reckless risk of selling
credit default
default swaps without initial
credit default swaps without initial
collateral
collateral and capital to guarantee
collateral and capital to guarantee
creditworthiness to satisfy
satisfy
obligations.
creditworthiness to satisfy
obligations.

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Speculative risk taking —The central reason American International
Group was bailed out was that the government was seeking to
prevent the failure of some of the worlds largest banks, thereby
potentially causing a global financial catastrophe.

AIG’s action reflect ethical culture that neglects the most

important to stakeholders. The demise of AIG’s Financial
Products in part, resulted from excessive risk taking by economist
and financial scholars, using computer models that failed to take
into account real world market risks.

The cause of demise of AIG- the failure to assess the risk of

Credit Default Swaps- pushed the Federal Government to rescue
it and the U.S. banking system.

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AREAS OF CONSIDERATION

Brand equity The company sell off its Expense management Litigation
assets leading to available
The company is liquidity burden Competitors exists
restructuring Recover ownership of
Debt requirement-
requirement-lose the company Economic conditions
The resources are massive amount
vast for change of money. Use resources to limit
the risks
The company is Large government
amending its investment
business processes

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ALTERNATIVE COURSE OF ACTION

1. Take immediate action in improving the corporate

culture.

◦ To benefit from the right culture, ◦ Acceptance is negative.

eliminating excessive risk taking
from becoming more ethical. ◦ Employee turnover.
◦ To keep customers and
employees loyalty.
◦ To assert and maintain ethical
values.
◦ Decreases companies problem
and operation proceeds without
further delay.

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ALTERNATIVE COURSE OF ACTION

2. Strengthening risk management capabilities.

◦ Review manager’
manager’s needed ◦ Lowers retention of top executives
controls on risk taking. and employees.

◦ To eliminate reckless trading and ◦ Managers rejecting and not

cooperating with new program and
cost.
policies.

◦ Reduce unnecessary decisions on

bonuses or payments.

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ALTERNATIVE COURSE OF ACTION

3. Increase company’s transparency.

◦ Identifies all areas of exposure, ◦ Negative perception.

improves morale and increases the
bottom line. ◦ Competitive disadvantage.

◦ To restore credibility and image.

◦ Transactions, evaluations, and

performance for better
management.

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RECOMMENDATION

ACA 1. Take immediate action in improving the corporate

culture.
Corporate culture should not be applied recklessly to the
detriment of the company. The company should amend its
corporate culture and ethical rules must be adhered to prevent
imprudent decisions of managers thereby to prevent exces sive
loss.

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 DETAILED PLAN OF ACTION
Time
Activities Responsible Person(s)
Person(s) or Department
Frame

Introduce drafting a general model of

CEO and Senior
Senior Executive Managers One week
corporate culture to initiate change.

Draft
Draft a strategic mission and vision,
amending to improve work ethics and Week of 18
CEO and Senior
Senior Executive Managers
illegal practices. Nov

Establish a team to study, research and

Week of 25
analyse the current corporate culture, CEO and Senior
Senior Executive Managers
Nov
mission and vision of the company.

Discuss and formulate with employees

Week of 2
and managers the amendments, to CEO and Senior
Senior Executive Managers
Dec
receive inputs and suggestions.
Meet with employees, supervisors and
Week of 09
managers to discuss about working CEO and Senior
Senior Executive Managers
Dec
and culture problems.

Presentation, validation and revision of CEO and Senior

Senior Executive Managers Week of 16
corporate
corporate culture plan . Dec

Implementation of the appropriate

CEO and Senior
Senior Executive Managers Week of 23
strategic corporate culture changes the
Dec
organization can adapt to.

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REFERENCE

Daniels Fund Ethics Initiative, University of New Mexico. Coping with Financial and
Ethical Risks at American International Group (AIG). Retrieved from
http://danielsethics.mgt.unm.edu.

Wikipedia. American International Group. (2020, March 1). Retrieved from

https://en.m.wikipedia.org.

AIG Govres Case Study. Coping with Financial and Ethical Risks at American
International Group (AIG). (2020, March 1). Retrieved from https://www.scribd.com.

Ferrell, O.C., Thorne, D. & Ferrell, L. (2012). Social Responsibility & Business. 4th Ed.
Coping with Financial and Ethical Risks at American International Group (AIG). New
Tech Park, Singapore.

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