Download - Case of SS-10 AIG
-
8/21/2019 Case of SS-10 AIG
1/10
P A R T
CASES
CASE 5
Coping with Financial and
merican International
Ethical Risks
Group
AIG)*
W h e n
A m e r i c a n I n t e r n a t i o n a l G r o u p ( A I G ) c o ll ap s e d i n
September
2008 a n d w a s
subse
q u e n t l y saved b y a g ove rnm ent ba i lo ut , i t
became
one o f the m ost c on t rovers i a l pl ay ers i n the
2008-2009 f i n anc i a l c r i s is . Th e c orp orate c u l tu re at A I G h ad
been
i n v o l v e d i n a high-stakes
r i s k - t a k i n g
scheme
s u p p o r t e d b y m a n a g e r s a n d e m p l o y ee s t h a t a pp e a r ed e n t i r e l y f o c u s e d
o n
s h o r t - t e r m f i n a n c i a l g a i n . O u t o f a
f i r m
of
116,000
employ ees, one
u n i t
w i t h
a r o u n d
500
e m p l o y ee s , A I G F i n a n c i a l P r o d u c t s , w as c h i e f l y t o b l a m e f o r b r i n g i n g d o w n the c om p any ,
a n d c u r r e n t C E O E d L i d d y , w h o w a s s u m m o n e d b y f o r m e r T r e a su r y Secretary H a nk P au l son ,
es ti m ates tha t o f tha t nu m b er on l y t w e n t y to t h i r t y people were d i re c t ly
involved.
T h e A I G F i n a n c i a l P r o d u c t s u n i t s p e c ia l iz e d i n d e r iv a t i v e s a n d o t h e r c o m p l e x f i n a n
c i a l
c o n t r a c t s t h a t w e r e
t i e d
to s u b p r i m e m o r t g a g e s or c o m m o d i t ie s . W h i l e its dea l i ng s
w e r e
r isky ,
th e u n i t g enera ted b i l l i o ns o f do l l ars i n p ro f i t s for A I G . Even so , d u r i n g h i s l ong
t e n u r e
as
C E O o f A I G , M a u r i c e H a n k G r e e n b e r g h a d been op en ab ou t h i s su sp i c i ons
of
t h e A I G F i n a n c i a l P r o d u c t s
u n i t .
A f t e r G r e e n b e r g r e s i g n e d as c h i e f e x e c u ti v e o f A I G i n
2005, t h e F i n a n c i a l P r o d u c t s
u n i t became
even more speculat ive in i ts ac t ivi t ies .
I m m edi a te l y b efore i t s c o l lap se , A I G ha d exp osu re to $64
b i l l i o n
i n p o t e n t i a l s u b p r i m e
m o r t g a g e
losses.
T h e p e r f e ct s t o r m f o r m e d w i t h t h e s u b p r i m e m o r t g a g e c r i s i s a n d a s u d
d e n
sharp d o w n t u r n i n the va l u e o f
res i dent i a l
rea l
estate
i n
2008. Since
m u c h o f t h e s p e cu
l a t i o n i n t h e F i n a n c i a l P r o d u c t s
u n i t
w as t i e d t o d e r i v a t i v e s , e v e n s m a l l m o v e m e n t s i n t h e
v a l u e o f f i n a n c i a l m easu rem en ts c o u l d resu l t i n ca tas t rop hi c
losses.
I n
t h i s case, w e trac e the h i s to ry o f A I G
as
i t evo l ved
i n t o
one o f the larg es t and m ost
resp ec ted i nsu ran c e c om p an i es i n the w o r l d , and exp l ore the m ore rec ent events tha t l ed
to i t s d e m i s e . A I G h a d a m a r k e t v a l u e of
close
to 200 b i l l i o n i n
2007,
b u t b y 2009 t h i s
a m o u n t
h a d f a l le n to a m e r e 3.5 b i l l i o n . O n l y a g ov e r n m e n t
rescue
o f w h a t h as a m o u n t e d
to 180 b i l l i o n i n l o a n s , in v e s t m e n t s , g u ar a n te e s , a n d f i n a n c i a l i n j e c t i o n s p r e v e n t e d A I G
f r o m
f a c i n g t o t a l b a n k r u p t c y i n la te
2008.
T h e g o v e r n m e n t re s cu e d t h e c o m p a n y n o t
to
k eep it f r o m b a n k r u p t c y , h o w e v e r , b u t to p r e v e n t t h e b a n k r u p t c i e s o f m a n y o t h e r g l o b a l
f i n a n c i a l i n s t i t u t i o n s t h a t d e p e n d e d on A I G as c o u n t e r p a r t y o n c o l la t e r a l iz e d d e b t o b l i
g a t i o n s . I f A I G h a d been a l l o w e d to f a i l , it is p o s s ib l e t h a t t h e f i n a n c i a l m e l t d o w n t h a t
o c c u r r e d i n
2008-2009
w o u l d have been w orse .
T h i s case f i r s t e x a m i n e s t h e e v e n ts l e a d i n g u p
to
th e
2008
m e l t d o w n ,
i n c l u d i n g
the
p h i l o s o p h y
o f t o p m an ag em ent and the c orp ora te c u l tu re tha t se t the stage f o r A I G s d o w n
fa l l .
N e x t , w e r e v i e w t h e e v e n ts t h a t o c c u r r e d i n
2008,
i n c l u d i n g e t h i c a l
issues
re l a ted to
t r a n s p a r e n c y a n d f a i l e d i n t e r n a l c o n t r o l s . F i n a l l y , w e l o o k at t h e r o l e o f t h e g o v e r n m e n t
a n d
i ts dec is ion to b a i l o u t A I G .
T h i s case was prepared by O. C. Ferrell, John Fraedrich, and Jennifer Sawayda. Jennifer Jackson assisted in the previous edition of
this case It was prepared for classroom discussi on rather than to illustrate either effective or ineffective handlin g of an administrative,
ethical,
or
legal decision by
management A ll sources
used for this
case
were obtained through publicly available m aterial.
-
8/21/2019 Case of SS-10 AIG
2/10
CASE 5: COPING
W I T H
F I N A N C I A L
A N D E T H I C A L RISKS
AT AIG
A I G ' S HISTORY
The
saga
of Amer ica n Inter nati onal Group (A IG ) began i n 1919 w i t h the Ame ric an
businessman Corne lius Vander Starr, wh o fou nd ed a comp any in Shanghai represe nting
A m e r i c a n
insurance companies selling
f i r e
and marine coverage in Asia. Starr's
success
i n
Shanghai
q u i c k l y
led to expansion
across
Asia; Starr opened a branch of the company
i n
the
U n i t e d
States
in 1926. W h i l e AIG began as a representative of
A m e r i c an
insurance
companies abroad, in the
U n i t e d
States
it
p r o v i d e d
insurance
r i s k
coverage to insurance
companies as a way to disperse l i a b i l i t i e s . Reinsurers such as AIG were created to remove
some of the
r i s k
associated w i t h large disasters. Because o f A I G and others, insurance com-
panies c o u l d
g r o w
faster than ever before.
Insurance companies are educated
r i s k
takers. When insurance companies feel they
have too muc h
r i s k ,
they go to their reinsurance companies, such as A I G , to take out insur-
ance
so that if something catastrophic happens, they can s t i l l pay thei r clients. A I G utilizes
m o d e l s to determine how much insurance it can sell to insurers and s t i l l pay out. To put
i t
s i m p l y ,
A I G charges insurance companies a
p r e m i u m
in order to
a l l o w
them to spread
t h e i r r i s k
so that they can sell insurance policies and
g r o w
more r a p i d l y .
I n
1968 Maurice
H a n k
Greenberg, a native Ne w Yorker and experienced insurance
executive who had been w i t h AIG for many years, took over as CEO. AIG grew expo-
n e n t i a l l y d u r i n g his tenure. By the end of the 1980s the company had become the largest
u n d e r w r i t e r
of commercial and i n d u s t r i a l coverage in the
U n i t e d States
and the leading
i n t e r n a t i o n a l insurance o r g a n i z a t i o n .
A I G c o n t i n u e d to expand t h r o u g h o u t the 1990s led by its r e t u r n to China as the f i r s t f o r -
e i g n
insurance organizati on granted a license by the Chinese authorit ies to operate a w h o l l y
o w n e d
insurance business in Shanghai. (While many
f o r e i g n
organizations are required to
have Chinese investors, w h o l ly owned f o r e i g n
businesses
do not have this requirement.) AIG
la ter
expanded to Guangzhou, Shenzhen, and Beijing, as
w e l l
as
V i e t n a m .
In 2001 A IG estab-
l i s h e d t w o j o i n t
ventures in general insurance and
l i fe
insurance in
I n d i a w i t h
the Tata
G r o u p ,
the leading I n d i a n i n d u s t r i a l conglomerate. New A I G subsidiary companies f o l l o w e d the fall
o f the Soviet U n i o n i n t o Eastern Europe, w i t h general and l i fe insurance companies f o r m i n g
i n
Russia, Poland,
H u n g a r y ,
and the Czech Republic, among other emerging markets.
I n
2001 A I G purchased Ame ric an General
C o r p o r a t i o n ,
a top U.S.
l i f e
insurer. This
a c q u i s i t i o n made AIG a leader in the U.S. l i f e insurance i n d u s t r y and consumer l e n d -
i n g .
Today, the
f o u r
p r i n c i p a l business
areas
of A I G are General Insurance,
L i f e
Insurance
a n d
Retirement Services Financial Services and Asset Management. For the
i n d i v i d u a l
consumer, business, fin anc ial professional, or insurance professional, A I G provides acci-
d e n t and health insurance, auto insurance, l i f e insurance, banki ng and loans, retirement
services, t r a v e l insurance,
a d d i t i o n a l
services, and annuities.
I m m e d i a t e ly
before its
2008
collapse, A I G had revenues exceeding 110
b i l l i o n , t o t a l assets
of over 1
t r i l l i o n ,
and
116 000
employees around the w o r l d .
A I G ' S CULTURE
M a u r i c e
H a n k
Greenberg was the CEO of AIG for 38 years, and was therefore a key
p l a y e r in shaping the modern
face
and corporate culture of the company. Ma ny consid-
ered Greenberg a genius in the insurance business, and arguably he was one of the most
-
8/21/2019 Case of SS-10 AIG
3/10
1 7 0
PART
CASES
successful a n d i n f l u e n t i a l e xe c ut ive s i n t he b us ine ss. Bu t c r i t i c s c a l l e d h i m aut o c ra t i c i n h is
dr i ve
t o e x p a n d t h e c o m p a n y
i n t o
a n i n t e r n a t i o n a l p ow e r h o u s e .
D u r i n g h i s career, G r e e n b e r g c h a m p i o n e d i n n o v a t i v e p r o d u c t s t h a t i n s u r e a l m o s t
a n y t y p e o f r i s k ,
i n c l u d i n g
I n t e r n e t
i d e n t i t y
t h e f t a n d h i j a c k i n g . A t least f o u r U . S . p r e s i
d e n t s s o u g h t h is a d v i c e o n i n t e r n a t i o n a l a f f a i r s a n d f i n a n c i a l m a r k e t s . G r e e n b e r g w a s
a lw ay s k n o w n f o r
u t i l i z i n g
h is contacts a n d i n f l u e n c e t o h e l p a d v a n c e t h e c o m p a n y . O v e r
t h e y e a rs , G r e e n b e r g a g g r e s s i v e ly l o b b i e d f o r l a w s a n d r u l i n g s f a v o r a b l e t o A I G . H e w a s
v e r y i n v o l v e d w i t h i n t e r n a t i o n a l p o l i t i c s a n d h e l p e d t h e U .S . g o v e r n m e n t t o secure i n f o r
m a t i o n a n d d e v e l o p b a c k - d o o r c h a n n e l s f o r c l a s si f i e d d e a l i n g s . I n r e t u r n , A I G w as g i v e n
t h e b e n e f i t o f t h e d o u b t w h e n r e g u l a t o r y agencies came q u e s t i o n i n g t h e c o m p a n y 's d o i n g s .
W h e n b i l l i o n s o r t r i l l i o n s o f do l lars are
i n v o l v e d ,
g l o b a l c o r p o r a t i o n s h a v e p o w e r s e q u a l t o
or g re a t e r t han
those
o f g o v e r n m e n t s a n d r e g u l a t o r y agencies.
I n
spite of Greenbe rg 's ac t ive
n e t w o r k i n g ,
t he e ar ly
2000s f o u n d
A I G u n d e r i n v e st i g a
t i o n
b y t he S e c ur i t ie s an d
Exchange
C o m m i s s i o n f o r i t s f i n i t e i n s u r a n c e d e a l s — c o n t r a ct s
t h a t
c o v e r e d s p e c i f i c a m o u n t s o f losses r a t h e r t h a n u n e x p e c t e d losses o f i n d e t e r m i n a t e
s i z e — a n d w h a t a p p e a re d t o be l o a n s
(since
p r e m i u m s w e r e s t r u c t u r e d t o m a t c h p o l i c y
p a y o u t s a n d e l i m i n a t e r i s k ) r a t h e r t h a n g e n u i n e r i s k a l l o c a t i o n v e h i c l e s . A f e d e r a l i n q u i r y
l a t e r f o u n d
i n f o r m a t i o n
t h a t G r e e n b e r g m i g h t h av e been p e r s o n a l l y
i n v o l v e d
i n c r e a t i n g a
b o g u s r e i n s u r a n c e t r a n s a c t i o n
w i t h
t h e G e n e r a l Re C o r p o r a t i o n t o
f r a u d u l e n t l y
b oos t A I G 's
reserves. N e w Y o r k A t t o r n e y G e n e r a l E l i o t S p i tz e r s u b p o e n a e d G r e e n b e r g , w h o t re a t e d t h e
s u m m o n s f a r m o r e l i g h t l y t h a n h e s h o u l d h a v e . A s r u m o r s
s w i r l e d ,
A I G ' s s t o c k b e g a n
to
p l u m m e t ,
a n d th e A I G b o a r d s t ar t e d t o
become
c o n c e r n e d .
I n 2005 G r e e n b e r g w a s f o r c e d o u t as C E O . N e x t M a r t i n S u l l i v a n h e l d t h e C E O
p o s i t i o n f o r t h r e e y e a r s ,
f o l l o w e d
b y R o b e r t W i l l u m s t a d f o r t h re e m o n t h s . W i l l u m s t a d
w a s f o r c e d t o s t e p d o w n i n 2008 i n t h e w a k e o f t h e c o r p o r a t i o n ' s m e l t d o w n . H e w a s
r e p l ac e d b y E d w a r d L i d d y , f o r m e r C E O o f T h e A l l s t a t e C o r p o r a t i o n . T h e S EC l e v e l e d
charges
o f f r a u d a g ai n st G r e e n b e r g r e s u l t i n g f r o m t h e c i r cu m s t a n ce s s u r r o u n d i n g h i s
d e p a r t u r e .
I n o r d e r t o s e t t l e t h e
charges
t h a t A I G m a n i p u l a t e d f i n a n c i a l s t at e m e n ts i n
2005, t h e c o m p a n y p a i d t he S EC $1 .6 b i l l i o n i n 2006, a n d G r e e n b e r g a g r e e d t o p a y a n
a d d i t i o n a l $15 m i l l i o n i n 2009.
W H A T H A P P K X K D A T AKITOC.U SK ITS DEMISE?
T h e h e a r t o f A I G ' s t r o u b l e s l e a d i n g u p t o t h e 2008 b a i l o u t w a s a
k i n d
o f d e r i v a t i v e c a l l e d
c r e d i t d e f a u l t s w a p s
(CDSs).
C r e d i t d e f a u l t s w a ps a re f i n a n c i a l p r o d u c t s t h a t t r a n s f e r
t h e c r e d i t e x p o s u r e ( r i s k ) o f f i x e d - i n c o m e p r o d u c t s ( b o n d s ) b e t w e e n p a r t i e s . T h e b u y e r
o f a c r e d i t s w a p receives c r e d i t p r o t e c t i o n , as t h e se l l e r o f t h e s w a p g u a r a n t e e s t h e c r e d
i t w o r t h i n e s s
o f t h e p r o d u c t . T h e r i s k o f d e f a u l t i s t h e r e b y t r a n s f e r r e d f r o m t h e h o l d e r o f
t h e f i x e d - i n c o m e s e c u r i t y t o t h e s e l l e r o f t h e s w a p . O n e s i n g l e c r e d i t d e f a u l t s w a p c a n b e
v a l u e d
a t h u n d r e d s o f
m i l l i o n s
o f d o l l a r s .
A s
a r e i n s u r e r , A I G u s e d CDSs as a
k i n d
o f i n s u r a n c e
p o l i c y o n c o m p l e x c o l l a t e r a l i z e d d e b t o b l i g a t i o n s ( C D O s ) .
T h e c o m p a n y i s s u e d t h e s w ap s a n d p r o m i s e d to p a y these
i n s t i t u t i o n s , A I G ' s c o u n t e r p a r t i e s , i f t h e d e b t s e c u r i t i e s d e
f a u l t e d . H o w e v e r , A I G d i d n o t h a ve a l a r g e e n o u g h s a f e ty n e t
t o
w e a t h e r t h e s u b p r i m e m o r t g a g e c o l l a p s e .
These
i n s u r a n c e
c o n t r a c t s became e s s e n t i a l l y w o r t h l e s s
because
m a n y p e o p l e
AIG did not have a
large enough safety net
to weather the subprime
mortg g
collapse.
-
8/21/2019 Case of SS-10 AIG
4/10
C A S E 5 : C O P I N G W I T H
F I N A N C I A L AND
E T H I C A L RISKS A T A I G
c o u l d n o t p a y b a c k t h e i r s u b p r i m e m o r t g a g e s a n d A I G d i d n o t ha v e th e c r e d i t w o r t h i n e s s
f or
the big col la teral cal l .
T h e g o v er n men t to o k th e dr as t i c s tep o f
b a i l i n g
o u t th e c o m p a n y , p r o v i d i n g t h e f u n d s
to
p u r c h a se t h e C D O s t h a t w e r e b e i n g h e l d b y b a n k s , h e d g e f u n d s , a n d o t h e r f i n a n c i a l
i n s t i t u t i o n s ,
a n d i n t h e
process
e n d e d u p
w i t h
7 9 .9 p e r c e n t o w n e r s h i p o f
A I G .
T h e U.S .
g o v e r n m e n t i s n o w t h e s e n io r p a r t n e r i n a sp e c i a l -p u r p o s e e n t i t y t h a t
w i l l
receive interest
an d share
l i a b i l i t y
i n t h e o w n e r s h i p o f
these
t a i n t e d i n v e s t m e n t i n s t r u m e n t s . T h e g o v e r n
m e n t h a d f e a r ed t h a t i f A I G w e r e a l l o w e d t o g o b a n k r u p t , m a n y b a n ks t h r o u g h o u t t h e
w o r l d w o u l d h av e g o n e b an k r u p t as wel l .
As
w e h av e n o ted , o n e u n i t o f t h e c o m p a n y , A I G F i n a n c i a l P r o d u c t s , w a s t h e source
o f ma n y o f th e c o mp any 's w o es . Fo u n ded i n 1987 b y
H o w a r d
Sosin to trade o ver- the-cou nter
d e r i v a t i v e s ,
i ts c r e a t i o n w a s t i m e d p e r f e c t l y t o r i d e t h e d e r i v a t i v es m a r k e t b o o m . B y a n d
l a r g e , F i n a n c i a l P r o d u c t s w a s r u n l i k e a h e d g e
f u n d
o u t o f
W i l to n ,
C o n n e c t i c u t , a n d
L o n d o n . H edg e fu n d s ar e a sp ec i al ty p e o f
f u n d
avai lable to a
select
r an g e o f in v es to r s . T h ey
seek to u t i l i ze a w i d e v a r i e t y o f i n v e s t m e n t t o o l s t o m i t i g a t e , o r hedge r i s k . O f t e n t h e t e r m
r e fe r s to fu n d s th a t use sh o r t se l l i n g as a
means
o f i n c r e a s i n g i n v e s t m e n t r e t u r n s . S h o r t
se l l ing i s b e t t i n g th at th e s to c k p r i c e o f a c o mp an y
w i l l
change d u r i n g a s p e c i f i e d p e r i o d o f
t i m e .
W h e n th e stocks mo v e th e exp ec ted
d i r e c t i o n ,
th e i n v es to r mak es mo n ey .
A I G
F i n an c i a l Pr o du c ts sp ec i a l ized i n der i v at i v es th at g ener ated b i l l i o n s o f do l lar s i n
p r o f i t s o v e r th e y ea r s. D e r i v a t i v e s a re f i n a n c i a l c o n t r a c t s o r i n s t r u m e n t s w h o s e v a l u e i s
d e r i v e d f r o m s o m e t h i n g else s u ch as c o m m o d i t i e s ( c o r n , w h e a t , soybeans, etc . ) , s tock s,
b o n d s , a n d e v e n h o m e m o r t g a g e s . G a i n s o r losses f r o m d e r i v a t i v e s come f r o m b e t t i n g
o n t h e m o v e m e n t o f
these
v a lues . T h e u n i t also dea l t i n mo r tg ag e sec ur i t i e s , a sector that
t u r n e d
r a n c i d w i t h t h e c o ll a ps e o f t h e h o u s i n g b u b b l e . F o r m e r N e w Y o r k A t t o r n e y G e n e r a l
E l i o t S p i tzer , a c h amp i o n o f f i n a n c i a l sector r e f o r m , c l a i m e d t h a t A I G F i n a n c i a l P r o d u c t s
w as th e b lac k h o le o f
A I G .
W h e n
H o w a r d
S o s i n j o i n e d A I G h e w a s g i v e n an u n u s u a l d e a l — a 2 0 p e r c e n t stake
i n th e
u n i t
a n d 2 0 p e r c e n t o f i ts p r o f i t s . W h i l e A I G c a n b e d e s c r i b e d as a c o n s e r v a t i v e
g l o b a l c o n g lo m er ate se l l i n g i n sur an c e p o l i c i es to
businesses
a n d i n d i v i d u a l s , th e F i n an c i a l
P r o d u c t s
u n i t
w as s ta f f ed b y qu an t i ta t i v e sp ec i a li s ts w i t h d o c t o r a te s i n f i n a n c e a n d m a t h .
Emp lo y ees o f th e u n i t c o n duc ted th emse lv es l ik e i n v estmen t b an k er s .
I n
the late
1990s,
u n d e r t h e l e a d e r s h i p o f Joseph Cassano, A I G F i n a n c i a l P r o d u c t s
r a m p e d u p i t s business o f s e l l i n g c r e d i t d e f a u l t s w a p s , w h i c h w er e a t th e h ear t o f th e
2008-2009
f i n a n c i a l m e l t d o w n . A I G F i n a n c i a l P ro d u c t s e x p a n d e d
i n t o
w r i t i n g swaps
to
c o v e r d e b t t h a t w a s b a c k e d b y m o r t g a g e s . T h e u n i t so ld sw ap s to l ar g e
i n s t i t u t i o n a l
i n v es to r s .
These
c o l la te r a l i zed deb t o b l i g at i o n s w er e b ac k ed b y mo r tg ag es , an d th e sw ap s
i s su e d b y A I G b a c k e d some 440 b i l l i o n
w o r t h
o f o b l i g a t i o n s . T o p u t t h i s i n p e r s p e c ti v e ,
t h e e n t i r e m a r k e t
w o r t h
o f A I G w as a r o u n d 200 b i l l i o n a t t h e t i m e . A I G m a d e m i l l i o n s
se l l ing c o l la te r a l ized deb t o b l i g at i o n s ( C D O s ) a n d w as ab le to p o st mo dest m ar g i n r equ i r e
m e n t s , w h i c h i s t h e a m o u n t t h e c o m p a n y keeps as a dep o s i t to p r o tec t ag a i n s t th e r i sk o f
l o a n
d e f a u l t s o r n o n p a y m e n t s . F o r e x a m p l e , t o b u y s to c k o n m a r g i n , y o u m u s t ha v e at least
50 p er c en t o f th e p ur c h ase p r i c e i n y o u r ac c o u n t . A I G w as able to ma k e these C D O d ea ls
w i t h
a v e r y s m a l l f r a c t i o n o f ac t u a l m o n e y o n h a n d . U n f o r t u n a t e l y , some o f these C D O s
w er e a t tac h ed to h o me mo r tg ag es .
I n sp i te o f th e r i sk , th e c o m p an y i n v o l v e d i t s e l f i n b a d m o r t g a g e l e n d i n g b y f i n a n c i a l
i ns t i t u t i ons
t h a t
d i d
n o t h av e su f f i c i en t c ap i ta l to c o v er th e lo an s ,
w h i c h
i n
t u r n
h a d b o u g h t
t h i s ty p e o f i n sur an c e f r o m A I G t h a t c r ea te d a n u n s t a bl e f i n a n c i a l e n v i r o n m e n t . T h e l o a ns
an d
t h e C D O s w e r e o f t e n s o l d t o p e o p l e w h o c o u l d n o t r e p a y t h e i r d e b t . C E O G r e e n b e r g
-
8/21/2019 Case of SS-10 AIG
5/10
P ART
CASES
became concerned a b ou t t h i s u n i t ' s d er iv a t iv e d ea l in g s a n d asked a g r ou p t o s h a d o w i t s
t r a d es . Gr een b er g w a s u n c om f or t a b le
w i t h
t h e r es u l t s a n d t h ou g h t t h e u n i t w a s t a k in g t oo
m a n y r i sk s . How ev er , Gr een b er g le f t t h e c om p a n y i n
2005 because
of r eg u la t or s in v es t ig a t
i n g
A I G ov er it s a c c ou n t in g p r a c t ic es .
A I G
s o l d c r e d i t p r o t e c t i o n o n C D O s b y s i m p l y
w r i t i n g pieces
of paper that s ta ted that
A I G
w o u l d
cover
th e
losses
i n
case these
o b l i g a ti o n s w e n t b a d . A I G
agreed
to e i ther take
ov er t h e ob l ig a t ion s or
cover
th e
losses
o n C D O s . W h i l e A I G m a de b i l l i o n s o f d o l l a r s i n
p r o f i t s
a n d managers r ec eiv ed m i l l i on s o f d o l la r s i n c om p en s a t ion f or s e l lin g these so-ca l led
in s u ra n c e p ol i c ies , i t t u r n e d ou t t o be a h ig h - r i s k house of cards . The tools , CDOs, and CDSs
were used reckless ly and fa i le d to assess systemic r i s k o f c ou n t er p a r t ies n o t m ea s u r in g t h e i r
o w n
exposures
a n d n o t p a y i n g t h e i r o b l i g a t i o n s . T h e F i n a n c i a l P r o d u c t s u n i t w a s u n d er
i n v e s t i g a t i o n a r o u n d t h e w o r l d , i n c l u d i n g b y th e U n i t e d K i n g d o m s Serious F r a u d O f f i c e .
However , i t s probe against
A I G s
F in a n c ia l P r od u c t s u n i t w a s ev en t u a l ly d r op p ed .
A l t h o u g h t h e y have since g a i n e d n o t o r i e t y , before
2008
d e r i v a ti v e s w e r e n o t w i d e l y
u n d e r s t o o d b y t h e p u b l i c , mass m e d i a , r e g u l a t o r s , a n d e v e n m a n y o f t h e executives w h o
w e r e o v er s e e in g t h e i r us e. A I G c o u l d
have
t a k e n a n o t h e r a p p r o a c h , b u y i n g m o r t g a g e s o r
C D O s a n d t h e n h a v i n g some o t h e r p a r t y package t h e m i n t o a cred it default swap as in sur
ance
b u t since A I G w as a n i n s u r e r i t s i m p l y w r o t e p o l i c i e s o n C D O s , i n c r e a s in g
revenues
w i t h
t h e h op e t h a t on ly a f ew w o u l d default .
IG Lacked
Transparency
There
were
suggestions
t h a t A I G k n e w o f p o t e n t i a l p r o b l e m s i n v a l u i n g d e r i v a ti v e
contracts
before t h e f i n a n c i a l m e l t d o w n o c c u r r e d . O u t s i d e a u d i t o r s r ai s ed
concerns
a b ou t b e in g ex
c lu d e d f r o m c on v er s a t ion s t h a t concerned t h e ev a lu a t ion o f d er iv a t iv es . A s A IG ' s a u d i t or ,
P r i c e w a t e rh o u s e C o o p e r s ( P w C ) h a d a
r i g h t
t o k n o w a b o u t th e m o d e l s a n d a bo u t m a r k e t
in d ic a t or s t h a t in d ic a t ed t h a t t h e v a lu e o f A I G swaps s h o u l d b e l o w e r e d . D u r i n g t h i s p e r i o d ,
h o w e ve r , A I G
executives Cassano
a n d S u l l i v a n c o n t i n u e d t o reassure in v es t or s a n d a u d i
t or s t h a t A I G h a d a c c u r a te ly id e n t i f i ed a l l
areas
o f exposure t o t h e U . S . r es id en t ia l h ou s in g
m a r k e t a n d st a te d t h e i r c o n f id e n c e i n t h e i r e v a l u a t i o n m e t h o d s . T h e
Justice
D e p a r t m e n t
l a u n c h e d a p r o b e o f A I G
executives
i n c l u d i n g
Joseph Cassano
to invest igate whether they
h a d m is led in v es t or s , b u t ev en t u a l ly d ec id ed n ot t o b r in g c r im in a l
charges
against the m .
T h e m a r k e t i n d i c a t o r s i n q u e s t i o n
came
i n t h e f o r m o f d e m a n d s f o r c o ll a t e ra l b y A I G
t r a d i n g p a r t n e r s . A t a c on g r es s ion a l h e a r in g , S u l l iv a n s t a ted t h a t he b e l iev ed t h e ev a lu a
t ion s t o b e accurate based o n t h e i n f o r m a t i o n h e possessed a t t h e t i m e . T h i s s i t u a t i o n is
s i m i l a r
to
executives
a t E n r o n c l a i m i n g th e y d i d n o t k n o w t h a t E n r o n h a d u t i l i z e d t h e d e
r i v a t i v e s
a n d o f f - t h e - b o o k balance sheet p a r t n er s h ip s t h a t caused i t s d e m i s e . M a n y E n r o n
executives
e n d e d u p b e i n g f o u n d g u i l t y of c r im es .
IG
Provided ncentives to
Take
Risks
W h a t w er e t h e f a c t or s w i t h i n t h e c or p or a t e c u l t u r e o f A I G th a t
p r o m o t e d
s p e c u l a ti v e r i s k - t a k i n g ? P a r t o f t h e p r o b l e m m a y
have
been A IG ' s in c en t iv es . T h e A I G c u l t u r e w a s f oc u s ed o n
a
r e w a r d
system that placed l i t t l e r es p on s ib i l i t y on
executives
w h o
m a d e v e r y p o o r d e c is io n s . A l t h o u g h t h e y p r o d u c e d n e a rl y 4 0
b i l l i o n i n
losses
i n
2008
a n u m b e r o f managers w er e selected t o
receive large bonuses. A I G o f f er e d cash awards and other perks
PB^ heAIG
culture was
focused on
reward
system that
placed
little
responsibility on executives
who made
v ry
poor
decisions.
-
8/21/2019 Case of SS-10 AIG
6/10
C A S E 5 : C O P I N G W I T H F I N A N C I A L A N D E T H I C A L
RISKS
A T A I G
to 38 e xe c u ti ves and a re te n t i on p rog ram w i t h p a y m e n t s f r o m 92,500 to $4 m i l l i o n f o r e m
p l oy e e s e arni ng salaries b e t w e e n 160,000 and $1 m i l l i o n .
A f t e r
r e c e i v i n g m o r e t h a n $ 1 5 2 b i l l i o n i n f e d e r a l
rescue
f u n d s , A I G
p u b l i c l y
c l a i m e d
tha t i t w o u ld e l i m i n a t e some o f these bonuses for senior executives
w h i l e
a l l t h e t i m e
p l a n
n i n g
t o h a n d o u t cash a w a r ds t h a t d o u b l e d o r t r i p l e d th e salaries o f s o m e . A I G asserted
t h a t
these
ty p e s o f p ay m e nts w e re
necessary
to k e ep t op e m p l oy e e s a t AI G , e ve n as c on tro l
o f t h e c o m p a n y w a s b e i n g h a n d e d o v e r t o th e g o v e r n m e n t . T h e f a ct o f r e w a r d s d o l e d o u t
i n th e
face
o f
excessive
r i s k - t a k i n g a n d p os s ib l e m i s c o n d u c t h as m e t w i t h o u t r a g e a m o n g
m o s t s t a k e h o l d e r s . T h e m a i n r e as o n t h a t A I G w a s b a i l e d o u t at a l l w a s t h a t t h e g o v e r n m e n t
w as se e k i ng to p re ve nt the f a i l u re o f some o f t h e w o r l d ' s l a rg e st b a n k s , t h e r e b y p o t e n t i a l l y
c au s i ng a g l o b a l f i n an c i a l c a tas t rop he . AI G 's ac t ions re f l e c t an e th i c a l c u l t u re th a t neglects
it s
m o s t i m p o r t a n t s t a k e h o l d e r s .
T h e de m i se o f AI G 's F i na nc i a l P rodu c ts
u n i t
re su l te d i n p ar t f r o m
excessive
r i s k - t a k i n g
b y
e c onom i s ts and o th e r f i nan c i a l e xp e r ts u s i n g c om p u te r m ode l s th a t f a i l e d to tak e i n t o ac
c o u n t
r e a l - w o r l d
m a r k e t r i s k s . F o r e x a m p l e , A I G
p a id
G a r y G o r t o n , a f in a n c e p r o f e ss o r a t
t h e Y al e S c h o o l o f M a n a g e m e n t w h o s e
w o rk
h a d
been
c i t e d i n
speeches
b y Fe de ra l
Reserve
C h a i r m a n B e n B e r n a n k e , l ar ge c o n s u l t i n g fees f or de ve l o p i ng c om p u te r m od e l s to g au g e r i sk
f o r m o r e t h a n
400 b i l l i o n
i n c om p l i c a te d c re di t de f au l t sw ap s. Re m e m b e r tha t a s i ng l e sw ap
c an b e va l u e d a t h u nd re ds o f m i l l i o n s o f d o l la rs . A I G r e li e d o n G o r t o n s m o d e l s to d e t e r m i n e
w h i c h s w a p d ea ls w e r e l o w r i s k . U n f o r t u n a t e l y ,
these
m o d e l s d i d n o t a n t ic i p at e h o w m a r k e t
forces
and c ontrac t te rm s c ou l d t u r n swap s i n t o h u g e f i n a n c i a l l iab i l i t ies . A I G d i d n o t a ss ig n
G o r t o n to
assess those
th re a ts , and the re f ore h i s m od e l s d i d no t c ons i de r th e m .
L i k e o t h e r m a j o r f i r m s , A I G e n t e r ed a v e r y l u c r a t i v e b u t p e r i l o u s n e w m a r k e t w i t h o u t
t r u l y u n d e r s t a n d i n g t h e
sheer
c o m p l e x i t y o f th e f i n a n c i a l p r o d u c t s i t w a s s e l li n g . W h a t t h e
c o m p a n y l e a r n e d t o o l at e w a s t h a t co m p u t e r s a n d a c ad e m i c e x p e rt s c a n n o t d e t e r m i n e a l l o f
th e var i ab l e s , f o rc e s, an d w e i g h ts th a t
cause
a
h i g h -
o r
l o w - r i s k
i n v e s t m e n t t o g o b a d . T h e
b l am e l i e s w i t h business p l a c i n g t o o m u c h t r u s t i n m o d e l s t h a t t u r n o u t t o c o n t a i n fau l t y
a s s u m p t i o n s . M o d e l s c a n n o t p r e d i c t
w i t h
a b so l u te c e r t a i n t y w h a t h u m a n s w i l l d o because
h u m a n s a re n o t al w a y s r a t i o n a l . W a r r e n B u f f e t t , c h i e f e x e cu t iv e o f B e r k s h i r e H a t h a w a y a n d
a
b i l l i o n a i r e
m an y t i m e s ove r , has sa id , . . . b e w are o f
geeks
. . . b e a r i n g f o r m u l a s .
A I G :S CRISIS A X I ) B A I L O U T
A I G ' s p r o b l e m s
came
to a
b o i l
i n
September
2008.
D u e t o t h e m a n y
issues
ou t l i ne d e ar l i e r ,
A I G ' s s t o ck w a s d o w n g r a d e d b y t h e
r a t i n g
c o m p a n i e s, w h i ch caused the s toc k to d r o p , caus-
i n g a r u n o n t h e r e i n su r e r 's l i q u i d assets (cash o n h a n d ) t h a t r e v e a l e d i t s l a c k o f l i q u i d i t y .
S i m p l y
p u t , A I G d i d no t have th e c ap i ta l to re p ay i nve s tors ask i ng f or the i r m on e y b ac k .
A I G
u l t ima te ly
o w e d W a l l
Street's
biggest f i r m s abo ut $100 b i l l i o n for speculative trades
t u r n e d bad ; $64 b i l l i o n o f t h a t w a s t i e d to losses on su b p r i m e m ortg ag e s . T he c om p any a l l e g
edly p laced b i l l ion s o f dol lars at r i sk
t h r o u g h
s p e cu l a t io n o n t h e m o v e m e n t s o f v a r io u s m o r t
gage
p oo l s , and th e re w e re no ac tu a l se cu r i ti e s b ac k i ng
these
sp e c u la t i ve p os i t i on s on w h i c h
A I G w a s l o s i n g m o n e y . T h e losses s t e m m e d f r o m market wagers that were essentia l ly
bets
o n
the p e r f orm an c e o f bu ndl e s o f der i va t ive s
l i n k e d
to subprime residentia l mortgages .
T h e g o v e r n m e n t
rescue
o f A I G p r o t e c t e d m a n y o f it s p o l i c y h o l d e r s a n d c o u n t e r p a r
ties f r o m i m m e d i a t e losses o n
t r a d i t i o n a l
i nsu ranc e c ontrac ts , b u t
these
speculat ive trades
w e r e n o t a p a r t o f t h e g o v e r n m e n t r i s k rescue. O v e r t h e course o f a m o n t h , t h e g o v e r n m e n t
-
8/21/2019 Case of SS-10 AIG
7/10
1 7 4
PART
CASES
d o l e d ou t ove r $152 b i l l i o n i n t a x pa y e r m o n e y , c r e a ti n g a l i n e o f c r e d i t f o r t h e c o m p a n y
an d
b u y i n g
u p A I G s t o ck . T h i s w a s a h i g h l y c o n t r o v e r s ia l m o v e , p a r t i c u l a r l y since the g ov
e r n m e n t h a d n o t d o n e t h e same t h i n g f o r th e o t h e r s t r u g g l i n g f i n a n c i a l g i a n t , L e h m a n
B r o t h e r s . I n M a r c h 2009, t h e g o v e r n m e n t m a d e t h e c o n t r o v e r s i a l d e c i s i o n t o d o l e o u t a n
o the r $30
b i l l i o n
i n ca p i t a l t o A I G . T h e d e c i s i o n w a s m a d e e v e n m o r e c o n t e n t i o u s w h e n i t
was revealed that $165
m i l l i o n
o f th e b a i l o u t m o n e y h a d g o n e t o
bonuses
o f e m p loy e e s o f
t h e f a i l e d F i n a n c i a l P r o d u c t s
u n i t .
T h e c o m p a n y s t a t e d t h a t t h e
bonuses
w e r e p a r t o f t h e
e m p l o ye e s' c o n t r a c ts a n d c o u l d n o t b e r e v o k e d .
B o t h c o n s u m e r s a n d g o v e r n m e n t o f f i c i a l s w e r e o u t r a g e d . Pressure o n A I G
became
so
g r e a t t h a t C E O E d w a r d L i d d y a sk e d e x e c ut iv e s w h o w e r e m a k i n g o v e r 100,000 a year to
r e t u r n
th e bonuses. T h e H o u s e o f R e p re s e n ta t iv e s v o t e d t o i m p l e m e n t a 9 0 p e r c e n t t a x o n
bonuses a t c om p an i e s tha t re c e i ve d ove r $5
b i l l i o n
i n b o n u s f u n d s . H o w e v e r , d u e to t h e
h i g h l e ve l o f p re ssu re ag a in s t the c om p an y , m os t o f the e xe c u ti ve s i n qu e s t i o n re tu rn e d the
m o n e y . I n 2 0 10 A I G a n n o u n c e d t h a t i t w a s r e v a m p i n g i ts b o n u s s y s te m . W h i l e p r e v i o u s b o
nuses
w e re la rg e ly based o n l e n g t h o f ti m e e m p l o y e d w i t h t h e co m p a n y , A I G v o w e d t o b e t
t e r a l i g n f u t u r e
bonuses
w i t h
p e r f o r m a n c e . T o p r e v e n t s u c h a n o c c u r r e n c e
f r o m
h a p p e n i n g
i n th e f u tu r e , t he g o v e r n m e n t also re so lve d to increase i t s o v e r s i g h t o f n e w b a i l o u t f u n d s .
W h e n
q u e s t i o n e d a b o u t th e d e c i s i o n t o r e p e a te d l y b a i l o u t
A I G ,
F e d e r a l
Reserve
C h a i r
B e n B e r n a n k e
t o l d
U . S. l a w m a k e r s , A I G e x p l o i t e d a h u g e ga p i n t h e r e g u l a t o r y s y s t e m .
T h e r e w a s n o o v e r s i g h t o f t h e f i n a n c i a l p r o d u c t s d i v i s i o n . Thi s w as a he dg e
f u n d ,
basical ly ,
tha t w as a t tac he d to a l a rg e an d stable i n s u r a n c e c o m p a n y . H e s t a te d t h a t A I G w a s t h e
s i n g l e case o u t o f t h e e n t i r e
2008-2009
f i n a n c i a l c r i s i s t h a t m a d e h i m t h e a n g r i e s t. H o w
e ve r, Be rn an k e w e n t on to say , W e ha d n o choice b u t to t r y to s tab i l i ze the sy s te m because
o f t h e i m p l i c a t i o n s t h a t th e f a i l u r e
w o u l d
h a v e h a d f o r t h e b r o a d e c o n o m i c s y st em .
A l t h o u g h
t h e b a i l o u t s w e r e m a s si v e , t h e y d i d n o t c o v er a l l t h a t A I G o w e d , a n d t h e
c o m p a n y ha s h a d t o s e ll o f f n u m e r o u s
assets.
T w o - t h i r d s o f t h e c o m p a n y n e e d e d t o b e s o l d
i n
a t o u g h m a r k e t f o r s e ll er s, r e s u l t i n g i n a u c t i o n s o f d o z e n s o f th e c o m p a n y ' s u n i t s a r o u n d
th e w o r l d . M a n y o f
these
sales r e s u l te d i n d i s a p p o i n t i n g p r i ce s f o r A I G . F o r e x a m p l e ,
M u n i c h Re , the w o r l d s b i g g e s t re i n su re r , ag re e d to b u y AI G's H a r t f o r d u n i t fo r 742 m i l
l i o n , a b o u t a t h i r d less t h a n A I G h a d
p a i d
f o r i t e i g h t years b e f o r e . T h e c o m p a n y also has
g i v e n m o r e t h a n 2,000 e m p loy e e s cash i n c e n t i v e s t o s t o p t h e m f r o m q u i t t i n g , s a y i n g t h a t
t h e p a y m e n t s a r e
necessary.
A n y b o d y w h o w a n t s t o s t a rt a n in s u r a n c e c o m p a n y o r beef
up t h e i r p o s i t i o n , t h e y w i l l come t o o u r o r g a n i z a t i o n a n d p i c k p e o p l e o f f, s a id t h e n - C E O
E d w a r d L i d d y
i n a n i n t e r v i e w . I f t h a t h a p p e n s , w e c an ' t m a i n t a i n t h e
businesses
w e w a n t
to
k e e p a n d w e w o n ' t b e ab le to se l l th e m fo r the k i n ds o f va lu e s tha t w e n e e d .
F o r m e r C E O G r e e n b e r g i n s i s ts th a t t h e c o m p a n y ' s u p p e r m a n a g e m e n t w a s t h e r o o t
cause o f t h e c o ll a p s e a f t e r h e l e f t . A I G h a d a u n i q u e c u l t u r e w h e n I w a s i ts C E O , p a r
t i c u l ar l y i n c o m p a r i so n w i t h the w ay m an y larg e p u b l i c c om p an i e s op e ra te today , he sa i d .
N e i t h e r
I n o r o t h e r m e m b e r s o f m y s e n i o r m a n a g e m e n t t e a m h a d e m p l o y m e n t c o n t r a c ts .
I
re c e i ve d n o
severance package
i n c o n n e c t io n w i t h m y re t i r e m e n t , an d I n e ve r so ld a si n g le
share o f
A I G
stock d u r i n g t h e m o r e t h a n 3 5
years
tha t I served as CEO . In a 2008 i n t e r v i e w ,
G r e e n b e r g e x p l a i n e d w h a t h e sees as the real cause o f t h e f i n a n c i a l c o l l a p se . H e b l a m e s
low i n te re s t rates a n d excessively easy c re d i t fo r the reckless r i s k - t a k i n g a n d p o o r d e c i s io n s
m a d e w i t h i n t h e f i n a n c i a l
i n d u s t r y .
H e also cites excessive l e v e ra g i n g a n d m a r k - t o - m a r k e t
ac c ou n t i n g p rac t i c e s as c o n t r i b u t i n g to the
m e l t d o w n .
M a r k - t o - m a r k e t means a s s i g n i n g
a v al u e t o a p o s i t i o n h e l d i n a f i n a n c i a l i n s t r u m e n t
based
o n t h e c u r r e n t m a r k e t p r i c e f o r
t h e i n s t r u m e n t . F o r e x a m p l e , th e
f i n a l
va lu e o f a f i n an c i a l c on t rac t ( say , g ra i n fu tu re s ) tha t
e x pi re s i n n i n e m o n t h s
w i l l
n o t b e k n o w n
u n t i l
i t e x p i r e s . I f i t is m a r k e d t o m a r k e t , f o r
-
8/21/2019 Case of SS-10 AIG
8/10
C A S E 5: C O P I N G W I T H
F I N A N C I A L
A N D E T H I C A L RISKS A T A I G
a c c o u n t i n g p u r p o s e s
it is
ass i g ne d the va l u e that i t
w o u l d
have
at
t h e e n d o f each day.
Gre e n b e rg b e l i e ve s that a l l
these
fac tors g re w ou t o f c ont ro l to the p o i n t w he re the e nt i re
sy s te m had now he re to g o b u t t o w a r d fa i l u re .
T he c ont rove rs i e s re g ardi ng A I G have not e nde d
w i t h
g o v e r n m e n t o w n e r s h i p . I n f a c t,
the p rob l e m s that c r i t ic s had
ide n t i f i e d
re g ardi ng the c om p any 's c u l tu re and reckless s p e n d
in g
w e r e o n
fu l l
d i sp l ay a m e re tw o m onth s a f te r i t had re c e ive d i t s b a i l ou t m one y . T op A I G
execut ives w ere spotted h o l d i n g a lavish
conference
at a pos h P oint H i l t o n Squaw
Peak Resort
in P hoe n i x for 150 f i nanc i a l p l anne rs and top A I G e xec u ti ves . T he thre e -day e ve nt re p orte dl y
cost ove r 343,000. Re p rese ntat ive s o f the c or p o rat i on de fe n d the c onfe re nc e , s ta t i ng that
m ost o f the costs w e r e
u n d e r w r i t t e n
by sponsors ; however, such an episode mere weeks after
re c e iv i ng a g ove rn m e n t b a i l ou t fu nd e d b y taxp ay e rs d i d not s i t w e l l
w i t h
stakeholders . Many
bel ieve i t demonstrated how l i tt le rem orse A IG has for the dec is ions lea din g up to the fai lure ,
a n d h o w l i tt le has changed since the c om p any re c e i ve d g ove rnm e nt m one y .
C I
NGUS T I G
The best way for AIG
to restore its credibility
w be by increasing its
transparency and
accountability.
A I G has
a
t o u g h r o a d a h e a d o f i t , n o t o n l y i n r e p a y i n g t a x
p ay e rs b u t also i n r e s t o r i n g it s d a m a g e d r e p u t a t i o n . T h e
best
w a y f o r A I G
to
restore i ts
c r e d i b i l i t y
w i l l
be
b y i nc re as i n g i t s
t ransp are n c y an d ac c ou n tab i l i ty . T hi s re qu i re s
a
m ore re a l i s t ic
assessment o f i ts r is k s a n d l i a b i l i t i e s . I n 2 0 1 1 A I G d e c i d e d to
increase
i t s c l a i m s e s t i m ate s for i nsu ranc e p o l i c i e s tha t i t had
sold
in the past ,
p a r t i c u l a r l y those associated
w i t h i t s p r o p e r t y
a n d
casual ty insurance
business
C h a r t i s . A I G
w i l l
increase loss
reserves f o r
these
insurance pol ic ies by $4.1 b i l l i o n , a m ove tha t
w i l l e l i m i n a t e m u c h o f it s o p e r a t i n g p r o f i t for 2010 b u t serve to
clean up its balance
sheet.
A I G
is
also se l l i ng o f f some of i ts
businesses
to generate the proceeds needed to repay
t a x p a y e r s . T h e c o m p a n y s o l d i t s A m e r i c a n L i f e I n s u r a n c e D i v i s i o n to M e tL i fe for $15 .5
b i l l i o n , i t s As i a -b ase d l i fe i n s u r e r A L A G r o u p t o G r e a t B r i t a in ' s P r u d e n t i a l P L C f o r
35.5
b i l l i o n ,
a n d i ts o w n e r s h i p i n th e t h i r d l a r ge s t i n s u r a n c e c o m p a n y i n T a i w a n f o r $ 2 .2 b i l
l i o n .
A d d i t i o n a l l y ,
A I G has reac he d an ag re e m e nt w i t h t h e U . S . g o v e r n m e n t , w h i c h plans
t o e n d i t s i n v o l v e m e n t w i t h A I G
w i t h in
the ne xt tw o y e ars. I n e ar l y 2011 the g ov e rn m e nt
ann ou n c e d p l ans to b e g i n se l l i ng o f f i ts 92 .1 p e rc e nt stake i n A I G t h r o u g h st o ck o f f er i n g s.
T o g e t h e r t h e A I G a n d t h e T r e a s u r y released 8.89 b i l l i o n i n s to c k . A I G h a s
been
able
to
repay $40 b i l l i o n to the Federal
Reserve
a n d T r e a s u r y. H o w e v e r , t h e success o f AI G 's s toc k
w i l l largely be based u p o n h o w w e ll i nve s tors b e l ie ve A I G w i l l p e r f o r m i n t he
f u tu r e .
A I G
w i l l nee d to im pl em en t strategies to reestabl ish inve stor tru st i f i t hope s to repay its debts
a n d
r e t u r n
to prof i tabi l i ty .
C O N C L U S I O N
T h e q u e s t i o n r e m a i n s : W a s
a
b a i l o u t r e a l l y
necessary?
Some,
su c h
as
G r e e n b e r g h i m s e l f ,
say yes. Yo u have to have a bai lo ut , Gre enber g argu ed. Bu t
I w o u ld
c a l l i t som e thi ng else
ra the r tha n a b a i l ou t . T h at i m p l i e s the w r o n g t h i n g . It is really also h e l p i n g M a i n Street, n o t
-
8/21/2019 Case of SS-10 AIG
9/10
P A RT
2
CASES
j u s t
W a l l
Street
because i f t h e e c o n o m y d o e s n 't g r o w , jo b s a r e g o i n g t o
be
l o s t a n d w e 'r e
g o i n g to go i n t o a d e p r e s s io n r a t h e r t h a n a r e c e s s io n . T h e t a x p a y e r i s n o t g o i n g t o ta k e a h i t
l o n g - t e r m because t h e m o n e y i n v o l v e d
w i l l
b e r e p a i d o v e r a p e r i o d o f t i m e
O t h e r s a r e n o t so c e r t a i n . C r i t i c s o f t h e A I G a n d a u t o
i n d u s t r y
b a i l o u t s , f o r e x a m p l e ,
c i te a l a c k o f a c c o u n t a b i l i t y i n h o w t h e f u n d s a r e t o be u s e d . M a n y a l so o p p o s e t h i s le v e l
o f g o v e r n m e n t i n t e r v e n t i o n i n c o r p o r a t io n s
because
i t
seems
t o
be
r e w a r d i n g
c o m p a n i e s
t h a t h a v e b l a t a n t l y i g n o r e d t h e
needs
and desires
o f
t h e i r s t a k e h o l d e r s i n f a v o r o f e n r i c h i n g
t h e m s e l v e s i n t h e s h o r t t e r m . E v e n m o n t h s a f te r t h e b a i l o u t , A I G c o n t i n u e d t o
lose
m a s
s i v e a m o u n t s o f m o n e y . A l t h o u g h t h e c o m p a n y i s b e g i n n i n g t o s h o w s ig n s o f r e c o v e r y , t h e
d a m a g e to i t s r e p u t a t i o n o v e r t h i s m a t t e r h a s b e e n m a s s i v e , a n d some c r i t i c s w o n d e r i f i t
w i l l ever recover .
T h e c o m p a n y h a s a l s o h a d a d i f f i c u l t t i m e s e l l i n g o f f i ts
assets
i n o r d e r to r e p a y i t s
d e b t s ,
as
m a n y o f i ts p o t e n t i a l b u y e r s a l s o h a v e b e e n
w o r k i n g to
r e c o v e r
f r o m
t h e 2008-
2009 r e c e s s i o n . W i t h o u t
a
d o u b t , t h e f a i l u r e o f A I G w a s m a s s iv e a n d , b a i l o u t
or
n o t ,
its
effects have
r i p p l e d
across the g lobe.
Q U E S T I O N S
D i s c u s s t h e r o l e t h a t A I G ' s c o r p o r a t e c u l t u r e p l a y e d i n i t s d o w n f a l l .
2 . D i s c u s s t h e e t h i c a l c o n d u c t o f
A I G
e x e c u t iv e s a n d h o w a s t r on g e r e t h ic s p r o g r a m m i g h t
h e l p t h e c o m p a n y t o s t r e n g t h e n t h e e t h i c s o f i t s c o r p o r a t e c u l t u r e .
3 . W h a t c o u l d A I G h a v e d o n e d i f f e r e n t l y t o p r e v e n t it s f a i l u r e a n d s u b s e q u en t b a i l o u t ?
SOURCES
A m e r i c a n
I n t e r n a t i o n a l
G r o u p , I n c . The New York Times D e c e m b e r
9,2010,
h t t p : / / t o p ic s . n y t i m e s . c o m / t o p / n e w s /
b u s i n e s s / c o m p a n i e s / a m e r i c a n _ i n t e r n a t i o n a l _ g r o u p / i n d e x . h t m l
(accessed
F e b r u a r y
16, 2011);
A n d e r s o n ,
Jenny.
A I G P r o f i t Is Reduced by $4 B i l l i o n .
The New York Times
June 1, 2005, h t t p : / / w w w . n y t i m e s . c o m / 2 0 0 5 / 0 6 / 0 1 /
b u s i n e s s / o i i n s u r e . h t m l (accessed F e b r u a r y 21, 2011); A n d e r s o n , Jenny. G r e e n b e r g Fires Back a t D i r e c t o r s . The
New York Times A u g u s t
5, 2005,
ht tp : //query. nyt imes. com/gst/ ful lpage. html?res=9Ao2E7DEi63EF 936A3575BC o
A9639C8B63
(accessed February 21 ,
2011);
Behan, Bev er ly. M em o to the Board o f A I G . BusinessWeek N o v e m b e r
16,
2 0 0 8 , h t t p : / / w w w . b u s in e s s w e e k . c o m / m a n a g i n g / c o n t e n t / n o v 2 0 0 8 / c a 2 0 0 8 1 11 8 _ 4 0 8 4 4 3 . h t m (accessed F e b r u a r y
21, 2011); B r o w n i n g , L yn n l e y.
A.I.G.'s
H o u s e o f
Cards.
Portfolio
September
29, 2008,
h t t p : / / w w w . p o r t f o l i o . c o m /
n e w s - m a r k e t s / to p - 5 / 2 0 o 8 / o 9 /2 8 / A I G s - D e r iv a t i v es - R u n - A m o k /
(accessed
F e b r u a r y
21, 2011); Byrnes,
N a n e t t e .
T h e U n r a v e l i n g o f A I G . BusinessWeek
September 16,
2 0 0 8 , h t t p : / / w w w . b u s i n e s s w e e k . c o m / b w d a i l y / d n f l a s h /
content/sep20 o8/db 20 o8o9i5_55227 i_page_2 . htm (accessed F e b r u a r y 21, 2011); D e s m o n d , M a u m a . A I G . C D O s .
CDS. It 's a Mess. F o r b e s . c o m , N o v e m b e r 15, 2008, http://www .forbes.com /2008/11/15/aig-credit-defa ult-mark ets-
equity-cx_md_1110markets24.html (accessed F e b r u a r y
21, 2011);
D r u c k e r ,
Jesse.
AIG's T a x D i s p u t e
w i t h
U.S.
Has
T w i s t of
I rony . The Wall Street Jou rnal N o v e m b e r
14,
2 0 0 8 ,
C2;
E i c h e n w a l d , K u r t , a n d Jenny A n d e r s o n . H o w
a T i t a n o f I n s u r a n c e R a n A f o u l o f t h e G o v e r n m e n t . The New York Times A p r i l
4, 2005,
h t t p : / / w w w . n y t i m e s .
c o m / 2 o o 5 / o 4 / o 4 / b u s i n e s s / o 4 a i g . h t m l (accessed F e b r u a r y
21, 2011);
G o g o i , P a l l a v i . A I G p l a n s o n ' c o m p l e t e l y
r e p a y i n g '
taxpayers.
US Today
January 16, 2011,
h t t p : / / w w w . u s a t o d a y . c o m / m o n e y / i n d u s t r i e s / i n s u r a n c e /
2011-01-14-aig-repay_N.htm (accessed
F e b r u a r y 18, 2011); G o l d m a n , D a v i d . A I G o v e r h a u l s b o n u s s y s te m .
C N N
M o n e y , F e b r u a r y
10, 2010,
h t t p : / / m o n e y . c n n . c o m / 2 0 1 0 / 0 2 / 1 0 / n e w s / c o m p a n i e s / a i g _ b o n u s e s / i n d e x . h t m
(accessed F e b r u a r y 16, 2011); T h e Great U n t a n g l i n g . The Economist N o v e m b e r 8 , 2 0 0 8 , 8 5 - 8 6 ; H e n r y , D a v i d ,
-
8/21/2019 Case of SS-10 AIG
10/10
CASE : C O P I N G W I T H F I N N C I L N D E T H I C L RISKS AT A I G
M a t t h e w Goldstein, and Carol Matlack. Ho w AIG's Credit Loophole
Squeezed
Europe's Banks. Business Week
October
16,
2008, http://www.businessweek.com/magazine/content/08_43/b4105032835044.htm (accessed
February
21, 2011);
Krisher, Tom. AIG Executives W o n ' t Face C r i m i n a l Charges, Lawyers
Say. The
Huffington
ost May 22,
2010,
http://www.huffingtonpost.com/2010/05/22/aig-executives-no-criminal-charges_n_586203.
h t m l
(accessed
February
18, 2011);
K r o f t , Steve. Wh y AI G Stumbled, and Taxpayers No w Ow n I t .
CBS
News,
M a r c h
17,
2009, http://www.cbsnews.com/stories/2009/05/15/60minutes/main5016760.shtml
(accessed
February
21,
2011);
Loomis, Carol
J.
AIG: The Company That Came to Dinner.
Fortune January 19,
2009, 70-78; Mas on,
Rowena. Serious Fraud Offic e Dro ps
UK
Probe.
The
Telegraph
May 26,
2010, h t t p : / / w w w . t e l e g r a p h . c o . u k /
finance/newsbysector/banksandfmance/7768815/Serious-Fraud-Office-drops-UK-probe-into-AIG.html
(accessed
July 7,
2011);
M o l l en k a m p , Carrick, Serena Ng, Liam Pleven, and Randall S m i t h . Behin d AIG's Fall, Risk Model s
Failed to
Pass
Re al-Wor ld Test.
The
Wall Street Journal November
3,
2008, Ai , A16; Morgenso n, Gretchen. AIG:
W h i t e r
Shade o f
Enron.
The New
York Times A p r i l
3,
2005, http:/ /www.nytimes.com/2005/ 04/03/business/
yourmoney/o3gret.html?_r=i&scp=i&sq=%22whiter%20 shade%20of%2oenron%22&st=cse
(accessed
February
21,
2011);
Morgenson, Gretchen.
Feds
end probe of AIG chief w i t h no charges. SFGate.com, May 24,
2010, h t t p : / /
articles.sfgate.com/2010-05-24/business/20911444_1_financial-products-unit-aig-executive-joseph-cassano
(accessed
July
7 2011);
Ng ,
Serena,
Carrick
M o l l e n k a m p ,
and Michae l Siconolfi. AIG
Faces $10
B i l l i o n in
Losses
o n
Trades.
The
Wall Street Journal
December io, 2008,
A1-A2;
Ng ,
Serena,
and
E r i k H o l m .
AIG to Book Charge
T i e d
to Chartis.
The
Wall Street Journal February
10, 2011, C1-C2;
Ng, Serena, and Li am Pleven. Revised A I G
Rescue Is
Bank Boon .
The
Wall Street Journal November
12,
2008, Ci,
C 5;
O'Brian, T i m o t h y L. G u i l t y Plea
Is
Expected in AIG-Related Case. The New York Times
June 10,
2005, h t t p : / / q u e r y . n y t i m e s . c o m / g s t / f u l l p a g e . h t m l ?
res=98oiE3DCii38F933A25755CoA9639C8B63&sec=&spon=& pagewanted=2
(accessed
December February
21,
2011);
Pleven, Liam and A m i r E f r a ti . Documents Show AI G Knew of Problems w i t h Valuations.
The
Wall Street
Journal October
11-12
2008,
B1-B2;
Rosenthal, Justine A. Maur ice Greenberg on What's Next for W a l l Street.
National
Interest Online
October
2
2008,
h t t p : / / n a t io n a l i n t e r e s t . o r g / a r ti c l e / m a u r i c e - g re e n b e r g - o n - w h a t s - n e x t -
for-wall-street-2876
(accessed
February
21, 2011);
Scherer, Ron. A Top Insurance Com pan y
as
the New Enron?
A n Acco unti ng Probe
at
AI G Worries
W a l l
Street, and Involves Some of America's Richest Men.
The
Christian
Science Monitor A p r i l
1,
2005, http://www.csmonitor.com/2005/0401/po3so1-usju.html (accessed February
21,
2011);
Son, H u g h . AI G Plans to Repay U.S. i n 2009, L id dy Tells CN BC Bloomberg December 22, 2008,
h t t p : / /
www.bloomberg.com/apps/news?pid=2o6oio87&sid=aDXR6Ayuezx4&refer= home
(accessed
February 21,
2011);
Son, H u g h . AI G
Says
More Managers Get R etention Payouts Topping
$4 M i l l i o n .
Bloomberg December 9, 2008,
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKIvmgvNl6zA
(accessed
February
21, 2011);
Stephen, Bernard. AI G, after taxpayer
b a i l o u t ,
returns
t o
p r o f i t a b i l i t y .
USA Today
May 7,
2010, h t t p : / / w w w .
usatoday.com/money/companies/earnings/2010-05-07-aig_N.htm
(accessed
February
18, 2011);
Stout, David, and
B r i a n
K n o w l t o n . Fed chief
says
insurance giant acted irresponsibly. The
New
York Times h t t p : / / w w w . n y t i m e s .
com/2009/o3/o3/business/worldbusiness/o3iht-03webecon.20567563.html (accessed February
21, 2011);
Walsh,
M a r y
W i l l i a m s . AIG Cuts Losses Sharply to $4.35
B i l l i o n
in First Quarter.
The New
York Times May 8, 2009,
B5; Walsh, Mary W i l l i a m s . Bigger Holes to
F i l l . The
Wall Street Journal November
11,
2008, Bi,
B5;
Weisman,
Jonathan, Sudeep Reddy, and Liam Pleven.
P o l i t i c a l
Heat
Sears
AIG.
The
Wall Street Journal March
17,
2009,
http://online.wsj.com/article/SB123721970101743003.html
(accessed
February
21, 2011); S m i t h ,
Randall, Deborah
Soloman, and Joann
S.
L u b l i n . AI G
O f f e r i n g
Near Low End
o f Range. The Wall Street Journal
Ma y
11, 2011,
http://online.wsj.com/article/SBioooi42405274870468i9045763i6oo259536ii8o.html?KEYWORDS=AIG+stock+
o f f e r i n g (accessed May
11, 2011).