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.


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


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.


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


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.


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


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


8/10

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


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 ?

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A n d e r s o n ,

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A I G P r o f i t Is Reduced by $4 B i l l i o n .

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