Case Study: Coping with Financial and Ethical Risks at AIG
In 2008-2009, AIG became one of the most controversial financial bailouts in U.S. history. AIG underwrites insurance risk coverage to insurance companies. If an insurance company acquires too much risk, they then go to AIG who is a reinsurance company. Reinsurance companies enable insurance companies the ability to sell more insurance policies and enable growth. Within AIG there was a division that was selling insurance on mortgage-backed securities that are known as credit default swaps. As the value of homes continued to rise in 2008, the contracts that AIG made with these credit default swaps expired and AIG pocketed the premiums. People were buying homes with zero money down. When the housing bubble burst and people started defaulting on their loans, AIG then had to buy a ton of bad mortgage backed securities that nobody else could afford to take on. Since AIG was the largest insurance company in the United States at that time, they simply could not afford to fail because this would create a domino effect on the entire U.S. financial system, so the United States government was forced to bail them out to keep the U.S. and the international financial system on its rails.
AIG’s corporate culture played a large role in its downfall. For 38 years, Maurice Greenberg was AIG’s Chief Executive Officer and was the face of AIG and its evolving corporate culture. He was an incredibly successful businessman, and “Greenberg championed innovated products that insure almost any type of risk, including Internet identity theft and hijacking. At least four U.S. presidents sought his advice on international affairs and financial markets.” (Ferrill, Fraedrich, Ferrill, Pg. 366). Because of the relationships he had with government and presidents and his involvement in...