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A Summary of the Case “Coping with Financial and Ethical Risks at American International Group (Aig)”

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A Summary of the case “Coping with Financial and ethical Risks at American International Group (AIG)”

Background American International Group, Inc. is a company whose operation began back in 1919. It was established back then by Cornelius Vander Starr as an insurance agency in Shanghai, China. AIG left china in 1949 after Starr had established himself as the westerner the sell insurance to the Chinese people. AIG headquarters then shifted from china to New York City, which is still the headquarters up to date. It is from here that AIG began its expansion tapping into other markets such as the Latin America, Asia, Middle East and Europe through use of its subsidiaries. AIG – Causes of its demise

The start of problems facing AIG began during the tenure of Greenberg as AIGs' CEO. It was during tenure that the company expanded from its initial line of insurance into other many complex lines of business and insuring risks that only a few other companies would consider handling. This led to the involvement of the company in businesses that it did not fully comprehend. AIG started investing in many different types of securities which included mortgage backed securities and also credit derivatives trading. AIG then went ahead to become a leading player in these markets, insuring other company's debt obligations against losses due to its excellent credit rating at the time. It was AIG's Financial Product Unit (AIGFP) that brought about the fall of the company, due to its disastrous credit swaps product. AIGFP was founded in the year 1987 by three Drexel Burnham Lambert Traders who were led by a Howard Sosin, a finance scholar. They convinced Greenberg based on the company's AAA credit rating to create a division which focused on complex derivatives trade. Greenberg and Sosin signed an agreement in which 38 percent of money earned went to AIGFP while the remainder 62 percent went to AIG. If things had to go bad down the line it was AIG and not AIGFP that would be on the hook. AIGFP continued its expansion program opening branches in other countries such as London, Tokyo and even Paris.
Despite the fact that AIGFP had never made even a single credit swap by the year 1998 the unit had revenue of over $500 million. It was in the year 2002 that AIGFP was charged by the justice department for illegally helping PNC Financial Services to not correctly show their bad assets in their books. AIGFP did this by setting up a separate company "special purpose entity "to handle all the issues related to the assets of the PNC firm. By doing so AIGFP was alleged of breaking the securities law by setting up the company by the Feds that would invest in the firm making it appear real. It was until 2004 that AIG would fully settle the charges against it. It was asked to give back over $45 million in fees, a fine of $80 million and in addition give up all the interest it had earned on the deal. The unit was not formally sanctioned due to the incident but the justice department placed it on a short leash. It was in March of 2005 that Greenberg stepped down as the CEO amidst investigations on allegations of accounting malpractices at the firm by the New York Attorney General Eliot Spitzer. The issue under investigation by then was not directly related to AIGFP, but the effects of the dealings eventually affected the operations of the unit negatively. Following the departure of Greenberg at the helm of the company and in addition the investigations ongoing within the organization the credit ratings agencies downgraded the company's credit worth from AAA to AA. This reduction in AIG'S credit rating led to provisions in some of AIGFP's credit default swaps. This made AIG to pay in collateral for the deals over $1 billion. This was the mark of many dark days for the unit. It was until later in the year that Eugene Park an executive at AIGFP was named to closely look at the portfolio containing the firms credit default swaps. The evidence was alarming in that the unit had insured many CDO's that had large proportions of it as subprime mortgages. This meant that in any situation where the housing market had to collapse the risk of default was too high. This coming up after the downgrading of the units credit ratings indicated an increased chance that AIGFP had to come up with collateral to pay out all the bets it had made in the past. In the year 2007 with the collapse of the housing market and plummeting in value of subprime assets AIG was supposed to pay a sum of $1.5 billion to Goldman Sachs based on the credit default swaps insured by AIG to cover the mortgage backed securities. During the same year AIG had to pay $2 billion to meet the demands of other firms that made collateral demands. It was during this year that the stock prices of AIG fell 25 percent and a reported loss of $1.1 billion in portfolio swaps in AIGFP. The problems facing AIG continued further with the company reporting a loss of $11.5 billion and in addition $5.3 billion posted as collateral in February of 2008. AIG would get further shock as the credit rating agencies planned to further downgrade the company's credit ratings as at September of 2008. This would trigger needs for more collateral that the company would not handle.

AIG - Unethical Behavior The unethical behavior of AIG was that the company would hand out multi-million dollar a bonus to it's over 450 employees operating in its six offices around the world. After handing out these bonuses AIG still had the guts to accept a government bailout plan, this was as the country underwent recession with most of its citizens unemployed and barely making ends meet. AIG also conducted some unethical behavior with its executives dealing in unethical financial reporting practices and illegal brokerage as uncovered during a recent investigation by New York Attorney General Eliot Spitzer. AIG also started investing in many different types of securities which included mortgage backed securities and also credit derivatives trading. AIG then went ahead to become a leading player in these markets, insuring other company's debt obligations against losses due to its excellent credit rating at the time.

AIG Today AIG's future is still not clear after facing years of problems. The company is undergoing several transformations that include increased efforts to appoint a new chief executive officer and its initiative to sell most its non-core assets tied to the firm. AIG is still faced with the responsibility of repaying federal loans handed to it by the government which amount to billions of dollars. This is further complicated by the fact that it is still unknown how much the government's patience will last. All the above reasons lead to the inability of experts to gauge the company's future

The future of AIG is still dependent on the financial market stabilization. The company's policy holders are encouraged by the company's gradual rise from its problems. The process of redefining AIG i.e. prompted shifts in capacity has led to some of its clients having to reassess how they relate to the insurer.. AIG though slow in the process of disposing its noncore assets has made it clear that it would make sure that it gets the true value of its businesses through the process. Without a doubt, the failure of AIG was massive and, bailout or not, its effects have rippled across the globe.

References * “Business Ethics” by O. C. Ferrell, John Fraedrich, Linda Ferrell, Case 6 – “Coping with Financial and Ethical Risks at AIG” * “About AIG”, http://www.aigcorporate.com/aboutaig/financialcrisis_2008.html

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