Aig Case Study

In: Business and Management

Submitted By fearlesspug
Words 622
Pages 3
Case Study: Coping with Financial and Ethical Risks at AIG

Cesare Lucritzia

Capella University

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…...

Similar Documents

Ethics Aig

...Ethics Paper: AIG Introduction American International Group Inc. (AIG) is a multi trillion dollar insurance giant. AIG originated in China in 1919 and was perceived as a humble honest company (Gilani, 2008). Within the last few years AIG has been at the forefront of much debate about their financial decisions. A few attributed to AIGs demise was their accumulation of misplaced bets on credit default swaps. AIG also was ran by a CEO named Maurice R. Greenherg who grew the company aggressively and diversified the insurance company to a trillion-dollar balance sheet. AIG found its investments going bad when the housing market began to crash (AIG: What Went Wrong). Analysis AIG was the world’s largest insurance company. The company originally a humble honest company that was founded in China in 1919 and up until recently had a reputable reputation. There are many steps leading up to AIGs financial hardships such as their participated in global trade of derivatives and invested in mortgage-related investment portfolios and collateral calls on credit defaults (Actions Related to AIG). An associate company of AIG was writing insurance in the form of credit default swaps. These swaps offered buyers protection against losses on debts and loans of borrowers in the amount of $447 billion (Gilani, 2008). AIG also participated in collateralized debt obligations (CDOs) that mainly incorporated subprime mortgages and Alt-A mortgages, just to name a few. AIG used these premiums...

Words: 668 - Pages: 3

Aig Fraud Essasy

... of the defendants in conversation about the deal. The recordings came from a Gen Re system that automatically recorded calls in case there was an insurance derivative trade dispute (All Five convicted for aig-gen re deal, 2008). So basically the big scandal at AIG all stemmed from cooking the books to make revenues and assets seem much higher than they actually were. A huge part leading to the investigation by the SEC, Spitzer, and others was the fore-mentioned $500 million transfer of loss portfolios between AIG and Gen Re, but this was not all that AIG was up to. The SEC wanted to know if Greenberg had found to way to manipulate stock price other than by his books. To no surprise they found that with a little pressure to the experts and his friend, Richard Grasso, chairman of the NYSE, he was in fact able to do that as well. It turned out that throughout his life Greenberg had been very good and making almost any situation advantageous to him or in this case, his company. Being the type of man he was, Greenberg, regularly rubbed shoulders with important people, as this was seen in his political side. Since he operated internationally and nationally he had also developed certain closeness with political figures and regulators both in the US and around the world. All of these special pieces of what made the company operate so well is also what eventually got them in trouble. Eventually it was time for the US government to step in and take the reins. They made it...

Words: 1616 - Pages: 7

Aig Case

...INTRODUCTION In this memorandum, I will address the incentives that Michael Joseph and the E&Y audit team had in the AIG case. Joseph and the audit team violated the AICPA Code of Conduct, particularly for section 90 and section 101. In addition, Joseph violated the AICPA section 50 pretending that he had not talked to the audit team. INCENTIVES According to SEC, Michael Joseph should have know that PNC’s SPE (Special Purpose Entities) transactions were not in compliance with GAAP. Also, Joseph’s dual role in both AIG and PNC resulted in a conflict interest for him. However, Joseph still chose to cooperate with AIG in issuing report stating that the nonconsolidated accounting treatment was an appropriate application of GAAP. Several incentives pushed him to do so. First, since AIG had an extensive role in global credits and insurance markets, to build a positive relationship with AIG for Joseph was beneficial in the long-term. As Joseph accepted the offer from AIG, the potential buyers went to Joseph to consult accounting-related issues, which raised Joseph’s reputation as well. In addition, working for such a big company as AIG brought Joseph huge economic return, which could be another incentive for Joseph to take the risk. The E&Y audit team for PNC directly contacted Joseph to determine whether PNC’s proposed SPE would be GAAP-compliant. On one hand, PNC’s external audit firm was E&Y so that E&Y should take the responsibility to handle the SPE issues. On the other...

Words: 772 - Pages: 4

Aig Fair or Foul?

...The Ethical Dilemma of AIG Fair or Foul? A matter of public opinion. American International Group (AIG) was established in 1919 by Cornelius Vander Starr in Shanghai, China. He became the first westerner in Shanghai to sell insurance to the Chinese. After turbulent times and the hostile takeover of the communist regime, he left for greener pastures in 1949 and ended up in New York City. While in New York, the company began to grow and prosper. I wide range of premium services was being offered and the future looked bright. The company went public in 1969. Fast-forward thirty-five years, no one could have prepared for what was about to happen. In 2005 an accounting scandal rocked AIG to the tune of $1.6 billion. Criminal charges were filed against many of the company’s top executives. The summer of 2008 was a time that began to send shockwaves around all of the world markets. Financial statements were disclosed and stock prices began to fall rapidly. On September 16, 2008 AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permitted firms with the highest credit ratings to engage in high-risk investment practices. Credit default swaps without depositing any form of collateral with their trading counter-parties. The Federal Reserve announced the creation of a secured credit facility of up to $85 billion to keep the company from completely collapsing. In exchange, the government would receive an 80...

Words: 559 - Pages: 3

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

... 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...

Words: 1304 - Pages: 6

Aig Case Studies

...IMPORTANT TERMS AIG CASE STUDIES 1. How the Insurance Industry is Segmented * Property and Casualty * Life Insurance * Reinsurance 2. Profitability Measures of Insurance Companies * Expense Ratio * Loss Ratio * Combined Ratio 3. Credit Default Swaps * A financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event (pay-off third party debt if this party defaults on loan) * The buyer of the CDS makes a series of payments (the CDS ‘fee’ or ‘spread’) to the seller and, in exchange, receives a payoff if the loan defaults * CDS protects against a default on assets tied to a corporate debt & mortgage securities * Buyer receives credit protection; seller guarantees the credit worthiness of the product * Is CDS an insurance? i. Function similar to insurance; provide protection against non-payment of loans 4. Sub-prime mortgages * Home loans given to people who are high-risks and can’t afford them reasonably 5. Collateralised Debt Obligations (CDOs) * Asset-backed commercial paper * A group of bad mortgages sold as a single investment for other banks or financial institution to buy 6. Liquidity Risks 7. Systemic Risk * The risk imposed by interdependencies is a system or market, which could have the potential to bring down the entire market or system in one...

Words: 630 - Pages: 3

Aig Accouncing Scandal 2005

... 2001 to the balance sheet masking the actually decline of loss reserves of $144 million and $187million. With the additional premium and loss reserve, analysts thought that the earnings of AIG in those two quarters were great. In the release of earnings in Q1 2001, Greenberg even wrote “"AIG had a solid first quarter... We added $63 million to AIG's general insurance net loss and loss adjustment reserves for the quarter, bringing the total of those reserves to $25.0 billion at March 31, 2001." What went wrong? The Securities and Exchange Commission (SEC) had already been probing into AIG during early 2000 due to a various misconducts of AIG. They were already suspicious of the integrity of the financial information provided by AIG. In January 2005, the counsel of General RE phoned SEC representatives to disclose the entirety LPT transaction. On February 14 2005, AIG received a subpoena from SEC relating to finite reinsurance accounting. And 3 days later, AIG disclosed the LPT scheme to the public. In March 2005, Greenberg stepped down from the CEO position. In May 2005, AIG issued a restated financial statement for fiscal years from 2000 through 2003, which reduced the income for 2004 for 1.32 billion. Also Eliot Splizer, the New York Attorney General filed a civil case against AIG. Responsibility of the Auditors With litigation going on for AIG, its auditor PricewaterhouseCoopers LLP were also under scrutiny because they signed off the financial statements of AIG...

Words: 1927 - Pages: 8

Aig Report

...AIG continued to streamline its core insurance operations and restructure businesses, over the past few years, to enhance capital allocation and operating leverage. For this, AIG has been using the proceeds gained from the disposition of redundant businesses along with earnings from its ongoing business operations. The gradual recovery in the economy and equity market, post the downturn in 2008, has helped AIG to recoup the value of its investments and dispose of its redundant and risky businesses at attractive valuations. This in turn has helped in consistent improvement of the financial leverage along with the reduction in interest expenses. Consistent payoffs along with strategically divested assets improved the operating leverage and led to an operating cash flow of $3.95 billion in the first nine months of 2013, which surged from $3.68 billion in 2012 and an outflow of $81 million in 2011. Moreover, reduction in debt by $6.27 billion in the first nine months of 2013 from 2012-end level, through its liability management initiatives, helped improve debt-to-capital ratio to 17.6% at the end of Sep 2013 from 20.5% at 2012-end and about 31% at 2010-end. The redemption of notes worth $500 million in Sep 2013 will further improve the financial leverage. At the end of Sep 2013, AIG s DIB had excess liquidity worth $2.9 billion, while majority of DIB s debt is scheduled to mature in the next 5 years, thereby enhancing capital flexibility and buoyancy for long-term growth. Going...

Words: 785 - Pages: 4

Fall of Aig

... to recover, causing the world’s largest insurance company to fall. The workplace often brings out compliance in most people. Because of this, the proper authority can get workers to do whatever they are told. This being the case, workers can be influenced by the managerial staff to do things that may be unethical, sometimes without the employee even knowing it is wrong. In the cases where they do, employees have to make a choice. Many times employees will just do as they are told so that they can keep their jobs. Occasionally they will quit and go to a different job to circumvent the problem. Very seldom an employee becomes a snitch, which hardly ever works in their favor (Crews 3). Because Greenberg managed greater than 17 percent of outstanding shares and he had complete control over his subordinates’ job future, he was not going to be questioned or replaced (Boyd 56). Because the employees did not want to lose their jobs, they were willing to do whatever Greenberg wanted, even if it meant doing something for him that was unethical. This had a direct effect to the collapse in 2008. It was clear that some of the things Greenberg was doing were unethical and should have been challenged, yet no one stepped in to stop him in time. The harsh environment of Enron, Independent, and AIG from the companies Chief Executives stifled works from fighting the issues that are in the company (Cass Business School 17). This is a direct link to the unethical behavior of...

Words: 3262 - Pages: 14

Aig Scandal

..., England, thus causing a lot of impact on their market. It also caused a lot of consequences for the rest of the world because other countries had bought CDSs from AIG. On top of that, it impacted the importation and exportation of goods and the prices of those goods worldwide (Loomis and Burke). LESSONS LEARNED All my life, I found politics and economics boring and uninteresting, which one can view as ironic for someone wanting to enter into the field of business. It took this Management 3200 class to “force” me to learn about one of the biggest financial crises that has hit our country. In other words, I knew nothing about the AIG collapse before January, and now I can say that I have learned enough to understand a good majority of the collapse and how to prevent a financial collapse of my own. First of all, I have learned that as a manager, one needs to understand the level of impact of their actions. The decisions that managers make have the potential to impact an entire nation, like the decisions of AIG and Joe Cassano, for example. Cassano’s choice to continue selling the credit default swaps eventually led to AIG filing for bankruptcy. This caused a spiral effect that put the entire United States in a near depression state. I have also learned how much financial decisions impact our own lives, whether we are working in that industry or not. In the case of AIG, the collapse influenced every aspect of our country. Financial decisions impact us whenever we buy or...

Words: 2991 - Pages: 12

Aig Accounting Scandal

...AIG / Gen Re 2004 ACCOUNTING SCANDAL Table of Contents I. Introduction 3 II. The Companies and Participants 4 III. The Setting 5 IV. Aftermath 9 V. Conclusion 10 I. Introduction AIG’s accounting scandal is one of the biggest accounting scandals in the first decade of 21st century. In 2004, SEC discovered that AIG rewrote its financial reports for years from 2000 to 2004, with support from Gen Re, one of the biggest reinsurers in the world. This scandal led to reduction of AIG’s net income in 2004 of $1.32B, and total settlement of $1.6B from government. AIG was also accused of violating 16 counts of the criminal code. II. The Companies and Participants AIG is the world’s largest insurance and financial services company. AIG, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities worldwide. In 2007, AIG has 93,000 employees, business in 130 countries, $6.2 billion net income, and $59.8 billion premium written. Gen Re Corporation, established in 1921, is a Connecticut corporation with its principal corporate offices located in Stamford, Connecticut. Gen Re became a wholly-owned subsidiary of Berkshire Hathaway Inc. on December 21, 1998. It is one of the largest reinsurers in the world. In 2007, Gen Re has $6.0 billion premium written. Hank Greenburg, CEO of AIG, was born in 1925. He admitted to NY Bar in 1953, and joined AIG 1962. In 1968, he was named CEO. He has led AIG for 38 years, until he stepped...

Words: 1565 - Pages: 7

Aig Incomplete

...Title: American Insurance Group (AIG) Group Name: Date: Executive Summary: Company Background American International Group, Inc. (AIG) is a world leader in insurance and financial services. It is a holding company for a network of subsidiaries primarily engaged in insurance and insurance-related activities, including property, casualty, life, financial services, retirement savings products, asset management, and aircraft leasing. It is headquartered in New York City, and operates in more than 130 countries and jurisdictions. In 2006, AIG had sales of $113 billion and 116,000 employees (Saporito, 2009). According to the 2008 Forbes Global 2000 list, AIG was once the 18th-largest public company in the world. Its common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo. AIG faltered in America’s sub-prime mortgage crisis. It had traded heavily in credit default swaps and could not meet its obligations. In that case, United States government came to its rescue with an $85 billion bailout on September 16, 2008. As of March 2009, AIG has taken a major step toward cleaning up its image by reorganizing its insurance units under American International Underwriters. It is the foreign general insurance segment of AIG. AIU and its subsidiary brands are now distinct from AIG (National News, 2009). The holding company, itself, is currently undergoing rebranding that includes a new name, which is expected to be revealed in the...

Words: 1258 - Pages: 6

Aig Case

...AIG: From Bailout to Bonuses (2008) Based on a paper by: Paige Vandermyn & Holden Canty Summary by: Andrew F. Roberts During 2008's "too big to fail" bailouts exercised by the federal reserve, many struggling multi-national companies were awarded cash in hopes of avoiding bankruptcy. One company deemed simply too big to fail was the American International Group, Inc. (AIG for short), which provides insurance for individuals and businesses. The company, which would have almost certainly been forced into bankruptcy if not for the bailout, received hundreds of millions of dollars to keep from drowning. However, in an utterly shocking series of events, the company paid $218 million to top executives in bonus money. In a completely unethical fashion, the company used taxpayer bailout money to fund vacations and private jet flights to the executives who many blamed for causing AIG's financial troubles in the first place. Additionally, many senior employees were flown to California for a "retreat" including spa treatments and golf outings. This retreat cost over $400,000 dollars. By the end of 2008, AIG had received over $100 billion in bailout money. Unfortunately, the general public was not sure if the money was going toward improving business of simply paying for luxuries of the organization. These actions by AIG completely ignored each and every theory related to the study of ethics. In regards to the individualistic theory of ethics, AIG seemingly...

Words: 660 - Pages: 3

Aig Scandal

... “insurance” to cover losses that had already occurred, the exact opposite of how insurance normally works. AIG ended up paying out $10 million in fines to settle inquiries into the Brightpoint deal, while Brightpoint paid out $600,000. In November 2004, AIG paid another $126 million for a deal involving PNC Financial Services without admitting wrongdoing in either case. In the latter transaction, AIG allegedly helped PNC disguise its losses by shifting them to an off-balance-sheet entity. Internal documents demonstrate that AIG was deliberately marketing policies whose main purpose was to help companies manipulate earnings. A 1997 internal document outlined a new form of “nontraditional insurance” whose main benefit would be “income statement smoothing.” In addition to the “nontraditional insurance” deals, investigators are also looking into whether AIG set up its own Enron-style off-balance-sheet entities to hide its financial difficulties. According to a March 22 Wall Street Journal article, suspicions have centered on AIG’s relationship with two companies, Excess Reinsurance and Richmond Insurance. “There are signs that AIG controlled the companies, but it accounted for its business with the pair as if each was unaffiliated with it,” the Journal said, citing sources knowledgeable about the matter. According to the Journal, “If they were affiliated, then AIG in effect was buying reinsurance from itself. That would mean that the nearly $1.2 billion in reinsurance......

Words: 1899 - Pages: 8

Aig Case Study

...Case Study: Coping with Financial and Ethical Risks at AIG Cesare Lucritzia Capella University 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...

Words: 622 - Pages: 3