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Transcript of Ethics
They essentially sell insurance to insurance companies.
AIG charges insurance companies a premium so they can spread their risk, and allow their insurance policies to grow more rapidly.
In 1968 Maurice Greenberg took over as CEO and the company grew rapidly. By the 1980's the company was the largest underwriter of commercial and industrial coverage in the US.
In the 1990's they started to expand into other countries.
In 2001 they purchased American General Corp. A top US life insurer. Being as big as AIG was no one ever really questioned them until the early 2000's when the SEC started investigating their "Finite Insurance" deals.
SEC found Greenberg responsible for creating bogus transactions with General Re to boost AIG's reserves.
Greenberg was forced out of CEO in 2005 as stock began to fall. He eventually was forced to pay 15 million to the SEC in 2009. AIG had to pay 1.6 billion in 2006.
Mark Sillivan succeded Greenberg and was CEO for 3 years followed by Robert Willumstad for only 3 months due to the 2008 corporation meltdown.
Current CEO is Edward Liddy, former CEO of Allstate corporation. Problem occurred because of Credit Default Swaps (CDS). One CDS can be worth hundreds of millions of dollars.
Another problem AIG faced was with Complex collateralize debt obligations (CDO)
AIG issued the Swaps, but didn't have a large enough safety net when the sub prime mortgage collapsed.
Government had to step in to pay CDOs , since AIG could not. Gov now owns 79% of AIG
AIG's Financial Products unit was the source of the problems. The Financial Product unit was founded in 1987 by Howard Sosin.
In the 1990s Joseph Cassano took over as head of this division. This is when they started to increase the amount of CDSs.
AIG backed 440 billion dollars worth of obligations. The market worth of AIG was only 200 billion at the time.
Said could could cover losses, but really they didnt have the money to if it went bad.
CDOs were sold to people who couldn't repay their debt. AIG made billions off this but the CDOs and CDSs were used recklessly and failed to take in the effect of risk.
The Financial Product unit is still being investigated today for its actions. There is evidence AIG knew bad things were coming. Outside auditors were being excluded from specific conversations and meetings. If true, they could be charged with Fraud, similar to Enron.
At a congressional hearing Sullivan said he believed all the evaluations to be accurate. Even the people at Enron said they didn't know and still were charged. Sullivan and Cassano could also be charged. AIG focused on reward system for excessive risk taking, even if execs lost money. They gave millions in bonuses to managers and execs, even after the government bailout.
Even when the Gov. owns 80% of the company, AIG continues to take high risks and reward its employees with millions of dollars.
Used computer model to gave risks of its CDSs. Computer models didn't take into account of real life risks.
343,000 spent on conference days after bailout. Crisis And Bailout Conclusion and Questions September 2008 everyone figured out AIG couldn't pay back investors. Government came to the rescue and paid 152 billion and allowed AIG to stay afloat.
March 2009. Government put out another 30 billion to AIG. 165 million of this money was put towards employee bonuses.
Government didn't a choice because of the ripple event it would have caused if AIG went down.
AIG had to sell 2/3 of the company to pay back everyone. Took hard loss on things they sold.
Payed over 2000 employees more money to stop them from quitting.
To this day Greenberg says he's innocent. Was bailout necessary? Greenberg says yes, Many others say no, because AIG made a lot of money for short term gains.
AIG's reputation might never recover because of the damage that has been done.
AIG is having a tough time selling anything, because of the recession. 1. Discuss the role that AIG's Corporate culture played , if any, in its downfall.
2. Discuss the ethical conduct of AIG executives and how a stronger ethics program might help the company to strengthen the ethics of its corporate culture
3. What could AIG have done differently to prevent its failure and subsequent bailout?