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fraudulent case study of AIG

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xiangying meng

on 16 November 2013

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Transcript of fraudulent case study of AIG

Keeping our promise
What went wrong ?
Fraudulent case of

Meng Xiangying
What is A.I.G ?
AIG is "a holding company which, through its subsidiaries, is engaged in a
Broad range of insurance and insurance-related activities in the United States
And abroad."
1st step
Its principal business units are General Insurance, Life Insurance & Retirement Services, Financial Services, and Asset Management.

The Financial Services unit engages in aircraft and equipment leasing, capital market transactions (including CDS transactions), consumer finance, and insurance premium finance.
Maurice R. "Hank" Greenberg
focus is shifted from personal insurance to high-margin corporate coverage
Founded in 1919
Cornelius Vander Starr
(cc) image by nuonsolarteam on Flickr
2001, all the AIG problems became a reality when they had been audited by a request of PwC to the committee of boards’ directors that supervises the outside accountants’ work.
In 2005, New York City attorney, Elliot Spitzer well known for the previous investigations and prosecutions to the Mutual funds in 2003 and Insurer bid rigging in 2004, files civil suit against AIG for accounting frauds along with Gen Re, alleging that AIG "engaged in misleading accounting and financial reporting, projecting an unduly positive picture of AIG's underwriting performance for the investing public.”
AIG and SEC agreed on a settlement based on the following points:

The CEO and the CFO had to be replaced,

The improper accounting and the bid rigging, and other acts involving company workers fund had a total excess of 1.6Bn USD.

Federal criminal charges against officers from both AIG and GEN REN for violating 16 counts of the criminal code included: conspiracy, mail fraud and false statement to SEC.
“This case is not about the violation of technical accounting rules. It involves the deliberate or extremely reckless efforts by senior corporate officers of a facilitator company (Gen Re) to aid and abet senior management of an issuer (AIG) in structuring transactions having no economic substance, that were designed solely for the unlawful purpose of achieving a specific, and false, accounting effect on the issuer's financial statements.”
(cc) photo by medhead on Flickr
announced 2007 earnings of $6.20 billion or $2.39 per share. Its stock closed that day at
per share.
Less than seven months later, however, AIG was on the verge of bankruptcy and had to be rescued by the United States government through an
$85 billion
Government aid has since grown to $182.5 billion, and AIG’s stock recently traded at
less than $1.00
per share.

However, the doubts start growing in public opinion about the AIG bailout, and the majority start asking if the AIG bailout was really necessary.

  Otherwise much worse problems could happen to the American economy and surely that it would affect the world economy as a whole.
Stand higher

More risk &
More responsibility to stand

From the point of
the Industry
From the point of management of AIG
AIG insurance crisis revealed the risk of new features

The insurance industry on financial markets, the depth of intervention, increased its cyclical characteristics.

The important role of Insurance Company in the sub-loan crisis transmission
The monitoring mechanism in AIG didn’t play its role.

Over-involved in derivatives trading

Real estate related to the excessive concentration of risk

Too many parts of AIG's business lines are encroached on the bond sub-products
The CDS market has exploded in size growing from an estimated
billion amount at the end 2001 to
trillion by mid-year 2008, an increase of approximately 540%.

AIG FP sold protection to make money.AIG's guarantee than they would pay for the same protection from a seller with a lower credit rating, lesser balance sheet, or less-favorable guarantee.

Through CDS business, AIG was leveraging further its then AAA credit rating and trillion-dollar balance sheet.

The idea of pooling risky and safe debt as Collateralized Debt Obligations and marketing them among investors came from Drexel Burnham Lambert in 1987.

Default swaps would guarantee payment by the seller of the swaps in the unlikely event of default by the borrowers. When a large insurance company, such as AIG, provides the default swaps it can be interpreted as near-complete elimination of the risk.

Bank A B
Insurance company C
the bailout in history
The bailout had to be made
The story of American International Group explains the

larger catastrophe
not because this was the biggest corporate bailout in history but because AIG’s collapse and subsequent rescue involved nearly all the critical elements, including
. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand—
moral confusion
in high places, and the
failure of governing institutions to fulfill their obligations to the public
ARGUE:that some bonuses were needed to keep the most skilled executives.
ADMINISTRATION:Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated
SOLUTION:The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation.
REPLY:cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.
“WASHINGTON — The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.
Full transcript