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AIG Case Study

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Casey Pritchard

on 5 March 2013

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Transcript of AIG Case Study

As AIG's credit rating is downgraded due to the liquidity crisis and it loses billions associated with the CDSs, the company makes several questionable moves. Replacing Sullivan at CEO with Robert Willumstead. In September of 2008 the US Government is required to bail-out AIG and creates a liquidity fund of 85 Billion for AIG to draw from. Impact Impact on Shareholders Explain Evaluate Lessons Jerry Ganz, Casey Pritchard, Sara Green, Blair Hassler, Marissa Langston Reputational Catastrophe: A Case Study on American International Group, Inc. Engage in Ethical Behavior Transparency is Vital Perception is Powerful Rebranding is Required $147,302 for banquets
$139,375 on rooms
$23,380 for spa services
$6,939 for golf
$5,016 at the Stonehill Tavern
$3,065 for in-room dining and the lobby lounge
$2,949 for gratuities
$1,901 at the Monarch Bayclub
$1,488 at the Vogue Salon Offer New Products http://live.wsj.com/video/aig-debuts-reputation-insurance/6C9A91F4-CD84-42D8-98B3-A6D40E88F310.html#!6C9A91F4-CD84-42D8-98B3-A6D40E88F310 Chartis, still a division of AIG, announced a new insurance product called "ReputationGuard"
ReputationGuard gives policy holders confronting a publicity crisis access to public relations firms Burson-Marsteller and Porter Novelli and coverage for costs associated with avoiding or minimizing the potential impact of negative publicity
Burson-Marsteller was one of the four public relations firms employed by AIG during the height of its public scrutiny and specifically handled the controversial issues damaging the company’s image
Designed to cover a broad range of possible public-relations problems spanning from product recalls, food contamination, environmental disasters, executive scandals and, of course, government bailouts Impact on Employees Death Threats to AIG executives and their families Protesters outside executives' homes Response 15 out of top 20 highest paid executives returned bonuses, others donated them to charity "We've had several valued executives resign over the past few weeks. All of this hurts our efforts to unwind the business and repay the taxpayer as soon as we can." -Stephen Blake, Head of HR Impact on Government President Obama takes responsibility and calls for higher regulation July 21, 2010 the Dodd-Frank act was signed into Federal law Impact on AIG and their Consumers Overview Company History Company's roots trace back to 1919. Cornelius Vander Starr established an insurance agency in Shanghai named American Asiatic Underwriters Federal, Inc. The Hank Greenburg Era at AIG On the Doorstep of ......... ....DISASTER ! Questionable Behavior Leads to a Reputational Nightmare Harris RQ Summary Social Responsibility What do you think is the most important lesson we should learn from AIG's reputation crisis? Citizenship section of AIG's website
Supports good causes, environmental responsibility, and community responsibility
Employee Matching
Does this help AIG's reputation? Vision and Leadership Paid $165 million in bonuses after bailout
Public was outraged
AIG took back the bonuses
Engaged in the subprime mortgage ordeal Financial Performance Products and Services Largest insurance organization
Property casualty insurance, life insurance and retirement services
Mortgage insurance
Aircraft leasing
How do you view AIG based on its products and services? Emotional Appeal People took AIG's actions personally
Economic downturn
Viewed AIG as criminals Workplace Environment Associated with unethical behavior pre and post bailout
CDO's and Mortgage Backed Securities
Employee Bonuses
Lavish Parties
"Corporate America" Moved headquarters to New York City in 1939 and continued to grow his insurance empire for the next three decades. In 1967, the American International Group, Inc was formed. 1968 - Starr officially named Hank "Maurice" Greenburg" his successor. During the 1970's, AIG introduced new energy, transportation, and entertainment products and, in the 1980's, it expanded its business lines to include mortgage insurance and listed its shares on the New York Stock Exchange. The 1990's saw continued diversification into the financial services industry and the early part of the first decade of the 21st century brought a strengthening of AIG's position in the U.S. life insurance market. Greenburg was fired in 2005 due to an accounting scandal that resulted in a $1.6 billion fine to AIG. Following Greenburg's departure, AIG took on tens of billions of dollars in risk associated with mortgages. Activity was centered in AIG's Financial Products (FP) office in London which began selling credit default swaps in the early-2000's. The credit default swap was a product used to insure collateralized debt obligations (CDOs) against default. CDOs were a new investment vehicle used to lump various types of debt - both safe and risky - into one bundle product, many of which contained exposure to subprime mortgages. Therefore, the swaps were, essentially, insurance contracts on securities and AIG, for a fee, guaranteed the value of the securities. The CDO insurance plan worked well for a few years, raising the FP unit's evenue from $737 million to $3 billion in five years. By the end of 2007, AIG began to experience significant losses as the value of the securities they were guaranteeing plummeted. AIG's counterparties began demanding that the company provide the collateral for the deteriorating security values. On September 15, 2008, S&P downgraded AIG's credit rating to "AA" resulting in a liquidity crisis for the company. The very next day, the U.S. Federal Reserve provided an $85 billion credit facility to help AIG meet its collateral obligations. In exchange, the U.S. government received a 79.9% equity interest in AIG. In November of 2008, AIG and the U.S. government reached a new agreement for a total bailout package of $150 billion. AIG engaged in unethical behavior by taking risks with unregulated investment products - as a hedge fund would do - while using the cash from people's insurance policies as the collateral. "We're the new AIG, and we can't wait for tomorrow,
AIG: bring on tomorrow." In March 2009, AIG announced they were paying $165 million in bonuses to executives of the company. Just two weeks after receiving their initial bailout in September, one of AIG's companies held a lavish party for its salespeople at a resort in California. The general public, as well as, politicians on both sides of the aisle were outraged by these decisions. "This scrutiny and extensive commentary have adversely affected AIG by damaging AIG’s business, reputation and brand among current and potential customers, agents and other distributors of AIG products and services, thereby reducing sales of AIG products and services, and resulting in an increase in AIG policyholder surrenders and non-renewals of AIG policies..." Decisions 2005 Due to fraud investigations by the Securities and Exchange Commission, New York State Attorney General's Office, and the U.S. Justice Department. AIG Outs longtime Chairman and CEO Hank Greenberg and replaces him with Martin J Sullivan. Misrepresented financial data
Fined for inaccurately reporting insurance claims
Received directed brokerage in return for providing preferential treatment to certain mutual fund companies
Disguised company losses and debts Decisions Decisions What really caused the bailout? 2005-2008 AIG insured CDOs (Collateralized Debt Obligations) against default through credit default swaps
The chances of having to pay out on this insurance were highly unlikely, and for a while, the CDO insurance plan was highly successful
AIG believed that what it insured would never have to be covered
When foreclosures rose to incredibly high levels, AIG had to pay out on what it promised to cover As CEO of AIG Martin J. Sullivan underestimates the risk associated with insuring collateralized debt obligations through the sale of credit default swaps. This business centered around the AIGFP and it's head Joseph Cassano -who also massively underestimated the risk associated with the CDSs. AIG had pre-standing contracts with Goldman Sachs, Merrill Lynch, Bank of America and a select group of foreign firms
Government didn't explain pass-through bailout
Bonus contracts owed to the company’s senior executives and employees were in place before the bailout happened 2008+ 2005 On March 15, 2005, AIG's board forced Greenberg to resign from his post as Chairman and CEO under the shadow of criticism from Eliot Spitzer, attorney general of the state of New York. On May 26, 2005, as part of a series of actions against the alleged criminal activities of large corporations, Spitzer filed a complaint against Greenberg, AIG, and Howard I. Smith (ex-CFO of AIG) alleging fraudulent business practice, securities fraud, common law fraud, and other violations of insurance and securities laws.

After a subsequent investigation, however, all criminal charges were dropped, and Greenberg was not held responsible for any crimes. The State Attorney General's office however is still pursuing Greenberg in civil court for many of these same criminal allegations. Greenberg settled on a $15 million fine for the accusations of fraudulent AIG financial positions. Results and Implications 2005-2008 After Greenberg left AIG took on tens of billions of risk associated with mortgages. It insured tens of billions of derivatives against defaults. Secondly it used collateral on deposit to buy mortgage-backed securities. When losses hit the mortgage market in 2007-08, AIG had to pay out insurance claims and also replaces the losses in its collateral accounts. 2008 The U.S. Government ends up requiring that Robert Willumstead step down in September of 2008 after less than a year on the job. There was and still is lingering public outrage over AIG's use of bailout funds in terms of bonuses, severance pay, and executive expenditures.

The result of these activities has been a decline in the public opinion of AIG to the extent that they have been ranked last in the Harris Poll of Reputation Quotient (RQ) for the last three years (2011, 2012, 2013) In 2009, AIG announced it would pay $165 million in executive bonuses Making Choices Don't over-invest in a business unit that is associated with a bubble such as the housing boom. It could only be expected that once home-prices dropped and defaults occurred that the risk associated with those products would come to bear. AIGFP Lavish Executive Expenditures and Bonuses The $165+ million in executive bonuses paid out after AIG had secured bail-out funds was a public relations black eye.

New York Attorney General Andrew Cuomo announced that 73 AIG employees were each paid more than $1 million in bonuses, saying "AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout." and "Something is deeply wrong with this outcome." On November 10, 2008, just a few days before renegotiating another bailout with the US Government for $40 billion, ABC News reported that AIG spent $343,000 on a trip to a lavish resort in Phoenix, Arizona. What are some different choices AIG could have made in hindsight? The event was for AIG American General
AIG American General is a subsidiary of parent AIG
Distributes insurance for individuals and businesses
In much better financial shape than AIG itself
Regardless, hosting an event of this financial magnitude at this point in the company’s history was definitely a poor decision As it turns out... 1) AIG decided to re-brand its property-casualty business and to distance it from the problems of the parent company after the bailout 2) Initially AIG was named AIU Holdings (AIU standing for American International Underwriters) but the name did not separate it far enough away from its parent AIG's issues 3) It chose Chartis, derived from the Greek word for map, and sold protection against worker injuries, storm damage and lawsuits 4) Earlier this year, AIG made a change in the global market by rebranding back to AIG
New slogan - “Bring on tomorrow” As part of the bailout, the government received a 79.9 percent equity interest in AIG. Willumstad was forced by the U.S. government to step down and was replaced by Edward M. Liddy on September 17, 2008. Two weeks later, AIG held a lavish party for its salespeople at the St. Regis Resort in Dana Point, CA that cost the company over $440 thousand adding another questionable business decision to the growing list of things that the public could utilize in its judgment of the company.
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