What could AIG have done differently to prevent its failure and subsequent bailout?
When American International Group (AIG) collapsed in September 2008 and was subsequently saved by a government bailout, it became one of the most controversial players in the 2008–2009 financial crises. The corporate culture at AIG had been involved in a high-stakes risk-taking scheme supported by managers and employees that appeared entirely focused on short-term financial rewards. Out of a firm of 116,000 employees, one unit with around 500 employees, AIG Financial Products, was chiefly to blame. Current CEO Ed Liddy, who was summoned by former Treasury Secretary Hank Paulson, estimates that only twenty to thirty people were directly involved in bringing down the company.
The AIG Financial Products unit specialized in derivatives and other complex financial contracts that were tied to subprime mortgages or commodities. While its dealings were risky, the unit generated billions of dollars of profits for AIG. Nevertheless, during his long tenure as CEO of AIG, Maurice “Hank” Greenberg had been open about his suspicions of the AIG Financial Products unit. However, after Greenberg resigned as chief executive of AIG in 2005, the Financial Products unit became even more speculative in its activities.
Immediately before its collapse, AIG had exposure to $64 billion in potential subprime mortgage losses. The perfect storm formed with the subprime mortgage crisis and a sudden sharp downturn in the value of residential real estate in 2008. Since much of the speculation in the Financial Products unit was tied to derivatives, even small movements in the value of financial measurements could result in catastrophic losses.
In this case, we trace the history of AIG as it evolved into one of the largest and most respected insurance companies in the world, and the more recent events that led to its demise. AIG had a market value of close to $200 billion in 2007, and by 2009 this amount had fallen to a mere $3.5 billion. Only a government rescue of what has amounted to $180 billion in loans, investments, guarantees, and financial injections prevented AIG from facing total bankruptcy in late 2008.
Saving AIG was not meant as a reward, however. The government rescued the company not to keep it from bankruptcy, but to prevent the bankruptcies of many other global financial institutions that depended on AIG as counterparty on collateralized debt obligations. If AIG had been allowed to fail, it is possible that the financial meltdown that occurred in 2008–2009 would have been worse.
This case first examines the events leading up to the 2008 meltdown, including the philosophy of top management and the corporate culture that set the stage for AIG’s demise. Then it reviews the events that occurred in 2008, including ethical issues related to transparency and failed internal controls. Finally, the analysis looks at the role of the government and its decision to bail out AIG, taking 79.9 percent ownership in a company that grossly mishandled its responsibility to its stakeholders.

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May 4, 2012

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