Unethical issues of AIG
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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.
It was in 1962 when Starr transferred management of AIG United states holdings to Maurice R. Greenberg. Greenberg introduced policies that made the company shift from its original personal insurance background to anew high market corporate targeted cover. The new management under Greenberg went on to focus mainly on selling AIGs' insurance packages through independent brokers. This deviated from the initial system which made use of company agents thus eliminating the agents' salaries. This move aimed at reducing the expenses of the company but it led to decreased sales in some of the company's products. Greenberg was named the successor to Starr in the year 1968. In the following year 1969 AIG first went public.
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 company, due to its disastrous credit swaps product. AIGFP was founded in the year 1987 by three Drexel Burnham Lambert Traders who were led by a Howard Sosin, a finance scholar. They convinced Greenberg based on the company's AAA credit rating to create a division which focused on complex derivatives trade. Greenberg and Sosin signed an agreement in which 38 percent of money earned went to AIGFP while the remainder 62 percent went to AIG. If things had to go bad down the line it was AIG and not AIGFP that would be on the hook. AIGFP continued its expansion program opening branches in other countries such as London, Tokyo and even Paris.
Despite the fact that AIGFP had never made even a single credit swap by the year 1998 the unit had revenue of over $500 million (Tpmckraker, 2009)..
It was in 1998 that AIG was approached by JP with a proposal to insure JP Morgan's Complex corporate debt. It was stated by Gary Gorton, a Yale Business Professor that the chance of AIGFP not paying out these deals was almost 99.85 percent. This was based on the reasoning that for the unit to pay out these deals the economy would have to be in a full blown recession and that in this situation the counter parties would have already been wiped out. It was with this deal that AIGFP agreed for the first credit swap with Savage the then CEO signing the deal. Later in 1998 Cassano replaced Savage as CEO of the company. Although Cassano was not experienced in the complicated assessment of risks using computer models he was gifted in accounting and credit. It was through Cassano's strong desire to succeed that led to growth of the unit's revenue to 1 billion in a year and also led to a significant growth in the number of employees to 400 in 2005.
AIG - What went wrong?
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. It was in the year 2002 that AIGFP was charged by the justice department for illegally helping PNC Financial Services to not correctly show their bad assts in their books. AIGFP did this by setting up a separate company "special purpose entity "to handle all the issues related to the assets of the PNC firm. By doing so AIGFP was alleged of breaking the securities law by setting up the company by the Feds that would invest in the firm making it appear real. It was until 2004 that AIG would fully settle the charges against it. It was asked to give back over $45 million in fees, a fine of $80 million and in addition give up all the interest it had earned on the deal. The unit was not formally sanctioned due to the incident but the justice department placed it on a short leash.
It was in March of 2005 that Greenberg stepped down as the CEO amidst investigations on allegations of accounting malpractices at the firm by the New York Attorney General Eliot Spitzer. The issue under investigation by then was not directly related to AIGFP, but the effects of the dealings eventually affected the operations of the unit negatively. Following the departure of Greenberg at the helm of the company and in addition the investigations ongoing within the organization the credit ratings agencies downgraded the company's credit worth from AAA to AA. This reduction in AIG'S credit rating led to provisions in some of AIGFP's credit default swaps. This made AIG to pay in collateral for the deals over $1 billion. This was the mark of many dark days for the unit.
It was until later in the year that Eugene Park an executive at AIGFP was named to closely look at the portfolio containing the firms credit default swaps. The evidence was alarming in that the unit had insured many CDO's that had large proportions of it as sub prime mortgages. This meant that in any situation where the housing market had to collapse the risk of default was too high. This coming up after the downgrading of the units credit ratings indicated an increased chance that AIGFP had to come up with collateral to pay out all the bets it had made in the past. After Cassano was informed of the report he put up a group of investment bank researchers whose prime job was to assess the risks posed by the sub prime mortgages. The credit default swaps were stopped later in 2005 but this came as a case of too little to late owing to the fact that Cassano could not avoid obligations to his unit of over $80 billion worth that was in the form of collateralized debts that were inform of already made swaps in the books of AIGFP.
In the year 2007 with the collapse of the housing market and plummeting in value of sub prime assets AIG was supposed to pay a sum of $1.5 billion to Goldman Sachs based on the credit default swaps insured by AIG to cover the mortgage backed securities. During the same year AIG had to pay $2 billion to meet the demands of other firms that made collateral demands. It was during this year that the stock prices of AIG fell 25 percent and a reported loss of $1.1 billion in portfolio swaps in AIGFP. The problems facing AIG continued further with the company reporting a loss of $11.5 billion and in addition $5.3 billion posted as collateral in February of 2008.
AIG would get further shock as the credit rating agencies planned to further downgrade the company's credit ratings as at September of 2008. This would trigger needs for more collateral that the company would not handle.
What was unethical about AIG?
What was unethical about AIG was that the company would hand out multi-million dollar a bonus to it's over 450 employees operating in its six offices around the world. After handing out these bonuses AIG still had the guts to accept a government bail out plan, this was as the country underwent recession with most of its citizens unemployed and barely making ends meet. AIG also conducted some unethical behavior with its executives dealing in unethical financial reporting practices and illegal brokerage as uncovered during a recent investigation by New York Attorney General Eliot Spitzer (Cooper, 2006).
AIG - Whistleblower
Former AIG CEO Greenberg claimed that following his departure internal controls he had established during his 40 years at the helm of the company had been abandoned. This was made in comments written to the made House Oversight and Government Reform Committee. In the comments Greenberg accused Robert Willumstad and Martin Sullivan who were both his successors as the CEO of AIG of being unable to execute enough oversight on AIGFP's division. And it was for this reason that the company faced a lot of troubles emanating from the division's $500 billion portfolio. Greenberg claimed that the branch which was formed in 1987 was the company beginning to its downfall. Reports said that until this time AIG had lost $50 billion and made a $25.9 billion in mark to market losses. This was related to securities the company held in its investment portfolio and its CDS value.
Greenberg in his letter said that within the nine months a lot of credit collaterals default swaps had been made leading to increased obligations on the company's debt. This he said was different during his tenure and it was after he left office that most of the default swaps done by AIGFP were exposed to sub prime mortgages. . 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.
AIG's future is still not clear after facing years of problems. It is now a year since AIG was bailed out by the federal government and the company is still in a transition. The company is undergoing several transformations that include increased efforts to appoint a new chief executive officer, its initiative to sell most its non core assets tied to the firm and the increased anticipation take off of its new Chartis brand dealing with its commercial property operations. AIG is still faced with the responsibility of repaying federal loans handed to it by the government which amount to billions of dollars. This is further complicated by the fact that it is still unknown how much the government's patience will last. All the above reasons lead to the inability of experts to gauge the company's future (Time. The curious Capitalist, 2009).
The future of AIG is still dependent on the financial market stabilization. The company's policy holders are encouraged by the company's gradual rise from its problems. The process of redefining AIG i.e. prompted shifts in capacity has led to some of its clients having to reassess how they relate to the insurer. Most of the company's clients have chosen to remain loyal and appreciate the efforts made by the combine AIG and Chartis. Clients believe that the decision by the company to re brand its casualty operations was a step in the right direction. Although the Chartis spin off expected to be in the form of a public offering date has not been set, Chartis made a good start by explaining that it would take some time to its clients. AIG though slow in the process of disposing its noncore assts has made it clear that it would make sure that it gets the true value of its businesses through the process. The other looming question on AIG's future is its ability to repay the government bail out loans.
Top of Form
- Cooper, R. W. (2006) Research in Ethical Issues in Organizations Spitzer's Allegations of Unethical/Illegal Behavior: Has the Insurance Industry's Ethical Environment Really Changed Dramatically? New York: Emerald Group Publishing Limited.
- Mary, D. M., Irene, N. M. & Victoria, S. (2006) AIG: Accounting and Ethical Lapses. New York: Emerald Group Publishing Limited Time. The curious Capitalist. (2009, Aug). AIG: Still a company. Retrieved October 5, 2009, from http://www.time.com/ AIG Still a company - The Curious Capitalist - TIME.com.htm