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Overview of the Corporation: American International Group

In: Business and Management

Submitted By greenrosePM94
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An analysis of American International Group (AIG) indicates that it is a multinational insurance corporation that operates across the globe with around 88 million customers in its database. The company accounts for employing more than 64000 people across 90 countries. There are three major types of businesses that are currently operated by the company and these include AIG Property Casualty, AIG Life and Retirement and United Guarantee Corporation. These are the three important divisions that are noted in respect to AIG and they accounts for providing different insurance products and services to its customers. As for instance, AIG Property Casualty accounts for providing insurance products especially in respect to segments involving commercial, institutional and individual customers whereas AIG Life accounts for providing life insurance and retirement services to its customers. With regard to the UGC section, it focuses on providing mortgage guarantee insurance and mortgage insurance to its customers. Thus, the AIG Group as a whole accounts for providing insurance services of different categories to its larger customer database that is widely diversified, and its services are available throughout the globe.

Following the financial crisis of 2008, the financial industry suffered backlash from the public following a historic and infamous series of events that threatened America’s economy. From media pundits to organized efforts such as the “Occupy: Wall Street” movement, there has been a continual protest against the ‘injustice’ and corruption of greed that supposedly plagues large financial institutions. However, many Americans rely on financial services for retirement savings, investment opportunities, the ability to get a mortgage and more. Despite the complexity of many financial systems, which may be simply understood by the general public, the causes of the crisis held blame with those behind-the-scenes, and an ethical analysis can bring these actors and their decisions to light and provide a clear picture of what was done wrong and why. Looking into AIG, a major player in the financial crisis, a history of ethically questionable management can be seen, with blatantly unethical choices leading underlying collapse of the financial system in 2008.
AIG’s ethical troubles began to affect the company in 2004, brought on by a series of reporting choices made by executive management, namely, CEO Maurice Greenberg. Greenberg began working for AIG in 1960, transforming the company into an insurance giant. Greenberg was named CEO in 1968, a year before the company went public, and strategically grew the company over the next 35 years into one of the largest insurance companies in the world. Following steady earnings growth in the 90’s, AIG touted impressive increases in net income in the early 2000’s; attracting investors left and right. During Greenberg’s time as CEO, AIG became one of the most valuable companies in the US, with $50 billion in acquisitions and a market cap of $166 billion. AIG reported a 68% increase of net income in 2003, which prompted financial analysts to take a closer look at their accounting practices and financial records. David Schiff, an industry reporter, calculated earnings gains of 15% in 2003 based on AIG’s previous methodologies. This finding provoked Schiff to look into AIG’s previous company reports where he discovered a shocking level of inconsistency. Taking advantage of a number of different valuation metrics, AIG had reported its profits in a way that always emphasized the company’s returns and losses in the most positive light possible. (AIG’s accounting lesson. The Economist) On the heels of a $10 million penalty for insurance fraud in 2003, this news did not bode well for AIG and gained the full attention of the Securities and Exchange Commission (SEC) and New York Attorney General Eliot Spitzer. (AIG Agrees To Pay $10 Million Civil Penalty, SEC) Investigations into deceptive accounting claims, reporting investment income as underwriting income (window-dressing), as well as a scheme to hide workers’ compensation put AIG in the spotlight and triggered a change in leadership for the first time since Greenberg took over.
Chief Operating Officer Martin Sullivan replaced Greenberg in March of 2005, looking to get the company back on track and restore trust in AIG’s leadership. Sullivan had been with AIG for over 30 years as well, working in the finance department of an AIG subsidiary in the UK. (Westbrook, AIG’s Greenberg Steps Down as CEO; Sullivan Succeeds) His first order of business as CEO was the analysis and restatement of AIG’s earnings reports going back to 2000, with the revisions showing $2 billion less shareholders’ equity and almost $4 billion less in profits. Even with the restatement, AIG touted earnings $9.7 billion in 2004, surpassing all of their competition. (Westbrook, Plumb. AIG Lowers Net Income $3.9 Billion Over Fiver Years) The deceptive accounting practices to understate claim liabilities, misrepresenting underwriting profits, and the fraudulent reinsurance contracts reflect the inability of AIG’s management to make consistently ethical decisions. With earnings that trump their competitors, the unethical decisions become impossible to rationalize, and emphasize the failure to consider the consequences of their actions. AIG’s management had set a precedent for unethical practices and a complete disregard for their stakeholders, when the company was still viably dominant.
During the following years, AIG released statements in accordance with the generally accepted accounting principles (GAAP) and began working to fix persisting issues, providing a clearer view of the struggling company going forward. Unfortunately, AIG continued to engage in ethically questionable operations during these years as well, taking on considerable risk in the form of derivatives. AIG’s London unit, AIG Financial Products, had begun insuring derivatives that carried a significant risk without collateral.
Led by Joseph Cassano, AIG Financial Products’ core business centered around the derivatives market, namely in selling interest rate swaps, a “vanilla product.” These swaps allow investors to bet on the direction of interest rates and hedge their risk against systematic risk from unforeseen financial events. After learning about collateralized debt obligations (CDOs) from JP Morgan derivatives specialists who dealt with Cassano, the London unit began insuring CDOs. Collateralized debt obligations are sold as a pool of loans divided into pieces, based on the credit quality of the underlying securities. Cassano aimed to utilize AIG’s services to provide insurance to financial institutions holding CDO’s and other debts in case of defaulting. The branch generated $3.26 billion in profit in 2005, compared to $737 million in 1999, and increased their percentage of AIG’s overall operating income to 17.5% from 4.2% in the same years. AIG sold these credit default swaps with no regard for the potential risk carried by the policies, as they firmly believed that they wouldn’t end up obligated to fill any claims. In addition, AIG had the benefit of a high investment grade credit rating, and was able to write insurance without needing the collateral. While these policies were meant to provide funds in the case of default, the inherent risk taken on by the massive number of policies and more importantly, the effect that default would have on stakeholders, was brushed off by AIG. Cassano himself was quoted on this view in 2007, stating, “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”
By 2007, AIG Financial Products’ portfolio of credit default swaps was valued around $500 billion, generating as much as $250 million a year in income on insurance premiums, as described to investors by Cassano. As mortgage foreclosures triggered system-wide questions about the quality of debt across the credit spectrum, calls for collateral on the credit default swaps left AIG in a bad position. In the quarter ending September 30, 2007, AIG reported a $352 million unrealized loss on the credit default swap portfolio. As the London bank was responsible for providing collateral to its trading partners, AIG as a whole was required to meet the obligations and the growing problem served to undermine the company’s financial stability. After AIG Financial Products’ losses hit $25 billion, AIG’s stock price plummeted, and instilled fear among the other companies it does business with, as well as the tremendous amount of stakeholders and businesses tied to AIG as a whole. (Morgenson, Gretchen. “Behind Insurer’s Crisis, Blind eye to a Web of Risk.”) The events that followed, including a bailout of AIG by the Federal Reserve to the tune of $85 billion (supplement over time up to $182 billion) and the now infamous financial crisis of 2008, stand testament to the severity of AIG’s ethical lapses and poor decisions.…...

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