American International

Group, Inc. Case (AIG)

By: Sultan Alfahaid
Profile
In 1919 Cornelius Vander Starr founded American Asiatic
Underwriters (AAU), in Shanghai, China.
Which had considerable success in china and from then
expanded throughout Asia.
During World War II Cornelius moved the corporations
headquarters to New York and changed the name to
American International Underwriters (AIU)
Then in the 1970s the company became public and changes
its name to American International Group (AIG)
Profile
Major Divisions:
1. AIG property and casualty
2. AIG life retirement
3. United Guaranty Corporation
4. International Lease Finance Corporation
Profile
Key Executives:
1. Mr. Robert Herman Benmosche is CEO and President
2. Mr. David Lawrence Herzog is CFO and Exec. VP
3. Mr. William N. Dooley is Exec. VP of Investments
4. Mr. Jay Steven Wintrob is CEO and President of AIG Life
& Retirement
5. Mr. Peter D. Hancock CEO and President of AIG Property
Casualty
Profile
The company is divided into 1.47 billion shares, 86%
held by institutional and mutual fund investors.
Before its 2008 collapse, AIG had revenues exceeding
$110 billion
Total assets of over $1 trillion
116,000 employees around the world and operated in
130 countries
Ethical Issues
Fraudulent Accounting:
A federal inquiry from Attorney general Elliot Spitzer
into Warren Buffets reinsurer company General Re showed
two shammed transactions between it and AIG of reported
losses. This was done at a time when AIGs stock was declining.
The bogus deal made it look like Gen Re was going to pay AIG
$500 million in premiums, when in reality Gen Re would pay
no premiums and would actually receive $5 million from AIG
for its involvement in the deal.
Ethical Issues
Incentivized Risk Taking:
The AIG culture was focused on a reward system that placed little
responsibility on executives who made very poor decisions. Moreover,
they kept giving bonuses starting from $92,500 to $4 million to company
executives after they suffered losses to the tone $40 billion in 2008.
Credit Default Swaps:

Borrower
Before: BBB
rating
Investment
Bank
AIG
AAA rating
Only holds AA and
over rated debt
Cash
Premium Interest
CDS
After: AAA
rating
Insured
Ethical Issues
Accepting Bailout:
That AIG would be bailed out with an $85 billion equity-
linked loan with 8.5% plus LIBOR interest rate and 79.99%
equity was held as security in the form of warrants, which is
going to be sold off in the free market. Given the
circumstances it appeared to be a harsh deal considering
other institutions that were bailed out got 1% or 2% interest
on their loans.
Ethical Issues
Paying fully for Collateralized Debt Obligations (CDOs):
Since the assignment of Edward Liddy as CEO of AIG $60
Billion went to cover CDOs insured through AIG. A major
benefactor of the AIG bailout was Wall Street institutions
such as Goldman Sachs that received its CDO coverage fully
to the amount of $14 billion. The failure to negotiate the
price down indicates a major ethical problem.
Analysis
AIGs superior management had put in place a great
short-term profiting position of insuring debt, bets, and such for
a considerable amount of profit. They used complex modeling
of risk that has failed to predict humans being irrational. They
took a position i.e. assumption that borrowers will pay their
debts and didnt account for them defaulting. That position
exposed the corporation to huge losses that would have lead it
to file for chapter 11 bankruptcy. Which would have been a
better deal for AIG than being bailed out and having the
government essentially run it for the past years.

Questions ?