COPING WITH FINANCIAL AND ETHICAL RISK AT AMERICAN INTERNATIONAL GROUP (AIG) (A Managerial Ethi! Ca!e St"#$)
S"%&itte# %$' A% Priel*an&ar Ag"!tin +er,i! -a!ilnia Ken -"!ta&ante Patriia M. S"&"#i,ila Mi!t$ L.
San -e#a Cllege Manila Gra#"ate Shl / -"!ine!!
-ACKGROUND OF THE CASE
O0ER0IEW American International Group, Inc. (AIG), incorporated on June 9, 1967, is an insurance company. The Company proides a ran!e o" property casualty insurance, li"e insurance, retirement products, mort!a!e insurance and other #nancial serices to customers in oer 1$$ countries and %urisdictions. The Company operates throu!h t&o se!ments' Commercial Insurance and Consumer Insurance, as &ell as a Corporate and ther cate!ory. Commercial Insurance has three operatin! se!ments' roperty Casualty, *ort!a!e Guaranty and Institutional *ar+ets. Consumer Insurance also has three operatin! se!ments' etirement, -i"e and ersonal Insurance. The Companys Corporate and ther includes the Company, as &ell as certain le!acy assets and run/o0 insurance usinesses. The Company !roups its insurance/related le!al entities into t&o cate!ories' 2on/-i"e Insurance Companies and -i"e Insurance Companies.
AIG1S CULTURE AIG3s *ission/4ision 5tatement is as "ollo&s' "As a global fnancial services organization, we have committed our resources to developing products and services that address the needs o our clients as well as promote a corporate culture that values integrity, diversity, innovation and excellence." hile AIG3s slo!an is a short, memorale catch phrase, ta!line or motto used to identi"y a product or company in adertisements, and per"ectly encapsulates AIG3s corporate culture on a "e& &ords. The adertisin! slo!an, or usiness slo!an most associated &ith American International Group, is' We know money. AIG3s corporate culture can e o"ten credited to its C8 o" : years, *aurice ;
e him to e autocratic in his drie to e?pand the company into an international po&erhouse.
•
•
Inoled in a hi!h/ sta+es ris+/ta+in! scheme supported y mana!ers and employees that appeared entirely "ocused on short term #nancial re&ards. @ocused on a re&ard system that placed little responsiility on e?ecuties &ho made ery poor decisions They o0ered cash a&ards and other per+s to thirty/ei!ht e?ecuties and a retention pro!ram &ith payments "rom 9B$$ to D *illion "or employees earnin! salaries et&een 16$E and 1*.
-RI-ER2 AND CONI0ANCE Gien their corporate culture and mindset, one thin! led to another. In the early B$$$s the 5ecurities and 8?chan!e Commission "ound that AIG dealt &ith ;#nite insurance= deals Fcontracts that coered speci#c amounts o" losses rather than une?pected losses o" indeterminate si>e Fand &hat appeared to e loans (since premiums &ere structured to match policy payouts and eliminate ris+) rather than !enuine ris+ allocation ehicles. It &as discoered throu!h the "ederal inuiry conducted, that *aurice ;
CAUSE OF AIG1S FINANCIAL WOES AIG3s #nancial dilemma that resulted to the B$$: ailout, &ere cause y a typed o" deriatie called Credit He"ault 5&aps (CH53s). CH5 are #nancial products that trans"er the credit e?posure (ris+) o" #?ed/income products et&een parties. The uyer o" a credit s&ap receies credit protection, &hereas the seller o" the s&ap !uarantees the credit&orthiness o" the product. The ris+ o" de"ault is trans"erred "rom the holder o" the #?ed/income security to the seller o" the s&ap. AIG issued the s&aps and promised to pay these institutions, i" the det securities de"aulted.
AIG3s @inancial roducts nit ramped up its usiness y sellin! s&aps that coered det that &as ac+ up y mort!a!es, &hich is called Collaterali>ed Het li!ations (CH). The s&aps issued y AIG &ere ac+ed y DD$ illion &orth o" oli!ations. AIG &as ale to ma+e these CH deals &ith ery small "raction o" actual money on hand. The company &as inoled in ad mort!a!e lendin! y #nancial institutions that did not hae suLcient capital. The loans and the CH3s &ere o"ten sold to people &ho could not repay their det. AIG did not e?ercise due dili!ence in determinin! the credit &orthiness o" its orro&ers, in attemptin! to !au!e the chance o" de"ault. This can e summed up y the C3s o" Credit, namely' Character, Capacity, Capital, Collateral, Conditions. Greener! heard ne&s o" this, and as+ed the nit to ;shado& its trades=. AIG sold credit protection on CH3s y &ritin! pieces o" paper that stated that AIG &ould coer the losses in the case these oli!ations &ent ad. AIG "ailed to assess systematic ris+ o" counterparties, y not measurin! their o&n e?posures and rec+lessly usin! their CH3s and CH53s. In addition, prior to B$$:, deriaties &ere not &idely understood y the pulic, mass media, re!ulators, and many other e?ecuties &ho &ere proidin! the oersi!ht "or their use.
AIG1S LACK OF TRANSPARENC2 rior to the #nancial meltdo&n o" B$$:, the outside auditors o" AIG (rice&aterhouse Coopers) &ere e?cluded "rom the conersations on the ealuation o" deriaties. AIG3s e?ecuties *r. Cassano and *r. 5ullian, continued to assure inestors and auditors that AIG had accurately identi#ed all areas o" e?posure to the .5. residential housin! mar+et, and they estalished their con#dence on their ealuation methods. This situation is similar to the 8nron case &herein, its e?ecuties claimed they did not +no& that 8nron used deriaties and o0/the/oo+ alance sheet partnerships that caused it demise.
AIG1S RISK APPETITE AIG3 corporate culture promoted speculatie ris+/ta+in!. The company &as centered on a re&ard system that placed little responsiility on e?ecuties &ho made poor decisions. Hespite o" losin! D$ illion in B$$: and a"ter receiin! more than 1B illion in "ederal rescue "unds, AIG pulicly claimed that : e?ecuties receied cash a&ards and per+s and a retention pro!ram &ith payment "rom 9B,$$ to D million, &hile employees receied salaries ran!in! "rom 16$,$$$ to 1 million. These re&ards &ere doled out in the "ace o" e?cessie/ris+ ta+in! and in the middle o" a #nancial crisis, sho&in! utter ne!lect to their sta+eholders.
AIG entered the #nancial products mar+et &ithout truly understandin! the comple?ity o" the #nancial products that they &ere sellin!. Their losses stem "rom mar+et &a!ers that &ere essentially ets on the per"ormance o" undles o" deriaties lin+ed to suprime residential mort!a!es. AIG3s actiities clearly indicate that mana!ers and traders &ere "ocused on #nancial re&ards. They lost the importance o" stron! moral principles, and compliance pro!rams that respect their sta+eholders.
AIG1S -AILOUT AIG su0ered "rom lac+ o" liuidity. They did not hae enou!h capital to repay inestors &ho are as+in! "or their money ac+. To preent a strin! o" an+ "ailures, the !oernment doled out 1:B illion ta?payer money, oer the course o" a month, in order to create a line o" credit "or the company and uyin! AIG stoc+. This ended up &ith the 5 !oernment3s 79.9M o&nership o" AIG Fthus, ma+in! the 5 !oernment a senior partner in a special/purpose entity that &ill receie interest and share liaility in the o&nership o" these tainted instruments.
AFTERMATH It &as reealed that the 16 million o" the ailout money &ent to the onuses o" the employees o" the AIG3s "ailed @inancial roducts nit. The company has also !ien more than B,$$$ employees cash incenties to stop them "rom uittin!. @ormer C8 Greener!, maintains his innocence.
KE2 PEOPLE Ma"rie 3Han45 Green%erg •
•
• •
•
•
in! his contracts and inKuence to help adance the company.
Martin S"lli,an 6 R%ert Will"&!ta# •
The oth succeeded the position as C8, respectiely. 5ullian "or years a"ter Greener!, and months "or illumstad Fut he &as "orced to step do&n in B$$: in the &a+e o" the corporation3s meltdo&n.
+!e7h Ca!!an • •
•
ed in deriaties and other comple? #nancial contracts that &ere tied to suprime mort!a!es or commodities. @inancial roduct unit &as sta0ed y uantitatie specialists &ith doctorates in #nance and math &ho, it seems, &ere ery &illin! to ta+e ris+s.
E#8ar# Li##$ •
•
•
•
as recruited to the AIG post y
•
•
presidential nominee 5en. Narac+ ama mentioned the retreat and said, The Treasury should demand that money ac+ and those e?ecuties should e #red.= In li!ht o" the AIG onus payments controersy, -iddy ur!ed employees to return 16m issued in onuses to them, su!!estin! doin! the ri!ht thin! and returnin! at least part o" the onus is pre"erale to le!al action, notin! ;honorin! contractual commitments is at the heart o" &hat &e do in the insurance usiness.= hile -iddy called the onuses ;distaste"ul= in an appearance in the
Attrne$ General Elit S7it9er •
n *ay B6, B$$, 5pit>er #led a ciil complaint a!ainst *aurice . er declined to rin! any criminal char!es a!ainst Greener!, and t&o o" the ciil char!es &ere dropped in 5eptemer B$$6. O1P @our ciil char!es, the heart o" the case, remain outstandin!.
Gar$ Grtn • •
H8ar# S!in • •
PRO-LEMS A-OUT THE MANAGEMENT •
There is a lac+ o" accountaility on ho& the "unds &ere used.
•
•
•
•
They don3t hae enou!h ac+up plan "or their inestment as an insurance company they must e &ell educated &ith ris+. They placed illions o" dollars at ris+ throu!h speculation on the moements o" arious mort!a!e pools, and the ottom line is that these are no actual securities ac+in! these speculatie positions on &hich AIG is losin! money. They lost their underlyin! mission, the importance o" stron! moral principles, and !ood compliance pro!rams that respect sta+eholders. They &ere not transparent, as e?ecuties *r. Casssano and *r. 5ullian, continued to reassure inestors that they are still pro#tale and their model ealuations &ere accurate.
ETHICAL DILEMMA !iven the corporate culture o A!, was it appropriate or the government to use taxpayer#s money to purchase $%.%& o the struggling insurance company'( The pressin! uestion here is' hat &ould hae happened i" the Goernment did not ailout AIGR I" the 5 Goernment did not ail out AIG, critics say that there &ould hae een a repeat o" the American Great Hepression in the 19B$3s. It &ould hae caused the complete "ailure o" the lar!est 5 an+s li+e Citi, Goldman 5achs, and J *or!an, as &ell as the collapse o" the 5 Nan+in! and insurance industry, &hich ma+e up 7M o" the 5 GH. This &ould !o as "ar as a0ectin! ;real economy=, particularly manu"acturin!, retail, and healthcare. It &ould result to mass usiness "ailure, mass unemployment, and the "ree>in! up o" capital mar+ets. AIG &as ;Too i! to "ail=. The #nancial !iants &ere all interconnected and hae the same assets and shouldered the same ris+s. I" AIG &as not ailed out y the !oernment, it &ould also hae a seere e0ect on the !loal economy. The 5 &ould hae no "unctionin! #nancial system, &hich &ould mean that they &ill not hae the aility to produce or ship !oods !loally. 8ner!y in the "orm o" oil &ould hae stopped shippin!, electricity !eneration &ould hae een cut, massie "ood shorta!es mi!ht occur, etc. AIG has insured so many contracts that their o&n de"ault &ould hae tri!!ered usiness "ailures, &hich &ould hae a domino e0ect on the !loal scale. In !eneral, the ailout &as more aout maintainin! the political/economic status/uo. It &as an Indiidual s. Community type o" ConKict. The !oernment is mandated to protect its people. In this case the 5 Goernment had to do &hat it had to do to protect their citi>en3s lielihoods and economy.
ecause they &ere not sure &hat these to?ic assets that remained in the mar+et durin! the ailout &as actually &orth, and they did not &ant to ta+e any ris+s.
WHAT COULD AIG HA0E DONE DIFFERENTL2 TO CULTURE ETHICAL MISCONDUCT PRE0ENT ITS FAILURE AND SU-SE:UENT -AILOUT;
PRO-LEM E0ALUATION
PROPOSED ALTERNATI0Ee/&innin! 8conomist aul Eru!man thin+s that the 5 Goernment should hae rescued the an+s, ut let the o&ners e accountale. The prolem &as, the 5 Goernment o0ered ailout to AIG &ith no strin!s attached. The pulic too+ the ris+ o" the an+s "ailin! ut the o&ner3s or the top mana!ement pro#ted, as it &as eident in the 16 million dole out o" the ailout money y AIG. 8conomist aul Eru!man ar!ued that !oernment interention &as not enou!h, and structural prolems &ere deeper than they appeared. These prolems are ethicalmoral prolems that are en!rained in the corporate culture o" AIG. p to this day, the top mana!ement o" AIG &ho used their inKuence to !et ailouts has stayed in place to still reap the ene#ts o" the 5 ta?payer3s money. Capitalism cannot &or+ i" the short/si!htedmorally/s+e&ed indiiduals are not remoed. Nan+ ailouts allo&ed un&orthy mana!ement to remain in place, so that the remainin! assets &ould e put into !ood use and inestor con#dence &ill soar. ur !roup3s #nal recommendation is' )he government should have rescued*bailed out the banks, but let the top management be held accountable. We think that this is the best ends+based resolution that will result to the long+term greatest good.
REFERENCES
Gethard, G. (B$1D, 5eptemer 1D). alling !iant- A ase /tudy o A! Oe lo! postP. etrieed' BD June B$16, "rom http'&&&.easyi.comre"erence!uideapa&esite
Earnitschin!, *., 5olomon, H., leen, -.,
@o?, J. (B$$:, 5eptemer 16). hy the Goernment ouldn3t -et AIG @ailR Oe lo! postP. etrieed' BD June B$16, "rom http'content.time.comtimeusinessarticle$,:99,1:D1699,$$.html
Gross, H. (B$1D, ctoer 1). ememer the 1:B Nillion AIG NailoutR It asn3t Just !enerous 8nou!h. Oe lo! postP. etrieed' BD June B$16, "rom http'&&&.thedailyeast.comarticlesB$1D1$1rememer/the/1:B/illion/ ai!/ailout/it/%ust/&asn/t/!enerous/enou!h.html
@errell, .C., @raedrich, J. Case ' Copin! &ith @inancial and 8thical is+ at American International Group
(AIG). .C. @errell, J. @raedrich, -. @errell (8ds.), %th 9dition 5usiness 9thics-9thical 8ecision :aking and ases (pp. 16D/17) *ason, <' 5outh/ estern.