AIG: The Missing Piece of Its Failure Narrative & Why It MattersMercatus Center
The failure of American International Group Inc. was one of the main narratives from the financial crisis, prompting the push for greater financial market regulation and the adoption of Dodd-Frank. But what if the generally accepted account—that AIG’s supposedly unregulated derivatives activities sank the company—doesn’t actually tell the full story?
American International Group, Inc., also known as AIG, is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of December 31, 2016, AIG companies employed 56,400 people.The company operates through three core businesses: General Insurance, Life & Retirement, and a standalone technology-enabled subsidiary
AIG: The Missing Piece of Its Failure Narrative & Why It MattersMercatus Center
The failure of American International Group Inc. was one of the main narratives from the financial crisis, prompting the push for greater financial market regulation and the adoption of Dodd-Frank. But what if the generally accepted account—that AIG’s supposedly unregulated derivatives activities sank the company—doesn’t actually tell the full story?
American International Group, Inc., also known as AIG, is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of December 31, 2016, AIG companies employed 56,400 people.The company operates through three core businesses: General Insurance, Life & Retirement, and a standalone technology-enabled subsidiary
Role of Investment Banks in the Financial Crisis of 2008Mujtaba Zeeshan
This presentation explains how the investment banks played a vital role in the occurrence of the global financial crisis of 2008.
There's a brief discussion on Investment banks in general including their functions. Then briefly explaining the crisis in a manner that students can easily remember. And finally to support our claim, a research paper is used as a reference.
Short presentation on fall of the 4th biggest investment bank firm in United States during the period of financial crisis in 2008 which ultimately started recession in Unites States Of America and subsequent impact on whole world of economy.
This document a short presentation of the AIG SCANDAL that happened in 2005.
One of the most serious financial crises of 2000s was seen in the collapse of the insurance giant American International Group (hereinafter referred to as ‘AIG’). AIG is a global company holding the assets worth $1 trillion approximately. AIG was caught in a scandal (American International Group Scam) for fraudulent accounting with the help of General Reinsurance Corporation (hereinafter referred as ‘GRC’). The company declared the loss of revenue by $60 million approximately which also led to a drop in its stocks in the New York Stock Exchange as it was seen as a measure of the falling financial health of the company. To rescue the situation, AIG sought help from the GRC. GRC created two sham transactions of $250 million each to boost the losses in revenue of AIG. These two transactions helped to cover up the losses as AID need not mention the amount in its income statement as no actual risk was transferred but they mentioned the $500 million in their premium revenue which made up the loss reserves to pay claims. As a result of this, there was a false increase in the loss reserves as well as in their total increase for the year 2000 and 2001. For the next five years, at least, AIG crated misleading account statements to deceive investors, regulators and policyholders into believing that the company is running into usual and sometimes exceptional profits.This came into catch when the Attorney General’s office and the Insurance Department started investigating against the malpractices of AIG in the year 2004. Soon after, the U.S. Securities and Exchange Commission (hereinafter referred to as ‘SEC’) joined the investigation accusing AIG of fraud. The officers of the company who provided for this fraud did not face any criminal charges whereas the AIG had to pay a penalty of $1.64 billion to SEC.
About collapse of Lehman Brothers. A global financial services firm which filed bankruptcy in 2008, thereby, leading to worldwide crisis of economic downturn especially in US.
The presentation includes brief points, so it would be better if the reader goes through them in detail which would really help. This was created by our team for educational purpose.
Hope this helps.
Galleon Group owned by Raju Rajaratnam was caught by FBI by wiretapping the conversation between Raj Gupta, former director of several MNC's inculding Infosys, Goldman etc.
Role of Investment Banks in the Financial Crisis of 2008Mujtaba Zeeshan
This presentation explains how the investment banks played a vital role in the occurrence of the global financial crisis of 2008.
There's a brief discussion on Investment banks in general including their functions. Then briefly explaining the crisis in a manner that students can easily remember. And finally to support our claim, a research paper is used as a reference.
Short presentation on fall of the 4th biggest investment bank firm in United States during the period of financial crisis in 2008 which ultimately started recession in Unites States Of America and subsequent impact on whole world of economy.
This document a short presentation of the AIG SCANDAL that happened in 2005.
One of the most serious financial crises of 2000s was seen in the collapse of the insurance giant American International Group (hereinafter referred to as ‘AIG’). AIG is a global company holding the assets worth $1 trillion approximately. AIG was caught in a scandal (American International Group Scam) for fraudulent accounting with the help of General Reinsurance Corporation (hereinafter referred as ‘GRC’). The company declared the loss of revenue by $60 million approximately which also led to a drop in its stocks in the New York Stock Exchange as it was seen as a measure of the falling financial health of the company. To rescue the situation, AIG sought help from the GRC. GRC created two sham transactions of $250 million each to boost the losses in revenue of AIG. These two transactions helped to cover up the losses as AID need not mention the amount in its income statement as no actual risk was transferred but they mentioned the $500 million in their premium revenue which made up the loss reserves to pay claims. As a result of this, there was a false increase in the loss reserves as well as in their total increase for the year 2000 and 2001. For the next five years, at least, AIG crated misleading account statements to deceive investors, regulators and policyholders into believing that the company is running into usual and sometimes exceptional profits.This came into catch when the Attorney General’s office and the Insurance Department started investigating against the malpractices of AIG in the year 2004. Soon after, the U.S. Securities and Exchange Commission (hereinafter referred to as ‘SEC’) joined the investigation accusing AIG of fraud. The officers of the company who provided for this fraud did not face any criminal charges whereas the AIG had to pay a penalty of $1.64 billion to SEC.
About collapse of Lehman Brothers. A global financial services firm which filed bankruptcy in 2008, thereby, leading to worldwide crisis of economic downturn especially in US.
The presentation includes brief points, so it would be better if the reader goes through them in detail which would really help. This was created by our team for educational purpose.
Hope this helps.
Galleon Group owned by Raju Rajaratnam was caught by FBI by wiretapping the conversation between Raj Gupta, former director of several MNC's inculding Infosys, Goldman etc.
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ECO315 Introduction to Money and BankingWEEK6 Homework (Financia.docxjack60216
ECO315 Introduction to Money and Banking
WEEK6 Homework (Financial Crisis)
Throughout the 2008 financial crisis, there are many examples related with the asymmetric information, the adverse problem, the moral hazard by the principal agent problem, and the conflicts of interest.
Find them related with following companies and financial programs:
· Investment Bank such as Lehman Brothers and Goldman Sachs
· Credit Rating Agency
· Subprime loans to collateral debt obligations (CDO)
· Credit default swaps (CDS)
· Fannie Mae and Freddie Mac (GSE)
· House prices and foreclosures
FINANCIAL MANAGEMENT
1. If a firm substitutes fixed for variable costs, which of the following will occur? A. The use of financial leverage will be increased.
B. The degree of operating leverage will be increased.
C. The break-even level of output will be reduced.
D. The profits will always be higher.
2. If investors want to limit financial risk and maximize their control of the business, which of the following
forms of business should they prefer?
A. Limited partnership
B. S corporation
C. Sole proprietorship
D. Corporation
3. A firm does not obtain financial leverage by
A. issuing preferred stock.
B. issuing common stock.
C. issuing bonds.
D. borrowing from the bank.
4. Unsuccessful use of financial leverage
A. increases earnings per share.
B. increases investors' rate of return.
C. decreases earnings per share.
D. decreases interest expense.
5. Which of these situations offers the best rationale for organizing a business as a limited partnership?
A. Management rejects the idea of personally assuming liability for the business.
B. You're an entrepreneur and you want two others' expertise, former business partners, to help execute your business plan.
C. Management needs to raise money through a stock offering, but does not want to relinquish control of the business to stockholders.
D. You want your small new business, which is operating out of your garage, to pay you and your partner (your spouse) dividends for which income tax will only be paid by you or your business, not both.
6. Which of the following is a correct statement about corporate losses?
A. They are carried forward three years and then carried back.
B. They are carried back three years and then carried forward.
C. They offset other sources of income in prior years.
D. They are carried forward to future years.
7. Break-even analysis requires knowing the relationship between
A. sales and total costs.
B. sales and earnings.
C. sales and assets.
D. total revenues and fixed costs.
8. If a firm produces 50,000 widgets and sells each unit for $20.50, what is the total revenue generated by
this production?
A. $1,025,000
B. $100,250
C. $10,250
D. $10,250,000
9. If Sam's Diner has an EBIT of $350,000, what are the diner's net earnings after paying $50,000 in
taxes and $34,000 in interest?
A. $266,000
B. $334,000
C. $311,000
D. $434,000
10. An increase of cost of capital will
A. decrease an invest ...
The Blue Sky Report® - A Kerrigan Quarterly – First Quarter 2020 PreviewErin Kerrigan
The Blue Sky Report®, published by Kerrigan Advisors, is the auto retail industry's most comprehensive and authoritative quarterly report on dealership M&A activity, as well as franchise values. The quarterly report, received by over 9,000 industry recipients in 35 countries, includes analysis of all dealership transaction activity for the year, and lays out the high, average and low blue sky multiples for each franchise in the luxury and non-luxury segments. To sign up to receive the quarterly report, please visit: https://www.kerriganadvisors.com/the-blue-sky-report/
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
Introduction to AI for Nonprofits with Tapp NetworkTechSoup
Dive into the world of AI! Experts Jon Hill and Tareq Monaur will guide you through AI's role in enhancing nonprofit websites and basic marketing strategies, making it easy to understand and apply.
The Roman Empire A Historical Colossus.pdfkaushalkr1407
The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
June 3, 2024 Anti-Semitism Letter Sent to MIT President Kornbluth and MIT Cor...Levi Shapiro
Letter from the Congress of the United States regarding Anti-Semitism sent June 3rd to MIT President Sally Kornbluth, MIT Corp Chair, Mark Gorenberg
Dear Dr. Kornbluth and Mr. Gorenberg,
The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
harassment and intimidation at the Massachusetts Institute of Technology (MIT). Failing to act decisively to ensure a safe learning environment for all students would be a grave dereliction of your responsibilities as President of MIT and Chair of the MIT Corporation.
This Congress will not stand idly by and allow an environment hostile to Jewish students to persist. The House believes that your institution is in violation of Title VI of the Civil Rights Act, and the inability or
unwillingness to rectify this violation through action requires accountability.
Postsecondary education is a unique opportunity for students to learn and have their ideas and beliefs challenged. However, universities receiving hundreds of millions of federal funds annually have denied
students that opportunity and have been hijacked to become venues for the promotion of terrorism, antisemitic harassment and intimidation, unlawful encampments, and in some cases, assaults and riots.
The House of Representatives will not countenance the use of federal funds to indoctrinate students into hateful, antisemitic, anti-American supporters of terrorism. Investigations into campus antisemitism by the Committee on Education and the Workforce and the Committee on Ways and Means have been expanded into a Congress-wide probe across all relevant jurisdictions to address this national crisis. The undersigned Committees will conduct oversight into the use of federal funds at MIT and its learning environment under authorities granted to each Committee.
• The Committee on Education and the Workforce has been investigating your institution since December 7, 2023. The Committee has broad jurisdiction over postsecondary education, including its compliance with Title VI of the Civil Rights Act, campus safety concerns over disruptions to the learning environment, and the awarding of federal student aid under the Higher Education Act.
• The Committee on Oversight and Accountability is investigating the sources of funding and other support flowing to groups espousing pro-Hamas propaganda and engaged in antisemitic harassment and intimidation of students. The Committee on Oversight and Accountability is the principal oversight committee of the US House of Representatives and has broad authority to investigate “any matter” at “any time” under House Rule X.
• The Committee on Ways and Means has been investigating several universities since November 15, 2023, when the Committee held a hearing entitled From Ivory Towers to Dark Corners: Investigating the Nexus Between Antisemitism, Tax-Exempt Universities, and Terror Financing. The Committee followed the hearing with letters to those institutions on January 10, 202
Francesca Gottschalk - How can education support child empowerment.pptxEduSkills OECD
Francesca Gottschalk from the OECD’s Centre for Educational Research and Innovation presents at the Ask an Expert Webinar: How can education support child empowerment?
How to Make a Field invisible in Odoo 17Celine George
It is possible to hide or invisible some fields in odoo. Commonly using “invisible” attribute in the field definition to invisible the fields. This slide will show how to make a field invisible in odoo 17.
1. F A L L E N G I A N T Case Study of American International Group, Inc. J E N N I F E R D E M A R S
2. TABLE OF CONTENTS (hyperlinks) I BACKGROUND II CAUSES OF FAILURE III RISKS TAKEN IV LESSONS LEARNED CONCLUSION REFERENCES
3. AIG Building, 70 Pine St., Lower Manhattan (1931 Photo) B A C K G R O U N D OVERVIEW HISTORY FINANCIAL CONDITION & ANALYSIS
4. O V E R V I E W American International Group, Inc. (AIG) is a world leader in insurance and financial services. It is headquartered in New York City, and operates in more than 130 countries and jurisdictions. Its primary activities include General Insurance and Life Insurance & Retirement Services. NYC
5. In 2006, AIG had sales of $113 billion and 116,000 employees (Saporito, 2009). According to the 2008 Forbes Global 2000 list, AIG was once the 18th-largest public company in the world. It was listed on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo. O V E R V I E W London, England
6. AIG Building, 70 Pine St., Low er Man hattan AIG faltered in America’s sub-prime mortgage crisis. It had traded heavily in credit default swaps and could not meet its obligations. The United States government came to its rescue with an $85 billion bailout on September 16, 2008. O V E R V I E W
7. AIG has taken a major step toward cleaning up its image by reorganizing its insurance units under AIU Holdings, as of March 2009. AIU and its subsidiary brands are now distinct from AIG (National News, 2009). The holding company, itself, is currently undergoing rebranding that includes a new name, which is expected to be revealed in the near future. O V E R V I E W
8. H I S T O R Y Cornelius V. Starr started AIG as “American Asiatic Underwriters” in 1919 in Shanghai (Madsen 2008).
9. H I S T O R Y Starr moved AIG from Shanghai to New York after the Communists came to power in 1949.
10. In 1962, Starr gave management of the company's lagging U.S. holdings to Maurice R. Greenberg , who shifted its focus onto selling insurance through independent brokers rather than agents. In 1968, Starr named Greenberg his successor. AIG went public in 1969. Maurice R. Greenberg H I S T O R Y
11. H I S T O R Y Greenberg was fired due to accounting scandal in February 2005, and was succeeded as CEO by Martin J. Sullivan . On June 15, 2008, Sullivan resigned and was replaced by Robert B. Willumstad , Chairman of the AIG Board of Directors. Willumstad was forced by the U.S. government to step down and was replaced by Edward M. Liddy on September 17, 2008.
12. H I S T O R Y SEPTEMBER 2008 AIG’s credit ratings were downgraded below "AA" levels, causing the company to suffer a liquidity crisis. The United States Federal Reserve Bank created an $85 billion credit facility to help AIG meet increased collateral obligations, in exchange for stock warrants worth 79.9% of the company’s equity. H I S T O R Y
13. H I S T O R Y LATE SEPTEMBER 2008 Two weeks after AIG was bailed out, the company held a $443,344.71 party for its salespeople at the St. Regis Resort in Dana Point, California.
15. H I S T O R Y Since September 2008, AIG has been marketing its assets to pay off its government loans. A decline in the valuation of insurance businesses, and the weakening financial state of potential bidders, has hindered its efforts (Barr 2009). AIG subsidiary, International Lease Finance Corp. (ILFC), Los Angeles, CA
16. H I S T O R Y MARCH 2, 2009 AIG reported a fourth quarter 2008 loss of $61.7 billion. The announcement of the loss had an impact on morning trading in Europe and Asia, with the FTSE100, DAX and Nikkei all suffering steep losses. In the U.S., the Dow Jones Industrial Average fell to below 7000 points, a twelve-year low. H I S T O R Y
17. H I S T O R Y On top of these losses, in March 2009, AIG was attacked by the public and media for its retention payments of $165 million. March 18, 2009, Liddy waits to testify on Capitol Hill.
18. March 23, 2009, Now-blank marquee on AIG building in New York City. As a result of public anger over these employee bonuses, AIG has rebranded a majority of its business under AIU Holdings, Inc. (Kaiser & Daly 2009). H I S T O R Y
19. H I S T O R Y Liddy announced on May 21, 2009 that he is resigning , but will stay until a new CEO is hired. He receives an annual salary of $1 and equity grants, though he may be "eligible for a special bonus for extraordinary performance payable in 2010" (Barnes 2009).
20. H I S T O R Y To date, the U.S. government’s total loan package to AIG has topped $182.5 billion (Hamilton, 2009).
21. F I N A N C I A L C O N D I T I O N AIG CURRENT FINANCIAL HIGHLIGHTS from MSN Money, July 20, 2009. -557.83% Net Profit Margin 0.00 Dividend Rate -720.86 Earnings/Share 340.12 Book Value/Share N/A Payout Ratio 130.87 Revenue/Share 4.09 Debt Equity Ratio -155.05% Return on Equity -97.25 Bil Income 17.53 Bil Sales
22. F I N A N C I A L C O N D I T I O N AIG REVENUE – QUARTERLY RESULTS (in Millions) from MSN Money, July 20, 2009. 20,458.0 N/A N/A N/A 20,458.0 FY (12/09) 11,104.0 -23,758.0 898.0 19,933.0 14,031.0 FY (12/08) 31,150.0 2 nd Quarter 110,064.0 Total 18,433.0 4 th Quarter 29,836.0 3 rd Quarter 30,645.0 1 st Quarter FY (12/07)
23. F I N A N C I A L C O N D I T I O N AIG EARNINGS PER SHARE – QUARTERLY RESULTS (in Millions) from MSN Money, July 20, 2009. -$39.67 N/A N/A N/A -$39.67 FY (12/09) -$742.94 -$459.02 -$181.04 -$41.13 -$61.75 FY (12/08) $32.87 2 nd Quarter $46.93 Total -$41.51 4 th Quarter $23.95 3 rd Quarter $31.62 1 st Quarter FY (12/07)
24. F I N A N C I A L C O N D I T I O N AIG QUARTER OVER QUARTER ESP GROWTH RATE from MSN Money, July 20, 2009. N/A N/A N/A 91% FY (12/09) -154% -340% 33% -49% FY (12/08) 4% 2 nd Quarter N/A 4 th Quarter -27% 3 rd Quarter --- 1 st Quarter FY (12/07)
25. F I N A N C I A L C O N D I T I O N AIG YEAR OVER YEAR ESP GROWTH RATE from MSN Money, July 20, 2009. N/A N/A N/A 36% FY (12/09) N/A N/A N/A N/A FY (12/08) N/A 2 nd Quarter -1,006% 4 th Quarter N/A 3 rd Quarter N/A 1 st Quarter FY (12/07)
26. The financials for 2008 were not good, as AIG posted a $99 billion loss for the year. The first quarter of 2009 looks promising, however, with revenue in the first quarter of 2009 outperforming all of 2008. Earnings-per-share is poor, but the first quarter 2009 loss was considerably lower than fourth quarter 2008. It is the hope of the markets that AIG has started to rebound from the low points of their 2008 crisis. F I N A N C I A L A N A L Y S I S
28. Many factors led to the ultimate takeover of American International Group (AIG) by the U.S. Federal Reserve in September 2008. NYC CAUSES OF FAILURE
29. CREDIT DERIVATIVES AIG’s trouble began when its Financial Products (FP) unit started selling credit default swaps. AIG FP developed a portfolio of $2.7 trillion in credit derivatives (Leonard, 2008). AIG became liable for much more money than it could pay out if the portfolios were to default. In 2008, AIG FP piled up $40 billion in losses related to its dealings in complex mortgage bond derivatives (Saporito, 2009). NY Times, 5/14/09 CAUSES OF FAILURE
30. FRIENDS IN WASHINGTON AIG was able to engage in risky business for so long because Washington looked the other way. The company befriended politicians with campaign contributions, escaping regulation that might have prevented the current crisis (Saporito, 2009). CAUSES OF FAILURE
31. POOR REGULATORY OVERSIGHT Regulators never imagined the extent of the looming defaults. AIG's uncollateralized insurance business was regulated by Washington's Office of Thrift Supervision, whose task is to watch over savings-and-loan companies, not global insurers (Saporito, 2009). Evidently it wasn't watching AIG. CAUSES OF FAILURE
32. POOR REGULATORY OVERSIGHT Joseph Cassano built up AIG FP on what's been described as regulatory arbitrage. As Federal Reserve Chairman Ben Bernanke explained, "AIG exploited a huge gap in the regulatory system. There was no oversight of the Financial Products division. This was a hedge fund, basically, that was attached to a large and stable insurance company" (Torres & Son, 2009). CAUSES OF FAILURE
33. CASSANO’S “FRANKENFINANCE” Cassano built his business unit upon "Frankenfinance” (Browning, 2008). He had no background in quantitative finance, and didn’t fully understand the business he was running (Progressive, 2009). Also, his judgment was clouded by his insecurity. Cassano resigned as Chief Executive of AIG FP in March 2008 after the company surprised investors by disclosing losses at the unit. CAUSES OF FAILURE
34. CAUSES OF FAILURE NO COLLATERAL REQUIREMENTS With its high credit rating, AIG FP wasn't required to stockpile reserves to cover potential losses (Saporito, 2009). Cassano said in August 2007 that he couldn't imagine a situation in which AIG would "lose one dollar in any of these transactions” (Saporito, 2009). Once the company lost its top credit rating, AIG FP should have stopped writing swaps and hedged, or reinsured, its existing ones (Saporito, 2009). But it didn’t.
35. CAUSES OF FAILURE CARELESS RISK MANAGEMENT When it was initially writing all that CDS protection, AIG thought it wasn't possible to take any losses because its contracts were supporting such highly rated, highly protected slices, according to a former AIG FP employee (Eisinger, 2008). AIG FP lost more than $10 billion in 2007 and $14.7 billion in the first six months of 2008 (Fox, 2008).
36. GREED By 2007, the CDS market had grown into a $70 trillion annual business. In selling CDS, AIG was receiving huge payments . AIG's FP unit was an endless money machine, adding $6 billion of riches to AIG's reserves from 1988 until 2005 (Lenzner, 2008). CAUSES OF FAILURE
37. CAUSES OF FAILURE DON’T ASK, DON’T TELL As long as AIG FP was producing a profit, senior management didn’t ask or care how it was being achieved. Martin Sullivan (fired from being Chief Executive of AIG in June 2008) had even eliminated a twice-a-month meeting to assess the work of the unit. He just wasn’t interested (Browning, 2008).
38. CAUSES OF FAILURE DANGEROUS EMPLOYEE INCENTIVES Howard Sosin founded AIG FP in 1987, and remained there until 1993. When he was first hired, he was offered a 20 percent stake in the FP unit and 20 percent of its profits (Browning, 2008). While many hedge fund managers receive this type of incentive program, this a conflict of interest . This causes a manager to throw caution to the wind in order to make a profit. Understanding that the higher the risk, the higher the expected return, Sosin was given almost free reign.
39. CAUSES OF FAILURE SYSTEMIC RISK Insurance companies can handle catastrophic risk but not systemic risk. AIG underwrote systemic risk. "One thing about the insurance model: it relies on diversification as its means to exist," said a top executive at an AIG competitor. "If an insurance company plays in a field where it underwrites systemic risk, that's a totally different experience" (Saporito, 2009).
40. CAUSES OF FAILURE THREAT OF GLOBAL DISASTER The CDS market is far from transparent. Nobody knew for sure what the consequences of AIG's failure for financial markets would be. The fear was that it could lead to total chaos. On March 10, Bernanke remarked, “In a crisis, the authorities have strong incentives to prevent the failure of a large, highly interconnected financial firm, because of the risks such a failure would pose to the financial system and the broader economy” (FRB Speech, 2009).
41. CAUSES OF FAILURE HUGE BONUS PAYOUTS After its bailout, AIG’s payout of retention bonuses, not to mention luxury trips and other perks, has caused AIG further failure in the form of a public relations fiasco .
42. R I S K S T A K E N April 30, 2009, Demonstrators outside AIG Headquarters in NYC.
43. CREDIT RISK The level of credit risk that AIG insured by selling credit default swaps (CDS) was far beyond what it could tolerate. The company mismanaged CDS selling because it failed to plan for what would happen if the assets protected by the swaps would default on a large scale.
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45. OPERATIONAL RISKS Employee Quality Control One of the AIG’s familiar arguments about retention bonuses is that it must keep in place the people who helped cause the catastrophe because new talent is nearly impossible to find. AIG is still keeping Senior Vice President and Chief Risk Officer Robert Lewis in place, though he may be one of the prime culprits of AIG's collapse (Carney, 2009 & WSJ, 2009).
46. OPERATIONAL RISKS Compensation Practices Focus on retention bonuses means that executives are getting paid not for their results, but rather for their reputation (Gellner, 2009). This tends to weaken the solvency of the company, as more money goes to compensation expenses rather than to reinvestment in more tangible assets. Estate of AIG Executive James Hass, Fairfield, CT
47. LIQUIDITY RISK On Sept. 15, 2008, AIG lost its AA credit rating. Moody's and S&P downgraded it immediately after Lehman failed. It had already been downgraded from AAA in 2005. The ratings downgrade triggers in its CDS contracts forced AIG to post $15 billion in collateral. AIG couldn't come up with that much cash on short notice.
48. MARKET RISKS AIG plunged into lucrative new markets without thoroughly understanding of market risk. AIG was unprotected and unprepared when the assets underlying its credit default swaps failed in great numbers. OPERATIONAL RISKS April 3, 2009, March on Wall Street & AIG as part of the Bail Out People, Not Banks Protest. M A R K E T R I S K S
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50. LEGAL RISKS AIG’s use government money has invited legal trouble. One recent example is that insurance regulators are looking into allegations that AIG is under-pricing coverage (Hoffman, 2009).
51. REPUTATIONAL RISKS AIG’s reputation was in the gutter when it got bailed out. Since then, the company has not done much to salvage its character. Does it even matter? More large bonuses are now scheduled to be handed out to executives at AIG. It will be a miracle if the company can recover and ever sell off it’s assets to repay American taxpayers.
53. LESSONS LEARNED Retain the Talent and Reward Properly In the era of downsizing and mergers, those employees who push a company forward are the most valuable.
54. LESSONS LEARNED Transparency is Essential Without transparency, as in AIG's case, there is miscommunication, scandal and inefficiency, which ultimately impacts the entire chain.
55. LESSONS LEARNED Gain Shareholder Trust Open up more to the public, offer added value and education, and build trust (Moore, 2009).
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58. CONCLUSION Between the CDS and securities lending, AIG still has lots of work to do. The government’s burden of AIG will not go away anytime soon. AIG has "made meaningful progress," but the company is still at the mercy of the economy (Saporito, 2009). In the businesses it wants to keep, like commercial insurance, competitors see an opportunity to grab market share. For the assets it wants to sell, there are few buyers. What remains is still a giant, vulnerable company.
59. R E F E R E N C E S Barnes, P. (2009, March 20). Treasury, Fed Reviewed AIG Bonus Info Months Ago. Retrieved June 30, 2009, from http://www.foxbusiness.com/story/markets/industries/finance/treasury-fed-reviewed-aig-bonus-info-months-ago/ Barr, A. (2008, May 9). AIG's shares fall 9% on record loss, $12.5 billion capital plan - MarketWatch . Retrieved July 1, 2009, from http://www.marketwatch.com/story/aigs-shares-fall-9-on-record-loss-125-billion-capital-plan Browning, L. (2008, September 8). AIG’s House of Cards . Retrieved July 9, 2009, from http://www.portfolio.com/news-markets/top-5/2008/09/28/AIGs-Derivatives-Run-Amok Carney, John (2009, March 27). The Business Insider. AIG's Whole Toxic Risk Management Team Still Happily Employed. Retrieved July 13, 2009 from, http://www.businessinsider.com/aigs-toxic-risk-management-team-still-happily-employed-2009-3 Eisinger, J. (2008, September 18). What Went Wrong at A.I.G.? Retrieved July 9, 2009, from http://www.portfolio.com/news-markets/top-5/2008/09/18/What-Went-Wrong-at-AIG FRB Speech - Bernanke, Financial Reform to Address Systemic Risk--March 10, 2009 . (2009, March 10). Retrieved July 9, 2009, from http://www.federalreserve.gov/newsevents/speech/bernanke20090310a.htm
60. R E F E R E N C E S (c o n t.) Fox, J. (2008, December 30). Did those people at AIG not understand anything about financial risk? Retrieved July 16, 2009, from http://curiouscapitalist.blogs.time.com/2008/12/30/did-those-people-at-aig-not-understand-anything-about-financial-risk/ Fox, J. (2008, September 16). Why the Government Wouldn't Let AIG Fail . Retrieved July 9, 2009, from http://www.time.com/time/business/article/0,8599,1841699,00.html Gellner, R. (2009, July 10). AIG bonus payments create self-destructive atmosphere . Retrieved July 16, 2009, from http://www.examiner.com/x-11326-Liberal-Examiner~y2009m7d10-AIG-bonus-payments-create-selfdestructive-atmosphere Hamilton, J. (2009, May 9). Edward Liddy: JengaPig CEO? Retrieved July 1, 2009, from http://www.examiner.com/x-8616-Houston-Workplace-Examiner~y2009m5d22-Edward-Liddy-JengaPig-CEO Hoffman, M. A. (2009, July 13). New York, Pennsylvania probe AIG pricing allegations| Business Insurance . Retrieved July 16, 2009, from http://www.businessinsurance.com/article/20090713/NEWS/907139988 Kaiser, E., & Daly, C. B. (2009, March 18). AIG CEO asks employees to repay some bonus money - Reuters . Retrieved July 1, 2009, from http://www.reuters.com/article/ousiv/idUSN1731687320090318 Lenzner, R. (2008, September 28). Why Wasn't AIG Hedged? Retrieved July 9, 2009, from http://www.forbes.com/2008/09/28/croesus-aig-credit-biz- cx_rl_0928croesus.html
61. R E F E R E N C E S (c o n t.) Leonard, A. (2009, March 18). There's still risk it could all blow up . Retrieved July 9, 2009, from http://www.salon.com/tech/htww/2009/03/18/aigs_ceo_takes_the_stand/ Madsen, W. (2008, September 23). AIG is a special case . Retrieved July 1, 2009, from http://onlinejournal.com/artman/publish/article_3777.shtml Moore, G. (2009, March 27). Transparency, Talent, Trust: What can Pharma learn from AIG. Retrieved July 21, 2009 from, http:// social.eyeforpharma.com/blogs/ged - moore /transparency-talent-trust- what-can- pharma-learn-aig Newman, R. (2009, March 17). What’s Good, What’s Bad About the AIG Bailout. Retrieved July 21, 2009 from, http://www.usnews.com/blogs/flowchart/2009/03/17/whats-good-whats-bad-about-the-aig-bailout.html Progressive. (2009, July 8). The Man Who Crashed the World . Retrieved July 9, 2009, from http://www.propeller.com/story/2009/07/08/the-man-who-crashed-the-world Saporito, B. (2009, March 19). Time. How AIG Became Too Big to Fail . Retrieved July 1, 2009, from http://www.time.com/time/business/article/0,8599,1886275,00.html The Wall Street Journal (2009, March 27). Top Risk Officers Remain at Insurer's Helm. Retrieved July 13, 2009 from, http://online.wsj.com/article/SB123812287215554481.html Torres, C., & Son, H. (2009, March 3). Bernanke Says Insurer AIG Operated Like a Hedge Fund (Update 3) . Retrieved September 9, 2009, from www.bloomberg.com/apps/news?pid =20601087&sid= aCrzJbsxzKdk
