2. Introduction
One of the most serious financial crises of the 2000s was seen in the collapse of the
insurance giant American International Group (hereinafter referred to as ‘AIG’). AIG is a
global company holding 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 to as ‘GRC’). The company
declared a loss of revenue of $60 million approximately which also led to a drop in its
stocks on 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 years 2000 and 2001. For the next five years, at least, AIG created
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 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 AIG had to pay a penalty of $1.64 billion to SEC.
3. American International Group
The AIG is an American multinational insurance corporation and finance operation. It
is functional in more than 130 states currently. The company is headquartered in New
York City and has offices throughout the world. It is a public company founded in 1919
by Cornelius Vander Starr and incorporated in Shanghai, China under the name of
American Asiatic Underwriters, later renamed American International Underwriters,
finally establishing its current name ‘American Insurance Group’ in the year 1967 as a
general insurance agency. Soon, the business grew manifold and within two years, Starr
formed a life insurance corporation. The company had its operations in many Latin
American countries, including China, Southeast Asia, the Philippines, Indonesia, and
Malaysia which was steadily growing. The AIU faced the first decline in its business
during the years preceding the Second World War. AIU moved its headquarters from
Shanghai, China to New York City in 1939, right before World War II began. After
World War II, American International Underwriters entered Japan and Germany for
providing insurance for American military personnel. Later, it expanded throughout
Europe. In the 1950s, AIU began to focus in the American Market to expand the
company. After the American International Group Scam, the U.S. Treasury Department
gave a loan to the company for its restructuring. As per the 2016 Forbes Global list,
AIG was declared the 87th largest public company in the world. The company serves
individuals and commercial organizations through a worldwide network of any insurer.
Currently, the company mainly deals in three businesses- General insurance, life, and
retirement plans, and a standalone subsidy that is technology enabled.
4. American International Group Scam
In the first case against AIG for American International Group Scam, in September 2003,
the SEC had made accusations of fraud for selling sham insurances for enabling itself to
report false and misleading financial information to the public. This matter was settled by
imposing a penalty of $10 million civil penalty on AIG.
Again in November 2004, the SEC again charged AIG for securities fraud for developing,
marketing, and entering into transactions that enabled another public company to remove
certain underperforming and troubled loans off its balance sheet. This matter was settled by
AIG paying disgorgements and a penalty of $126 million on the criminal charges that were
proved against it.
The company, therefore, was always on the radar of the department for its unfair accounting
practices. In 2005, AIG was caught for alleged fraud by the SEC, Justice Department, and
New York State Attorney General’s office. Investigations were conducted by independent
counsel at the request of AIG’s audit committee. The company was asked to present its
account statements for the last five years, which it could not do within the time provided.
Therefore, the inquiry against it began.
5. A place to start the discussion about how did it happen is Mr Maurice R. Greenberg, who
was the CEO of AIG for a term of four decades. He is also the largest shareholder of AIG
till date. Additionally, an important role was played by Ron Ferguson, who was the CEO
of GRC, the company which assisted AIG in executing the fraud. In late 2004, the
Attorney General’s office and the Insurance Department began its investigations for bid
rigging against AIG as a part of the general probe in the insurance industry for
misconduct. As the errors were found to be grave, the SEC began investigating the matter
jointly. It was found that there existed fictional transactions in the accounts of AIG. AIG
was assisted by GRC in late 2000 and early 2001 in the form of sham transfers for loss
reserves. This allowed the company to bolster its accounts and hide its losses. The
following charges were pressed against AIG after the inquiry-
• There have been sham transactions in order to inflate the reserves.
• Fake transactions have been created to conceal losses by converting them into capital
losses.
• Misled the Insurance Department about offshore affiliates of AIG.
• Improper reporting of worker’s compensation premiums.
6. The United States District Court of Southern District of New York held the company guilty on all
charges. The SEC alleged that from 2000 to 2005 AIG falsified its financial statements through a
variety of sham transactions to false a rosy picture of AIG’s financial result to analysts. It restructured
two sham transactions with GRC to add a total of $500 million in the loss accounts of AIG. During the
period of fraud, AIG sold its shares in a stock-for-stock corporate acquisition.
The violations- AIG, by the foregoing acts, directly or indirectly, as a company or by the officers as
individuals, is engaged in practices and course of business which constitutes violations of various
provisions of the Securities Act, 1933, the Exchange Act, 1934. The SEC in its complaint to the Court
was seeking a permanent restraint on AIG’s actions violating the said laws for all this time. AIG made
use of the means and instrumentalities of interstate commerce, or of the mails, in connection with the
transactions, acts, practices and course of business. Further, AIG circumvented the system of internal
accounting and knowingly falsified the records related to accounts of the company.
the Insurance Department were investigating the AIGs accounts for bid-rigging. Bid rigging is a
commercial contract which is already given to one party for the sake of formality, other parties are also
present at the bidding. It is a common practice in the insurance market, which was under the probe by
Insurance Department and Attorney General’s office. A whistle-blower probably gave a tip off of the
possible scam to the SEC in the year 2005, after which the SEC joined the other two in the probe as
well. The Attorney General and Insurance Superintendent sued AIG and its former Chairman and CEO
Greenberg under various charges of fraud. American International Group Scam
7. Bailout by the Government
AIG had been the biggest company in its field for years. Its impact was so high on the
economy that its failure would mean a bloat on the growth of the nation. Therefore, the
company was provided a bailout by the government of $85 billion. The US Financial
Stability Oversight Council (FSOC) declared that the financial condition of the company
did not pose a serious threat to the U.S. financial stability. Therefore, AIG was removed
from the list of systematically risky institutions with a unanimous vote in favor. It meant
that now the company will face lesser regulations and control from the government. The
Federal Reserve’s Board of Governors would no longer monitor the company and its strict
prudential standards including tougher capital requirements shall not apply. This status is
given to such companies where the stakes of the government are too high often called the
companies “too big to fall”. By this, the credit limits of the company were reduced, and the
amount which it had to keep in the accounts compulsorily was minimized too. Therefore,
the company closely escaped bankruptcy with the help of the Federal Government. But,
why was it done? Easy to say, AIG was a huge company with a humongous investment by
various classes of people. There were investments in the form of mutual funds, pension
funds, and hedge funds. Through the failure of AIG, the money market funds, which are
generally considered a secure means of investment, were also jeopardized. If AIG became
insolvent, it would send shock-waves throughout the money markets affecting both the
institutions as well the individual investors. It wasn’t a loss of one or two people; it would
have affected millions. It was realized that the company was too global to be allowed to fail.
Therefore, the government had to come to the rescue by avoiding bankruptcy for the
company
8. The first action was taken by the Federal Reserve by issuing a loan to AIG of 80 percent of its
equity capital. A total amount of $85 billion was to be repaid by the company over a period of
two years at an interest rate of 8.5 percent. However, the deal was revamped and the loan
amount was increased to $150 billion now. It was criticized widely as to whether it is
inappropriate or not to use taxpayer’s money to revive a company that is sinking as a result of
its own misdeeds. But there have been supporters also, as the wrongdoers were some officials
who have already been punished, and letting the company sink would mean nothing more than
the suffering of innocent investors.
9. Timeline
The most prominent scam (American International Group Scam) in the recent history of
the American economy was the AIG Accounting Scandal of 2005. The company was in
such a position that its failure would have meant a huge defeat for the entire economy of
America. Therefore, it became imperative for the government to protect this company
from failing. Such a shocking term of events unfolded in the following manner-
• September 2004- The SEC announces that it is investigating the misdeeds of AIG in
relation to its transactions with PNC Financial Services Group Inc, which it suspected
of being a false transaction.
• October 2004- The office of the Attorney General along with the Justice Department
sued AIG among various companies for bid rigging.
• November 2004- AIG agreed to the charges and pleaded to pay $126 million as a
settlement charge against the charges of bid-rigging.
• March 2005- Greenberg resigns as the CEO of AIG. In investigations, it was found that
AIG has misreported its transactions up to the limit of $500 million. The CFO of the
company, Howard was removed from his position as well.
• April 2005- AIG declared that it will restate the financial statements of the previous
five years. It reduced its year-end equity for 2004.
• June 2005- Two former officers of GRC plead guilty in criminal cases in matters
related to the AIG loss portfolio deal.
• January 2006- The charges against the present and former employees were taken back
on the condition that all the benefits illegally taken by them shall be paid back to
people.
10. The Moral Failure
For the handful of people who lost their hard-earned money in this fraud, the implications
were serious and heinous, so to say. What is noteworthy is that this institutional failure has
more far-reaching ethical implications than we understand. In a setup like a company, it is not
very difficult to defraud innocent investors who don’t have much knowledge of the conniving
means that the experts may use to manipulate the situation. Had the management of AIG been
working under any sort of ethical framework, based on what is right, valuing the principles of
honesty, fairness, justice, and respect, this would not happen. Every corporate fraud is a
disregard of moral values against wealth and greed for earning it. Not that it is the right thing
to do, but, had this been a one-time event, the actions of the executives of the company would
probably have been justified, but knowing and continuing to participate in this clearly shows
the lack of ethics in one and all.
What happened in this case, was exactly the opposite of utilitarianism. Utilitarianism means
and states that a decision should be taken on such considerations as it does maximum benefits
and minimum harm to society. The executives of AIG put their own interests in such a
prioritized position that the rights of and the harm being caused to the shareholders did not
bother them.
The ethical error lies on the part of GRC as well. The company needed to be true to its job.
Without the support of GRC, it would have become almost impossible for AIG to pull up this
fraud for this long period. Therefore, an important mention to GRC is a must, while we are
dividing the ethical liability as it has been no less guilty in provoking, aiding, and assisting
AIG in its evil motives.
11. Conclusion
The attempt of AIG to manipulate the shareholders about the financial health of the company
by concealing their losses led to their own downfall, to generalize. If we try to see the actual
consequences, it took a toll on the entire economy of the USA. A company as big as AIG
influences the growth of the economy of the nation and an institutional failure of this level
surely dilapidates the growth of the nation on multiple levels. As per the records of the U.S.
government, AIG was too huge a company to fail. It was given a federal loan of $85 billion
to revive back as well. Once an organization is a downfall of this level, it shall always
become difficult for it to reach back its position as the faith of the public once lost can hardly
ever be revived. No matter the issue, one conclusion that we can surely make is that the
involvement of AIG in the financial crisis was necessary for the world’s economy. Whether
the action of government will heal the wound or merely be a bandage still remains to be seen
as the company is still trying to win back its old dominant position in the market. American
International Group Scam
