Dixie Coolich AA #2 11/4/14
AIG Ex-CEO Willumstad Testifies Bailout Was Only Deal

In 2008 American International Group Inc., like many other financial institutions lost money during the financial crisis due to investments of sub-prime loans. In the interest of saving the company and saving the shareholders even a small portion of their invested money, AIG board of directors took a bailout package offered by the US government. The government bailout required that AIG give them control of 80 percent of their stock in return for a $85 billion loan that carried an interest rate of nearly 14 percent. “The board voted for the loan deal after exhausting private-sector lifeline possibilities.” (Zajac, 2014) At the time of the bailout the only other option for AIG was bankruptcy. “But AIG’s former chief executive officer, Hank Greenburg still owned a lot of AIG stock, and he sued, arguing basically that the government should have given AIG a nicer bailout, the way it did with JPMorgan and Citi. Other bailouts were also conducted during this crisis and with much better interest rates than American International Group Inc., received. To accomplish taking almost 80 percent of the company’s stock the board agreed to a reverse stock split making shareholders stock almost worthless. “Greenburg is suing the federal government for about $40 billion in damages, asserting that it violated the Constitution’s Fifth Amendment by taking control of AIG with “just compensation” for the shares it received” (Gordon, 2014) Robert Willumstad, former AIG Chief Executive Officer was called to testify in court on whether there were other options available to AIG’s board of directors besides the harsh terms the government offered them in 2008 in return for the bailout. There seems to be consensus among Willumstad and others involved on the government side of the bailout deal that it was the only option for AIG and they were offered the harsh terms of the bailout due to ”the insurance giant’s exceptionally risky behavior that caused the losses and called for strict treatment. Timothy Geither former government top regulator said he and his colleagues at the Fed and the Treasury Department believed that AIG’s dire financial condition was “substantially” the result of its management taking on excessive risk.” (Gordon, 2014)

The question becomes did the board of directors fulfill their responsibilities and duties to the shareholders at AIG? If the board had shown “oversight and guidance over management and looked out for shareholder interests” then the government may not have needed to step in and bail the company out of its financial ruin. (David, 2013) The AIG board of directors was not committed to the supervision of management, or the best interest of the shareholders, which resulted in the need for the bailout. The bailout resulted in the loss of stockholders equity, and a loss of company image to the general public. If the board had been more involved in the company’s strategic management and had better oversight and accountability then possibly AIG could have survived the financial crisis without the need of a government bailout to survive. In the year following the bailout the board agreed to the disbursement of millions of dollars in bonuses for top management. This was not helpful to an already unfriendly image of AIG by not only lawmakers who approved the bailout but also the general public. “AIG became a symbol for excessive risk on Wall Street and a touchstone of public anger.” (Gordon, 2014) It is the board’s responsibility to continuously audit top management and insure that the management is making sound strategic decisions, and in 2008 they were not making sound decisions. “AIG, which had operations around the globe, buckled after making huge bets on mortgage securities that soured.” (Gordon, 2014) Currently AIG has more than one financial expert on the board, consists of 14 members including two women and has no previous AIG executives serving at this time.

Bibliography

David, F. (2013). Strategic Management Concepts: A Competitive Advantage Approach. Boston, MA, U.S.A: Pearson.

Gordon, M. (2014, October 8). Geither defends terms of AIG bailout, risky conduct; interest rate said 'crazily high.'. Retrieved November 8, 2014, from U.S. News & World Report: www.usnews.com/news/business/articles/2014/10/08/geither-defends-terms-of-aig-bailout?

Levine, M. (2014, October 10). AIG Shareholders Still Want a Nicer Bailout. Retrieved November 6, 2014, from Bloomberg View: www.bloombergview.com/articles/2014-10-10/aig-shareholders-still-want-a-nicer-bailout

Zajac, A. (2014, November 6). AIG Ex-CEO Willumstad Testifies Bailout Was Only Deal. Retrieved November 8, 2104, from Bloomberg: www.bloomberg.com/news/print/2014-11-06/aig-ex-ceo-willumstad-testifies-bailout-was-only-deal.html