The Ethical Dilemma of AIG

Fair or Foul? A matter of public opinion.

American International Group (AIG) was established in 1919 by Cornelius Vander Starr in Shanghai, China. He became the first westerner in Shanghai to sell insurance to the Chinese. After turbulent times and the hostile takeover of the communist regime, he left for greener pastures in 1949 and ended up in New York City. While in New York, the company began to grow and prosper. I wide range of premium services was being offered and the future looked bright. The company went public in 1969. Fast-forward thirty-five years, no one could have prepared for what was about to happen. In 2005 an accounting scandal rocked AIG to the tune of $1.6 billion. Criminal charges were filed against many of the company’s top executives. The summer of 2008 was a time that began to send shockwaves around all of the world markets. Financial statements were disclosed and stock prices began to fall rapidly. On September 16, 2008 AIG suffered a liquidity crisis following the downgrade of its credit rating. Industry practice permitted firms with the highest credit ratings to engage in high-risk investment practices. Credit default swaps without depositing any form of collateral with their trading counter-parties.

The Federal Reserve announced the creation of a secured credit facility of up to $85 billion to keep the company from completely collapsing. In exchange, the government would receive an 80% equity stake in the company. By September 16, 2008, AIG’s stock prices had fallen over 95% to just $1.25 a share. The current 52-week high was over $70. The company reported over $13.2 billion in losses in the first six months of the year. As November came around, the U.S. Treasury would announce another $40 billion worth of AIG preferred stock under TARP.

Controversy really began when over $100 billion was paid out to major global financial institutions that had previously received TARP money. AIG employees and distributors participated in a lavish California retreat that featured spa treatments, banquets and golf outings. Less than twenty-four hours after the news of the party was first reported by the media, the Federal Reserve had agreed to give AIG an additional loan of $37.8 billion. While on their spending spree they managed to spend another $86,000 on an English hunting trip. The WSJ reported that a family sued AIG for alleged complicity in a ‘stranger-originated life insurance’ scheme, whereby AIG managers welcomed people without an insurable interest to take out policies against other people not even know to them.

Tempers really began to flare up when the company announced it would pay out millions of dollars in executive bonuses and total monies could exceed the billion dollar mark. Jake DeSantis, and executive in the firm, sent a resignation letter to Edward Liddy, the current CEO. It was published by The New York Times, and became world-wide news. He stated that his unit had nothing to do with the credit default swaps, he lost much of his compensation, and like other executives he had been asked to work for $1 a year out of duty to the organization. He was assured that he would be paid and was let down by Liddy’s lack of support, during a witch-hunt.