INTRODUCTION Who does one look to blame for the cause of the entire 2008 United States financial crisis? It is hard to point fingers at exactly one person because it was such an intertwined disaster, as far as involvement in the cause of the collapse. One thing is certain, however, American International Group (AIG) and American International Group Financial Products (AIGFP) were directly in the center of the collapse. Within AIG and AIGFP, a few managers stood out when it came to involvement in the financial scandal. Maurice “Hank” Greenberg is one manager that undeniably stands out. He was the founder and Chief Executive Officer of AIG until 2005. He micromanaged his workers and gave them little freedom (Bandler, Boyd, and Burke). Obviously, his managing tactics influenced the demographics of AIG tremendously. Joe Cassano, another core manager, was the CEO of AIGFP. He implemented credit-default swaps (CDSs) and oversold them, resulting in AIG having to file for bankruptcy because it couldn’t pay the buyers of these CDSs back (Serwer and Sloan). While these two men were heavily involved in the cause of the collapse, they raised many questions regarding the fact that AIG’s questionable decisions passed regulations and audits. Many people have looked into how AIG and AIGFP didn’t cause fuss while they were getting audited. How did they pass all of these regulations without any problems? It has been noted that Greenberg had previous relations with a lot of so-called “big-shots” in the business world that could have had an impact on the results of these audits and regulation checks (Cass Business School). This may or may not have influenced the result of AIG during 2007 and could have potentially prevented the financial crisis if regulators did end up lying about AIG. Many factors went into the collapse of the financial market requiring a government bailout, which is why it is difficult to pinpoint one exact cause of the collapse. However, if people made different decisions or if companies did things differently, there could have been a positive result and possibly no financial crisis at all.
EXPLANATION OF THE AIG COLLAPSE Obviously each human being thinks differently from one another. Humans have different motivators and factors that influence their decisions. Things such as values, past events, and attributes influence everyone differently, thus causing people to disagree on decisions. In a business, it is important that one voices their opinion so that managers can make decisions to positively help a business (Crews A1). AIG did not necessarily offer this freedom to their employees, which influenced the work-life and mindsets of all the workers. Hank Greenberg, also known as “one of America’s Ten Toughest Bosses,” put his employees under an unimaginable amount of stress and pressure. Even his two sons left the company because they could not handle the anxiety that came along with working for their father. Greenberg was so self-centered with AIG that he rejected all resistance to his ideas, just like Cassano did (Bandler). Good managers typically provide a work environment that is full of freedom and the drive for their employees to work hard. Greenberg did the complete opposite. Whenever employees expressed ideas to Greenberg that weren’t what he necessarily agreed with, they were shot down. No average worker wants or tolerates this type of work environment, and most of his employees, including his own blood, could not work under him; so they left AIG. Just like Greenberg, Cassano put his employees under a lot of pressure as well. Cassano was constantly watching them and they couldn’t make a decision without some backlash from him. Cassano loved his status and his control over others, and he let everyone know it (Lewis). Cassano provided a work culture full of fear. The way that he addressed his employees caused a lot of employees to leave the company. He taught his employees to not question him and his decisions, which in the end caused all of AIGFP to accept the CDSs and let AIG fall. On top of living in a world of fear, employees were not comfortable with standing up to Cassano, even if it was in the best interest of the company. If he had instilled a culture of comfort and freedom at AIGFP, employees might have felt compelled to stand up for the company and express their concerns with his decisions. If Cassano has listened, he might have limited the number of CDSs that he made and saved the United States financial market from failing. Joe Cassano assured everyone, within and outside of AIGFP, that AIG would never lose a single dollar due to his credit-default swaps. CDSs refer to the buying of insurance in the event that a company cannot fulfill its financial obligations. Ironically, AIG suffered over $30 billion in losses from Cassano’s credit-default swaps, but no one knew this until it was too late because of the blanket that he used to cover these losses (Loomis and Burke).
Looking back on the AIG collapse, Cassano’s extreme confidence in his work and AIG fooled everyone. He rarely told the truth and if he did, it was not the whole truth. Cassano did not understand the risk that came with making too many CDSs. Part of this reasoning is that he was not educated by his superiors on how risky the CDSs actually were. He saw that these deals were working and believed that the more deals he made, the more money he would make. As a manager, he did not look into the negative consequences of making faulty deals or too many deals. Had Cassano been more educated on the possible results of his plethora of CDSs, he would have realized that he needed to be more cautious with the number of deals he was making.
A managers’ responsibility includes providing a healthy environment for employees to work in. This is influenced by the way they conduct themselves when controlling others, leading others and bringing new people into the business. Managers are many times a deciding factor on whether employees stay or leave a certain company (Crews B5).
Greenberg selected Martin Sullivan to be his successor as CEO of AIG because he saw potential in Sullivan that he did not see in either of his sons. However, Greenberg later stated that Sullivan essentially could not perform to a level of satisfaction, which is contradicting because Greenberg handpicked Sullivan after 34-years of AIG experience (Cohan). One could argue that Greenberg would have been unhappy with whomever he chose as his successor because he found flaws in all of the candidates that were qualified to take over. When a manager steps down from his or her position, they direct their replacement in the right direction. Greenberg did not do this. If he had groomed Sullivan correctly, Sullivan would have understood AIG and AIGFP as a whole, the idea of credit-default swaps, and the risk that came along with them.
AIGFP employees were extremely unhappy working under Cassano. The huge bonuses that he paid them forced a handful of employees to stay a little longer until they could not handle him anymore and left for good (Lewis). Even those that stayed for the money eventually left AIG because the pressure was not worth the bonuses and money that they were being paid. Some wonder if there was anything that Cassano could’ve done to make his employees stay longer.
If one were to see Joe Cassano walking down the street, they would probably not expect him to be in charge of a well-known, multi-million dollar company. All of the money that he made was put back into AIGFP, rather than spent on himself. With no children and no wealthy lifestyle, AGIFP was all that Cassano had and he let it crash to the ground (Lewis). Knowing the extent of his personal investment in AIG, how could he have not understood the risk he put his company at? If he was that financially invested in AIG, he should have been more careful with his decisions and done everything he could to not let it fall like it did.
When it comes to the ethics of a company, the managers are the ones that provide the company with good culture. If a manager acts in an ethical manor, it will translate to the rest of the company and they will act in the same way. If a manager makes some unethical decisions, the other employees will see that and follow their manager’s footsteps (Crews C9).
Whenever anything within AIGFP went wrong, such as the quality of their debt obligations being lower than thought, AIG did not know about it. No one ever expressed these problems to anyone outside of AIGFP, which in the end caused harm in that everyone in the company was on different pages (Baranoff). AIGFP also lacked any kind of communication. It was secretive about its work and only told the public positive statements about the company so it would be viewed as a successful company. AIG acted in a similar way by not mentioning any of its troubles or hardships to the public.
AIG and AIGFP sold more than enough credit-default swaps before the financial downfall in 2008. While the idea sounded good to continue selling them, Cassano did not foresee the downfall of the housing market and did not believe that any bad could result from the CDSs. He didn’t think that everyone who had bought these bonds would be coming to AIG for help ever, let alone all at once. When the housing market collapsed, many consumers defaulted on their loans and homes and turned to AIG for help (Serwer and Sloan). The amount of money that AIG owed was growing by billions of dollars each day. Consequently, it could not pay anyone back.
AIGFP was the king of CDSs, which made sure that investors didn’t lose any interest on collateralized debt obligations (CDO). When the value of these CDOs fell, ratings of their parent companies, such as AIG, dropped as well. This caused AIG to lose its AAA status, which led to a rush of collateral demanded by its investors. AIG didn’t have billions of dollars waiting for a downfall like this, so the U.S. government had to intervene (Loomis and Burke). If the government had not bailed AIG out, people would have pulled their money out of the bank, resulting in a depression. As a result, the government had no choice, but to save AIG. This sent the message that citizens can consider the government a safety net whenever they get into financial trouble. People may now continue to involve in risky business and have no self-discipline because they know that the government will catch them when they fall.
Companies are required to host audits to make sure that all of the work that they are doing is legal and with good intentions of the company. Complications with these audits are what result in scandals and future problems. The Board of Directors does not have enough knowledge to fully understand and recognize if a company is being unethical or not. In other words, the Board of Directors is not doing its job efficiently if it cannot understand all aspects of the business that they are auditing (Crews D11).
Greenberg manipulated his Board of Directors by picking people who were very loyal to him and would not turn on him. When picking people, he chose his colleagues and good friends. They turned out to do exactly what he wanted them to do, not question any of his decisions (Cass Business School). They might as well have never existed because they didn’t do anything that a typical Board of Directors is supposed to do, such as making sure all decisions being made are ethical.
AIG paid millions of dollars to politicians in a timespan of 18 years. These politicians did not want to go against their supporters. Instead they decided to turn the other way with AIG’s financial decisions. It is as if AIG had been preparing to do something unethical for almost 20 years because of the consistent inflow of money to politicians knowing that they were on AIG’s Board of Directors (Saporito, Calabresi, and Duffy). By not overseeing AIG like they should have been, these politicians inadvertently fueled AIG’s financial fire.
The Board of Directors had a tendency to look the other way when it came to the decisions that AIG made. Financial downfall is always a possibility when one is dealing with money. However, no one wanted to be the one to “jinx” the inflow of money from the CDSs. Instead people accepted what was happening without asking any questions about how legal the decisions being made were (Sanati). Perhaps if someone did question Cassano and his decisions, or had proper internal audits been conducted, the amount of CDSs being sold could have been restricted and the downfall of AIG been prevented.
CONSEQUENCES TO IMPORTANT STAKEHOLDERS The collapse of AIG and the financial market had an impact on everyone, regardless if they were directly or indirectly related to the collapse. AIG, taxpayers, the United States Government, Edward Liddy, and other countries are five examples of stakeholders that suffered the consequences. AIG lost a lot of its credibility after it collapsed the financial market. It couldn’t be trusted, had a bad reputation in the world, and is now viewed as an example of a company that made bad managerial decisions and killed an entire country’s financial market (Loomis and Burke). While AIG is still running and doing better than it was, it has taken years and will continue to take time to get a positive reputation back. Taxpayers felt a big hit. Not only did the crisis decrease the values of their houses, stocks, and investments, but it also raised prices on everything because the government needed to make up the bailout money through taxes (Serwer and Sloan). All funds declined in value and it started making people feel uneasy and untrusting about their money. People believed that their money was not safe in the bank. If the government did not intervene, taxpayers would have begun to pull their money from the bank, causing a depression. The United States Government was the only reason that the U.S. didn’t go into another depression. By bailing AIG out, they saved the country. It caused the government to go into debt because they chose to pay back all of the taxpayers that AIG owed money. That was over a $100 billion bailout (Lewis). It also gave the impression that the government will always bail companies out. People might be more inclined to engage in risky business knowing that the government will help them if they don’t succeed, thus a win-win situation (Loomis and Burke). Edward Liddy had a unique point of view as far as consequences of the collapse. He became the CEO of AIG and had the task of picking up the pieces and getting AIG back on track. The government threw AIG into his hands as it was deep into the ground and everyone expected him to bring it back to life. This was one of the hardest jobs one could have been given and is a huge consequence of the previous managers of AIG (Loomis and Burke). The AIG collapse didn’t just influence the United States. AIGFP had large operations in London, England, thus causing a lot of impact on their market. It also caused a lot of consequences for the rest of the world because other countries had bought CDSs from AIG. On top of that, it impacted the importation and exportation of goods and the prices of those goods worldwide (Loomis and Burke).
LESSONS LEARNED All my life, I found politics and economics boring and uninteresting, which one can view as ironic for someone wanting to enter into the field of business. It took this Management 3200 class to “force” me to learn about one of the biggest financial crises that has hit our country. In other words, I knew nothing about the AIG collapse before January, and now I can say that I have learned enough to understand a good majority of the collapse and how to prevent a financial collapse of my own. First of all, I have learned that as a manager, one needs to understand the level of impact of their actions. The decisions that managers make have the potential to impact an entire nation, like the decisions of AIG and Joe Cassano, for example. Cassano’s choice to continue selling the credit default swaps eventually led to AIG filing for bankruptcy. This caused a spiral effect that put the entire United States in a near depression state. I have also learned how much financial decisions impact our own lives, whether we are working in that industry or not. In the case of AIG, the collapse influenced every aspect of our country. Financial decisions impact us whenever we buy or sell something, which I personally do everyday. I now understand how important it is for me to be able to somewhat recognize what is happening with our financial market and to keep up with current financial events. The third thing that I have learned is the importance of being ethical, especially as a manager. If managers are ethical in their actions, it will cause a domino effect and that will shape the values of the company to those that are more proper. The structure of AIG included bad moral decisions as a whole, thus causing many problems in the company. While these are just three things that I have learned through this experience, that doesn’t even begin to summarize how much I have legitimately learned. I now feel like I am significantly more educated on this crisis than the average American, which is not something that I could say before this year.