Coping With Financial and Ethical risks AT A.I.G

1.
American International Group’s headquarters is located in the American International building in New York. It is a company that is primarily engaged in insurance-related activities in the U.S and abroad, and offers services in more than 130 countries with 116,000 employees worldwide. AIG’s four major segments are general insurance, life insurance and retirement services, financial services and asset management. It was ranked as 16th in Fortune 500 in 2010 and was also known as the world’s fourth largest company according to “Global Forbes” in 2000. The company’s leading position in the global financial services market gives it significant bargaining power. However, exposure to the U.S sub prime crisis was the reason for its collapse. The AIG Financial Products unit, unfortunately, was operating as a company within the larger company in that the 500 employees of the unit who specialized in derivatives and complex financial contracts that were tied to subprime mortgages, sold credit default swaps (CDS) to financial institutions who in turn sold mortgage-based securities to the public. This of course contributed to the financial crisis of 2008 in that banks sold mortgages to people who were not credit worthy, because they received credit protection as a result. AIG made these collateralized debt obligations deals with a very small fraction of actual money on hand. Because most of the CDOs were attached to home mortgages, and AIG’s counterparties involved themselves in bad mortgage lending and did not have sufficient capital to cover loans, AIG was facing bankruptcy due to the fact that now it had to honor its contractual obligations towards these financial institutions all at once during the 2008 crisis. Even AIG could not predict the direction of the mortgage market despite having financial experts using computer models to manage risks. The government believed it had to bailout AIG because letting AIG going into bankruptcy could have a negative impact on the global financial market due to the involvement of many other financial institutions or counterparties in this scandal.

2. SWOT ANALYSIS

Strengths:
1. Strong brand name and good financial position globally

2. Excellent brand building and visibility

Weaknesses:
1. The company suffered from the degradation regarding its credit ratings: this caused the stock to drop, causing a run on the company’s cash on hand, that revealed its lack of liquidity.

2. Lack of internal control, ethical standards and good corporate governance, lack of transparency

3. Lack of understanding of the complexity of the financial products it was selling, leading to its failure to take into account real-world market risks.

4. The company is dependent on the U.S economy

Opportunities:
1. Easy expansion in other countries through mergers and acquisitions

2. Diversified portfolio

Threats:
1. Profitability is tied to the health of the economy

Solutions and recommendations

I would recommend more transparency in conducting business at AIG. It seems the Financial Products unit employees operated in their own world as an hedge fund company of some sort. If AIG was responsible, it would have monitored and assessed the state of the economy as its counterparts abused their credit protection by recklessly selling risky mortgages, thus creating an unhealthy financial environment. Instead the corporate culture at AIG rewarded decisions that led to quick gains. In order for AIG to be profitable again, it needs to implement a strategy that is aimed towards improving its corporate social responsibility image.

Answers to question at end of case

1. The corporate culture at AIG had been involved in a high-stakes risk taking scheme supported by managers and employees that appeared entirely focused on short term financial rewards.

2. AIG’s former CEO Greenberg claims that he had suspicions of the AIG Financial Products unit, however how come wasn’t he able to stop these reckless activities? This shows that there is a lack of an ethic program from top to bottom. In order to be profitable again, AIG needs to implement a strategy that is aimed toward improving its corporate social responsibility image.

3. AIG simply needed to have a code of conduct that had to be enforced in order to prevent its failure and subsequent bailout.