INTRODUCTION AIGFP was founded in 1987. Henry Sosin and two others persuaded CEO Hank Greenberg to create a division focused on investments that fed on AIG’s AAA rating. AIGFP had made more than $60 million in the first six months. Sosin left in 1993 and was replaced as CEO by Tom Savage. In 1998, AIGFP had revenue of $500 million and had yet to divulge in credit-default swaps. However, later that year, with the backing of Joe Cassano, who was at the time COO, Savage signed off on the backing of JP Morgan’s complex debt. This is where credit-default swaps were first acted on. These credit-default swaps were a series of payments made to a buyer in which the seller would compensate the buyer if the buyer defaulted on the loan. In 2000, Cassano took over as CEO. According to the numbers, the company had brought in over $1 billion that year. In 2002, it came out that AIGFP had helped conceal the bad assets of PNC Financial services by setting up a “special purpose entity” to undertake the assets. By 2004, AIG had paid an $80 million fine for helping conceal these bad assets. Later in 2005, rumors about bad accounting practices were going around and Hank Greenberg stepped down as his role of CEO. When he did this, credit-rating agencies dropped AIG’s credit rating from AAA to AA. This required AIGFP to have over $1 billion in collateral for their credit default swaps. After taking a second look at the portfolio, it became alarming that many of the credit-default swaps had to deal with subprime mortgages, meaning that the default risk was large if the housing market went under. By the end of 2005, Cassano had wisely chosen to stop dealing in credit-default swaps, but he could not undue the $80 billion of collateralized debt. However, Cassano stuck to the idea that they could he could not see how they could lose anything on these investments. In August 2007, the housing market plummeted and companies, starting with Goldman Sachs, required collateral from AIG that was insuring the mortgage backed securities. By November, AIG’s stock prices had plummeted 25 percent, and AIGFP recognized a loss of $352 million. Even with this, Cassano and Sullivan still tried to convince investors that everything was alright. Losses of $11.8 billion had been calculated by February of 2008. Cassano stepped down as CEO on March 31, but he left with consulting contract worth $1 million a month. In September, credit agencies planned to again drop AIG’s credit rating, causing them to have to have more collateral that they could not back. To insure this did not happen, on September 16, the Federal Reserve took control of 80 percent of AIG when it gave them an $85 billion dollar “loan” or bailout (The Rise).
EXPLANATION OF THE AIG COLLAPSE
“Managers perform several basic managerial functions: planning, directing/leading, organizing, staffing, and controlling. They should manage in a way that brings good people into the organization and makes good people want to stay. Managers, especially immediate supervisors, largely determine whether employees stay with or leave a company” (Crews 5). “Managers should remove employees whose behavior indicates they are not trustworthy to ensure the long-term interests of the company” (Crews 5a). Because of illegal accounting practices and hiding losses through an overseas company, Greenberg was removed from his position. AIG dropped from its AAA rating. Five others received jail time for conspiracy and fraud (Cass Business School 6). AIG had multiple people involved in fraud or conspiracy, showing good people were not brought into this organization and it caused problems. Instead of bringing in ethical employees, AIG brought in those who only cared about results. These employees were involved in illegal practices such as fraud that led to the downfall of AIG. An ex-AIG executive explained why he thinks that Greenberg was the main cause of the problem. He explains that Greenberg left a gap in the system. While it may not have fallen apart until he left, what he left was not much. Instead, he left a broken workplace. And of course he would! No one wanted to work for him. He was a terrible person (Cohan). This shows us the character of Greenberg. His ethics were not where they should have been and therefore it caused those around him to hate working for him. Managers’ demeanor helps bring in good employees. Because no one wanted to work for Greenberg, it was harder for him to bring in ethical workers. Therefore, those who did stay had similar ideas to Greenberg, and were unwilling to check his unethical behavior that ultimately led to the downfall of AIG. Also, Greenberg only kept those around who would work as hard as him. He said that a company like AIG is not founded on a normal work schedule. He went on to state that in order to make a company like AIG work, co-workers who believe the same thing and strive for the same ideas are vital (O’Harrow and Brady “The Beautiful Machine”). Training is a critical part of leadership. Instead of training well-rounded employees, Greenberg looked for those who only focused on working hard. Many times, this is actually a good idea. However, Greenberg instilled in his employees the drive to make money. Greenberg only focused on the short-term rise in the company and he ensured that his employees would go along with him instead of looking for a more ethical way to succeed, causing there to be no regulation of his actions. Without proper information, managers often will make incorrect and flawed decisions. This is a result of the business conclusions being very difficult to work with and conflicting priorities (Crews 7). “Managers weigh profits against ethical concerns. Unfortunately, many companies focus on short-term concerns instead of long-term measures of success. Likewise, many companies reward managers based on short-term measures, whereas ethical behavior almost always requires a concern for long-term reputation and profitability” (Crews 7a). AIGFP turned into a dictatorship. Cassano intimidated his co-workers. In exchange for large sums of money, he belittled and harassed them (Lewis). Cassano only cared about making money in the short-term. He did not focus on the high risk that his volatile investments carried with them. He also had little care for the work environment. He would make it terrible as long as he got the results he wanted. In the process, he sent a message to his employees that said money was the only thing that mattered. He only cared that the results were achieved, not how they were achieved. This led to the large involvement in credit-default swaps. Being very lucrative, Cassano focused on these swaps and the large profit they were earning AIG. However, he only focused on the profit, not on the idea that they did not have the collateral to back up these swaps, which in turn, led to the collapse of AIG. Greenberg can name all of the errors that Sullivan, Cassano, and the company made. AIGFP greatly increased the salve of credit default swaps instead of limiting them. These were no longer just issued on corporate debt but on a much different risk that Wall Street was endorsing by the issuance of progressively unsafe mortgage-backed securities that are connected to Alt-A and subprime mortgages (Cohan). Increasing the salve of credit default swaps was a very risky move. Limiting the risk that they already had should have been the focus of management. Instead, profits outweighed everything for them and they did not care about the risk they were adding to AIG. They did not want to bother with the “safe” move, but only with the move that would potentially be the most profitable for them. It started out to be very profitable; however, they did not have the collateral to back up the insurance they sold. By focusing more on these default swaps, they were writing down profits before the money was actually made and these profits ended up not coming in. Because of this, AIG could not pay back what they owed to people, causing the company to collapse. AIG’s achievements were earned by analyzing data, always revamping assumptions, balancing risks and manufacturing the hedges. These credit-default swaps required none of that. Savage also said that looking back, the deals should not have happened (Brady and O’Harrow). Managers sometimes do not make the correct decisions. As Savage points out, the deals should never have happened. In retrospect, it was easy for him to see how much they could hurt the company. They were too risky and all the factors pointed to the fact that it was the wrong decision. These credit-default swaps had too much risk attached to them and even though they were profitable, they were the main factor in the destruction of AIG. The reason for this is because; put in simple terms, it was a fraud. These swaps brought about too many losses and AIG was not able to recover, causing the world’s largest insurance company to fall. The workplace often brings out compliance in most people. Because of this, the proper authority can get workers to do whatever they are told. This being the case, workers can be influenced by the managerial staff to do things that may be unethical, sometimes without the employee even knowing it is wrong. In the cases where they do, employees have to make a choice. Many times employees will just do as they are told so that they can keep their jobs. Occasionally they will quit and go to a different job to circumvent the problem. Very seldom an employee becomes a snitch, which hardly ever works in their favor (Crews 3). Because Greenberg managed greater than 17 percent of outstanding shares and he had complete control over his subordinates’ job future, he was not going to be questioned or replaced (Boyd 56). Because the employees did not want to lose their jobs, they were willing to do whatever Greenberg wanted, even if it meant doing something for him that was unethical. This had a direct effect to the collapse in 2008. It was clear that some of the things Greenberg was doing were unethical and should have been challenged, yet no one stepped in to stop him in time.
The harsh environment of Enron, Independent, and AIG from the companies Chief Executives stifled works from fighting the issues that are in the company (Cass Business School 17). This is a direct link to the unethical behavior of the managerial staff. Instead of trying to encourage people to let them know what is going wrong, they intimidated them so the workers would not bring up the issues. The managers saw what they were doing was profitable, even if risky and unethical, and wanted to keep it that way. So instead to trying to change their ways, they intimidated those who would normally speak out so that there were no issues brought up.
Formed of Greenberg’s trusted contacts and associates as well as renown ex-politicians and statesmen that brought standing, the board was not likely to have the means necessary to stand up to Greenberg and his unclear decision about reinsurance transactions. They certainly would not look into AIGFP and its market models (Cass Business School 8). Because they were Greenberg’s friends, Greenberg was allowed to work in the reinsurance transactions that, if monitored, would have been seen as very dangerous for the company because it was a sham in order to make his financial statements look better. Greenberg was committing fraud and covering up losses that should have been seen by the board but were not. If seen and stopped, the collapse of AIG could have been less severe.
“Stakeholders, including boards of directors, consumers, investors, whistleblowers, auditors, lawyers, rating agencies, and regulatory agencies, are supposed to hold managers and businesses accountable for their decisions and actions. In reality, legal, auditing, rating, and/or regulatory weaknesses often contribute to ethics scandals” (Crews 11). Bernake state that AIG found a loophole in the regulatory system. Nothing was monitoring the Financial Products division. This giant insurance company had a hedge fund on the side (Saporito et al.). The regulatory system is supposed to hold the managers accountable, yet it let AIG have an unregulated “hedge fund” and did not monitor the fraud that was taking place.
Boards dominated by insiders and CEOs have control over major corporations (Vasudev 790). As mentioned earlier, the board was a group of people unwilling the challenge Greenberg, and this allowed him to have complete control over the company and he did not have leave much control for other stakeholders. Because of this, when he decided to hide the losses that AIG was actually having, only the board had the power to stop him and they were unwilling.
Many people question how and why the AIGFP deterioration began. This is because of a change in how the business decisions were made. This happened because the leadership had changed. Cassano was appointed CEO of AIGFP. Savage, its former CEO, had been versed in mathematics and understood what was happening within AIG, but Cassano did not have these qualifications and lacked the skills necessary for his position (Lewis). AIG needed a better regulatory system in place to realize that Cassano did not have the necessary skills for this position. Although he was a much respected businessman, when dealing with risky investments, qualifications in advanced mathematics are needed. The regulatory system of AIG should have held the management and Cassano accountable when it was clear that he did not fully understand the risk he was immersing the company into.
CONSEQUENCES TO IMPORTANT STAKEHOLDERS
AIG was obviously majorly affected by their collapse. In September of 2008, they became largely owned by the government when the government gave them an $85 billion dollar loan to cover some of their losses and insure that the company did not completely collapse. Stock price, which were once valued at over $70 per share dropped to $2.21 per share the day after the bailout.
The United States government was negatively affected by the collapse of AIG. This “too big to fail” idea left the government with a hard decision. They could either bailout AIG and start helping them rebuild and help them work through this tough time, or they could let them fall and cause the collapse of other huge firms. Bailing them out, while not a great choice, was the only option. Because of this the government took a 79.9% stake in AIG and gave them a $85 million loan. Since then, the government has given them over $180 million of the taxpayers’ money. The government received a lot of backlash from this because many taxpayers did not understand the affect it would have on the world if the government had allowed them to fail.
Hank Greenberg also took a big hit during this collapse. Formerly the CEO of AIG, Greenberg was forced to step down from his position and is now undergoing civil charges that have yet to have been resolved. Also, Greenberg owned a large portion of stock in AIG. During the collapse, his portion which was once value at over $700 million had dropped to $28 million. Although this is still an abundant wealth, this is a massive loss to his portfolio. Greenberg also owned a lot of stock through Starr International. Starr’s shares were once valued at $15.8 billion and have since dropped to $470 million. So even though he still has plenty of money, he lost 96 percent of his investment.
The United States taxpayers were also greatly affected by the fall of AIG. The collapse has cost taxpayers $170 billion as of now, and this number could continue to rise. The United States government and many taxpayers were outraged to hear where some of that money was going. AIG had paid out $165 million in bonuses to those at AIGFP, which had caused the collapse and bailout in the first place. Even though this was a small amount compared to the big picture, it still was putting the taxpayers’ money straight into the pockets of those who had brought about the fall ((Saporito et al.).
Finally, shareholders in AIG took the largest hit after its collapse. Overall, shareholders lost $170 billion dollars in the collapse. Many of these people relied on this money for retirement and future living. Even though they may not have individually lost as much as someone like Greenberg, they also were not left with an amount like $28 million. With this problem taking years to resolve, shareholders’ investment will likely never return anywhere close to its original state.
LESSONS LEARNED The first lesson that I learned was that it should be a high priority to be ethical. Now this may seem like an obvious thing, but it clearly is not. A manager has a duty to perform his tasks in an ethical manner and to higher those who will do the same. With AIG, many problems could have been avoided as fraud ultimately led to their collapse. The second lesson that I learned is transparency is important. Had Cassano and other leaders in AIG been transparent with what was going on in AIGFP, it would have been a warning call to investors that something like this can be very volatile. Instead, AIG managers kept saying that they saw no way the credit-default swaps could lose money. Also, they were not being transparent where the money they had was going. High ranking managers were receiving large bonuses while the company was failing and the information was not disclosed at the proper time. Finally, I learned that employees should be the focus of a company. If ethical, hard-working employees are brought into the company and trained, the company is put in a good spot to flourish. A company’s main goal should be centered on ethical practices, and the only way to ensure that is to bring in ethical employees. Inevitably, they will not be able to do this perfectly; however, if done well enough other employees should be able to recognize unethical decisions and stop them before they are finalized. Overall, companies need to hold employees to a high ethical standard to ensure that things like this do not happen.

WORK CITED PAGE
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