A Summary of the case “Coping with Financial and ethical Risks at American International Group (AIG)”

Topics: Credit rating, American International Group, Credit default swap Pages: 4 (1274 words) Published: September 23, 2013

A Summary of the case “Coping with Financial and ethical Risks at American International Group (AIG)”

Background
        
American International Group, Inc. is a company whose operation began back in 1919. It was established back then by Cornelius Vander Starr as an insurance agency in Shanghai, China. AIG left china in 1949 after Starr had established himself as the westerner the sell insurance to the Chinese people. AIG headquarters then shifted from china to New York City, which is still the headquarters up to date. It is from here that AIG began its expansion tapping into other markets such as the Latin America, Asia, Middle East and Europe through use of its subsidiaries.         

AIG – Causes of its demise

The start of problems facing AIG began during the tenure of Greenberg as AIGs' CEO. It was during tenure that the company expanded from its initial line of insurance into other many complex lines of business and insuring risks that only a few other companies would consider handling. This led to the involvement of the company in businesses that it did not fully comprehend. AIG started investing in many different types of securities which included mortgage backed securities and also credit derivatives trading. AIG then went ahead to become a leading player in these markets, insuring other company's debt obligations against losses due to its excellent credit rating at the time.         

It was AIG's Financial Product Unit (AIGFP) that brought about the fall of the company, due to its disastrous credit swaps product. AIGFP was founded in the year 1987 by three Drexel Burnham Lambert Traders who were led by a Howard Sosin, a finance scholar. They convinced Greenberg based on the company's AAA credit rating to create a division which focused on complex derivatives trade. Greenberg and Sosin signed an agreement in which 38 percent of money earned went to AIGFP while the remainder 62 percent went to AIG. If things had to go bad down the line it was...


References: “Business Ethics” by O. C. Ferrell, John Fraedrich, Linda Ferrell, Case 6 – “Coping with Financial and Ethical Risks at AIG”
“About AIG”, http://www.aigcorporate.com/aboutaig/financialcrisis_2008.html
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