This paper focuses on the financial demise of AIG and the corporate culture that pushed it there. It lays out specific factors that contributed to the bailout of the company and the ethical conduct of the executives that contributed to the poor decisions that led the company to a massive failure and ultimately, a bailout. Even though the company is on the road to recovery, its reputation has been damaged and some wonder if it will truly recover. The Demise of AIG: A Corporate Downfall In 2008-2009, AIG became one of the most controversial financial bailouts in U.
As an underwriter for insurance companies, AIG reinsures insurance companies who have taken on too much risk. This allows insurance companies to sell more insurance policies and continue to grow. The center of trouble for AIG was CDSs, or credit default swaps. These products are designed to transfer the risk of bonds between parties. As a result, the buyer of the CDS receives credit protection since the seller is guaranteeing creditworthiness.
The risk of default is transferred from the holder of the bond to the seller of the swap.
AIG issued these swaps and promised to pay their counterparties if the debt securities defaulted. Without being able to weather the collapse of subprime mortgages, these contracts became worthless as people began to default on their loans. As the largest insurance company in the US, AIG was forced to buy the bad mortgage backed securities that no one else could. Because of their position, AIG could not fail and the government was forced to bail them out. If they had not, the recession of 2008-2009 would have been far worse. Ferrell, Fraedrich, Ferrell,2012). As CEO of the company for 38 years, Greenberg was considered one of the most successful executives in the business. His relationship with contacts helped him to advance the company even further and granted him leeway when regulatory agencies came around.
Greenberg himself became concerned about the dealings within AIG and thought the unit was taking too many risks. When he left the company in 2005, regulators were already investigating AIG’s accounting practices. Ferrell, Fraedrich, Ferrell, 2012). The ethical conduct of AIG executives was a factor within the corporate culture that led to the downfall. The corporate culture was built around a system that would reward executives for making poor decisions and placed very little responsibility on them. Even though the company was experiencing $40 billion in losses, the managers were in the midst of receiving bonuses. The transparency that company created during the trouble did nothing for them.
AIG executives Cassano and Sullivan assured investors of the company’s exposure in the housing market and they even stated during a hearing that the information they had at the time they believed to be accurate. ( Ferrell, Fraedrich, Ferrell, 2012). AIG might have strengthened their corporate culture if they would have had a better ethics program in place. The problem seemed to be that there were so many unethical executives within the company with so much corruption going on that there was no code of ethics in which to base anything off of.
If the CEO of the company is using his status and relationships to do the dealings, than why should anyone else come into question; that is until the company began to fail. There are many things that AIG could have done differently to prevent the bailout and prevent its failure. One of the first things is the accountability practices. With a company as successful as AIG, there should have been internal audits done quite frequently to gauge the effect of the high risks it took on. Billions of dollars were on the line and no one seemed to want to maintain extra care to have accounts regulated.
Another thing the company could have done is to increase its transparency. For a company to maintain transparency, it needs to conduct itself so as not to hide anything from the investors and stakeholders. What is done behind doors should have been done for all to see. For them not to have transparency would have been a red flag that something was amiss. DISCUSSION This company’s downfall is a lot like Enron. AIG’s company culture did nothing to support the integrity of the company.
Acting as it did by being transparent and making unethical decisions proved that a Code of Ethics was not in place, and certainly not followed by even the top executives. A company needs to restructure itself from the ground up and create new policies and a Code of Ethics program. There needs to be a legitimate consequence for such actions. Creating a corporate culture means to create a positive reputation in the eyes of the investors and stakeholders. AIG executives seemed to have forgotten this and were more concerned with their own bonuses.
Cite this The Demise of Aig
The Demise of Aig. (2016, Oct 01). Retrieved from https://graduateway.com/the-demise-of-aig/