The Demise of Aig
The Demise of AIG:
A Corporate Downfall
Crystal Ruff
Globe University
ABSTRACT
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.S. history. 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
A Corporate Downfall
Crystal Ruff
Globe University
ABSTRACT
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.S. history. 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
References: L. Ferrell, O.C. Ferrell, & J. Fraedrich. (2012). Business ethics: Ethical decision making and cases (9th ed.). Mason, OH: South-Western.