1. List ethical dilemmas AIG faced before 2008 financial crisis2. Who are the stakeholders of American International Group? Explain how eachstakeholder is tied to the company3. Elaborate the causes, and consequences of Too Big to Fail in the AIG case.4. What could be possible solutions for resolving the ethical dilemmas above?

Due date: Friday November 20, 2015Too Big to FailAmerican International Group, INC (AIG) caseIntroductionAIG is the story of a company, and its network of financial partners, who tookunprecedented risk and fell because of it. To prevent global economic disaster, the U.S.government came to its rescue. This has resulted in the biggest taxpayer bailout of a privatecompany in American history.BackgroundAmerican International Group, Inc. – also known as AIG – is an Americanmultinational insurance corporation with more than 88 million customers in 130 countries. AIGcompanies employ over 64,000 people in 90 countries. The company operates through three corebusinesses: AIG Property Casualty, AIG Life and Retirement and United Guaranty Corporation(UGC). AIG Property Casualty provides insurance products for commercial, institutional andindividual customers. AIG Life and Retirement provides life insurance and retirement services inthe United States. And UGC focus on mortgage guaranty insurance and mortgage insurance. AIGalso focuses on global capital markets operations, direct investment and retained interests. AIG’scorporate headquarters are in New York City, its British headquarters are in London, continentalEurope operations are based in La Défense, Paris, and its Asian headquarters are in Hong Kong.The company serves 98% of the Fortune 500 companies, 96% of Fortune 1000, and 90% ofFortune Global 500, and insures 40% of Forbes 400 Richest Americans. AIG was ranked 40thlargest company in the 2014 Fortune 500 list. According to the 2014 Forbes Global 2000 list,AIG is the 42nd-largest public company in the world. As of June 1, 2014, it had a marketcapitalization of $78.48 billion, per Google Finance.Cornelius V. Starr started AIG as “American Asiatic Underwriters” in 1919 in Shanghai,China. He moved from Shanghai to New York after the Communists came to power in 1949. In1962, he gave management of the company’s lagging U.S. holdings to Maurice R. Greenberg,who shifted its focus onto selling insurance through independent brokers rather than agents. In1968, Starr named Greenberg his successor. Then AIG went public in 1969. Greenberg was fireddue to accounting scandal in February 2005 and was succeeded as CEO by Martin J. Sullivan.On June 15, 2008, Sullivan resigned and was replaced by Robert B. Willumstad, Chairman of theAIG board of Directors. Willumstad was forced by the U.S. government to step down and wasreplaced by Edward M. Liddy on September, 18, 2008.AIG faced the most difficult financial crisis in its history when a series of events unfoldedin late 2008. The insurer had sold credit protection through its London unit in the form of creditdefault swaps (CDSs) on collateralized debt obligations (CDOs) but they had declined invalue. The AIG Financial Products division had entered into credit default swaps to insure $441billion worth of securities originally rated AAA. Of those securities, $57.8 billion werestructured debt securities backed by subprime loans. As a result, AIG’s credit rating wasdowngraded and it was required to post additional collateral with its trading counter-parties,leading to a liquidity crisis that began on September 16, 2008 and essentially bankrupted all ofAIG.1Due date: Friday November 20, 2015The United States Federal Reserve Bank created an $85 billion credit facility to help AIGmeet increased collateral obligations, in exchange for stock warrants worth 79.9% of thecompany’s equity. To date, the U.S government’s total loan package to AIG has topped $182.5billion (Hamilton 2009). This has made AIG the largest government bailout of a private companyin U.S. history.Since September 2008, AIG has marketed its assets to pay off its government loans. Adecline in the valuation of insurance businesses, and the weakening financial state of potentialbidders, has hindered its efforts (Barr 2009). On March 2, 2009 AIG reported a fourth quarter2008 loss of $61.7 billion. The announcement of the loss had an impact on morning tradingEurope and Asia, with the FTSE100, DAX and Nikkei all suffering steep losses. In the U.S., theDow Jones Industrial Average fell to below 7000 points, a twelve-year low. On top of theselosses, in March 2009 AIG was attacked by the public and media for its retention payment of$165 million. As a result of public anger over these employee bonuses, AIG has rebranded amajority of its business under AIU holdings, Inc (Kaiser & Daly 2009). Liddy announced onMay 21, 2009 that he is resigning, but will stay until a new CEO is hired. He receives a salary of$1 and equity grants, though he may be “eligible for a special bonus for extraordinaryperformance payable in 2010” (Barnes 2009).Financial AnalysisThe financials for 2008 were not good, as AIG posted a $99 billion loss for the year.However, the first quarter of 2009 looks promising with revenue in the first quarter of 2009outperforming all of 2008. Earnings-per-share is poor, but the first quarter 2009 loss wasconsiderably lower than fourth quarter 2008. It is the hope of the markets that AIG has started torebound from the low points of their 2008 crisis.Financial Highlights for AIG (July 20, 2009) from MSN MoneySales17.53 BillionIncome-97.25 BillionNet Profit Margin-557.83%Return on Equity-155.05%Debt/Equity Ratio4.09Revenue per Share130.87EPS(Earnings per share)-720.86Book Value per Share340.12Dividend Rate0.00Payout RatioN/ARevenue-Quarterly for AIG (In Millions, 2009)1ST Quarter2nd Quarter3rd Quarter4th QuarterTotalFY(2009)20,458N/AN/AN/A20,458.0FY(2008)14,03119,933.0898.0-23,758.011,104.02FY(2007)30,645.031,150.029,836.018,433.0110,064.0Due date: Friday November 20, 2015Earnings per Share for AIG (In Millions, 2009)1ST Quarter2nd Quarter3rd Quarter4th QuarterTotalFY(2009)-$39.67N/AN/AN/A-$39.67FY(2008)-$61.75-$41.13-$181.04-$459.02-$742.94FY(2007)$31.62$32.87$23.95-$41.51$46.93Quarter over Quarter ESP Growth Rate AIG (In Millions, 2009)1ST Quarter2nd Quarter3rd Quarter4th QuarterFY(2009)91%N/AN/AN/AFY(2008)-49%33%-340%-154%FY(2007)–4%-27%N/AYear over Year Growth Rate AIG (In Millions, 2009)1ST Quarter2nd Quarter3rd Quarter4th QuarterFY(2009)36%N/AN/AN/AFY(2008)N/AN/AN/AN/AFY(2007)N/AN/AN/A-1,006%Causes of FailureBy 2007, the CDS market had grown into a $70 trillion annual business. In selling CDS, AIGwas receiving huge payments. AIG’s FP unit was an endless money machine, adding $6 billionof riches to AIG’s reserves from 1988 until 2005. Ironically, AIG’s trouble began when itsFinancial Products (FP) unit started selling default swaps. AIG FP developed a portfolio of $2.7trillion in credit derivatives. AIG became liable for much more money than it could pay out if theportfolios were to default. In 2008, AIG FP piled up $40 billion in losses related to its dealings incomplex mortgage bond derivatives. When it was initially writing all that CDS protection, AIGthought it wasn’t possible to take ant losses because its contracts were supporting such highlyrated, highly protected slices, according to a former AIG FP employee. AIG FP lost more than$10 billion in 2007 and $14.7 billion in the first six months of 2008.As long as AIG FP was producing a profit, senior management didn’t ask or care how it wasbeing achieved. Martin Sullivan, who was fired from being Chief Executive of AIG in June2008, had even eliminated a twice-a-month meeting to assess the work of the unit. “He wasn’treally interested in the business”, this person said.Howard Sosin founded AIG FP in 1987, and remained there until 1993. When he was firsthired at AIG, Howard Sosin was offered a 20 percent stake in the FP unit and 20 percent of itsprofits (Browning 2008). While many hedge fund managers receive this type of incentiveprogram, this is a conflict of interest. This causes a manager to throw caution to the wind in orderto make a profit. Understanding that the higher the risk, the higher the expected return, Sosin wasgiven almost free reign.By selling a large volume of CDS, AIG was taking a bigger lopsided position on a singleone-sided bet. AIG lacked the financial resources to make good on those contracts in the eventthat the housing downturn became as severe as it has now proved to be. AIG underwrotesystemic risk. “One thing about the insurance model: it relies on diversification as its means to3Due date: Friday November 20, 2015exist,” said a top executive at an AIG competitor. “If an insurance company plays in a fieldwhere it underwrites systemic risk, that is a totally different experience”. Insurance companiescan handle catastrophic risk but not systemic risk.AIG was able to engage in risky business for so long because Washington looked the otherway. The company befriended politicians with campaign contributions, escaping regulation thatmight have prevented the current crisis. Regulators never imagined the extent of the loomingdefaults. AIG’s uncollateralized insurance business was regulated by Washington’s Office ofThrift Supervision, whose task is to watch over savings-and-loan companies, not global insurers(Saporito 2009). Evidently it wasn’t watching AIG. Joseph Cassano built up AIG FP on what’sbeen described as regulatory arbitrage. As Federal Reserve Chairman Ben Bernanke explained,“AIG exploited a huge gap in the regulatory system. There was no oversight of the FinancialProducts division. This was a hedge fund basically that was attached to a large and stableinsurance company”.On March 17, 2009, AIG announced that they were paying $165 million in executivebonuses, according to news reports. Total bonuses for the financial unit could reach $450 millionand bonuses for the entire company could reach $1.2 billion. President Barack Obama, whovoted for the AIG bailout as a Senator responded to the planned payments by saying "[I]t’s hardto understand how derivative traders at AIG warranted any bonuses, much less $165 million inextra pay. How do they justify this outrage to the taxpayers who are keeping the companyafloat?" and "In the last six months, AIG has received substantial sums from the U.S. Treasury.I’ve asked Secretary Timothy Geithner to use that leverage and pursue every legal avenue toblock these bonuses and make the American taxpayers whole." Politicians on both sides of theCongressional aisle reacted with outrage to the planned bonuses. Political commentators andjournalists expressed an equally bipartisan outrage.Too big to failSimply put, AIG was considered too big to fail. An incredible amount of institutionalinvestors – mutual funds, pension funds and hedge funds – both invested in and also were insuredby the company. In particular, many investment banks that had CDOs insured by AIG were atrisk of losing billions of dollars. For example, media reports indicated that Goldman Sachs(NYSE:GS) had $20 billion tied into various aspects of AIG’s business, although the firm deniedthat figure. Money market funds – generally seen as very conservative instruments without muchrisk attached – were also jeopardized by AIG’s struggles, since many had invested in thecompany, particularly via bonds. If AIG was to become insolvent, this would send shockwavesthrough already shaky money markets as millions of investors – both individuals and institutions- would lose cash in what were perceived to be incredibly safe holdings.However, policyholders of AIG were not at too much risk. While the financial-productssection of the company was facing extreme difficulty, the vastly smaller retail-insurancecomponents were still very much in business. In addition, each state has a regulatory agency thatoversees insurance operations, and state governments have a guarantee clause that will reimbursepolicyholders in case of insolvency. While policyholders were not in harm’s way, others were.And those investors – from individuals looking to tuck some money away in a safe investment tohedge and pension funds with billions at stake – needed someone to intervene.4Due date: Friday November 20, 2015American International Group, INC (AIG) caseCase StudyINSTRUCTIONS: After reading the attached case study regarding American InternationalGroup, INC (AIG), answer the following questions in paragraph form using complete sentences.Be sure to check for spelling, punctuation, and grammar before uploading your responses.- Requiremento 2-3 pages longo Font size 11o Font: times New Roman1. List ethical dilemmas AIG faced before 2008 financial crisis2. Who are the stakeholders of American International Group? Explain how eachstakeholder is tied to the company3. Elaborate the causes, and consequences of Too Big to Fail in the AIG case.4. What could be possible solutions for resolving the ethical dilemmas above?5