American International Group (AIG)
CORPORATE GOVERNANCE, 5TH ED., Robert A.G. Monks and Nell Minow, eds., 2011, case study available online only p. 235 - 252
Posted: 18 Mar 2011 Last revised: 23 Dec 2013
Date Written: October 26, 2011
Numerous actors helped deliver one of the world’s largest insurance firms, American International Group, Inc. (“AIG”) to the brink of failure. Efforts to assign blame resemble Murder on the Orient Express in which twelve individuals, each inflicting a separate wound with the same dagger, were individually and collectively responsible for the stabbing death of a fellow traveler. However, unlike the case of the fugitive-turned-murder victim in Agatha Christie’s mystery novel, many of AIG’s wounds were self-inflicted. Management and the board of directors weakened AIG over many years, well in advance of the financial crisis. As the firm showed early warning signs of trouble, some, including its shareholders, attempted to intervene to restore the firm’s health. Near the end, in addition to management and the board, professional gatekeepers, counterparties, and regulators each played a part in AIG’s collapse.
Fortunately for AIG, and those dependent upon its survival, life did not imitate art. On Tuesday, September 16, 2008, just one day after 158-year-old Lehman Brothers Holdings Inc. (“Lehman”) filed for bankruptcy protection, the Bush Administration revived AIG at great public expense. In exchange for $85 billion, AIG became a ward of the state, with the US government entitled to nearly 80% of its stock. The AIG bailout grew to a $182 billion commitment. Even with the taxpayer-funded rescue, AIG posted a gigantic $61.7 billion loss for the 4th quarter of 2008, an historical record for any U.S. corporation. On the heels of the bailout and huge loss, in March 2009, it was revealed that $165 million in bonuses had been paid to employees of AIG Financial Products. This was the London-based business unit with approximately 400 employees that had accumulated massive risk that threatened the entire global financial system.
Instantly, AIG became a lightning rod for populist anger. Fueling the outrage was the added revelation that AIG’s counterparties were paid 100 cents on the dollar, about $62 billion of the bailout funds, when they should have and would have taken substantially less. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) became law. Many key provisions of this legislation were designed in response to AIG. Even if the government is ultimately paid back in full, the firm may remain a symbol for the worst corporate governance problems of the day including pay-for-failure, imperial CEOs, inadequate board oversight of risk management systems, and the propensity of firms to privatize gains and socialize losses.
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