ERS CASE STUDY-1

CASE -06
COPING WITH FINANCIAL AND ETHICAL RISKS AT

AMERICAN INTERNATIONAL GROUPS (AIG)
The American International Group (AIG) was a leading global insurance company, but its
troubles started in a division called AIG Financial Products. In the year 2008 , AIG shows
how risky decisions and poor ethics can bring down even the largest companies. AIG This
small unit traded complicated financial products called credit default swaps (CDSs), which
were tied to risky home loans . When the housing market crashed, AIG lost billions because it
didn’t have enough money to cover the promises made through these swaps. The company’s
culture encouraged taking big risks for short-term profits, which led to its downfall. Maurice
“Hank” Greenberg, who ran AIG for decades, helped grow it into a global leader. However,
critics say his leadership style created a culture focused on profits at any cost. After
Greenberg left in 2005, the Financial Products team took even bigger risks, ignoring
warnings from auditors and keeping key problems hidden from investors.
When the crisis hit, AIG couldn’t handle the losses and due to which its stock value dropped
rapidly. The U.S. government stepped in with a $180 billion bailout to stop AIG from
collapsing completely. This wasn’t done to save AIG but to protect other banks and
institutions that depended on it. If AIG had failed, it could have caused a global financial
disaster. Even after the bailout, AIG continued to face criticism for paying large bonuses to
executives and holding expensive events, despite losing billions. People saw this as proof that
the company hadn’t learned from its mistakes. AIG also had trouble selling parts of its
business to pay back its debts because many buyers were also struggling during the financial
crisis.
AIG’s story highlights how chasing quick profits without thinking about the risks can lead to
disaster. It also shows the importance of being honest with stakeholders and having strong
ethical practices. While the government’s bailout helped stabilize the economy, it raised
tough questions about rewarding companies that acted irresponsibly. In the end, AIG’s
collapse serves as a warning about what happens when businesses ignore long-term
responsibility for short-term gain.
Questions for discussions
ANS 1- AIG’s company culture was a big reason for its failure. When
Maurice “Hank”
Greenberg was in charge, the company focused on growing quickly and making fast money.
While this helped AIG become very successful worldwide, it also created an environment
where people were encouraged to take big risks without thinking about the long-term effects.
Greenberg left In 2005, Greenberg and left things got worse. A part of the company called
the Financial Products division started acting like a gambling business. This meant making
risky bets on complicated financial deals like credit default swaps (CDSs). AIG provided
Employees with incentives for taking risks and were rewarded for making quick profits, even
if their actions put the company in danger.
The company ignored warnings and didn’t properly control these risks. Leaders and
employees cared more about their own rewards than about keeping the company safe or
looking out for its customers and investors. This culture of greed and poor decision-making
eventually caused AIG to collapse.
ANS 2- Ethical Effects of the AIG Disaster and the Role for an Enhanced
Ethics Program
This led to the downfall of AIG due to a string of questionable decisions of its leadership.
The executives were misleading investors by painting a picture of stability when, in fact, the
situation was very critical. They engaged in some dangerous financial games of complex
instruments such as CDSs and continued awarding themselves huge bonuses even when the
losses were so huge.
It got worse: they withheld information required, and it was not even declared to its auditors.
This created an environment of secrecy and distrust.
An improved ethics program might have had a role in the company's action. This would have
included:
It calls employees and leaders to be responsible and very cautious in their decisions.
Advocacy of the whistleblower: Developing a fearless system for whistleblowing among the
staff members.
There would be an Independent Oversight team that would oversee high-risk sectors, namely
the Financial Products division, towards responsible practices.
Rewarding Moral Behavior: Align incentives and promotions with values-based and
responsible behaviour, not fast-and-loose or impulsive behaviour.
If more emphasis had been placed on ethics and accountability, AIG may have been able to
avoid most of the issues that finally resulted in its collapse.
ANS 3- AIG could have avoided its collapse and the necessity of a
government bailout if it had made wiser choices. This is what they might
have accomplished:
Better risk oversight: AIG needed stricter controls to monitor and contain this type of
operation, particularly within the Financial Products unit. Independent appraisals would have
spotted problems earlier and limited losses.
Transparency: If AIG had been truthful and open about all the risks involved, and had
listened to some of the early warnings it received then most of its most critical mistakes need
not have occurred.
Incentives for Accountability: Rather than handing out incentives for employees who
indulged in unsafe practices because it registered a quicker financial gain, AIG should have
instilled responsible and responsible behaviour.

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CASE -06

COPING WITH FINANCIAL AND ETHICAL RISKS AT

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