The Rise and Fall of AIG
(11 pages of text)
The Global Financial Crisis (2007-2009) has provided fertile ground for careful consideration of how the financial services industry operates. For many years it had been asserted that markets can self-police so that regulation and careful oversight are not required. The events from the crisis have caused many of the strongest proponents of this view, such as Alan Greenspan (former chairman of the Federal Reserve), to publicly acknowledge the problems with this belief. This case considers the events leading up to and following the bailout of AIG to allow for a discussion of how different internal and external factors contributed to the crisis at AIG, and the importance of studying each of them more carefully to avoid such problems in the future.
The goal of the case is to provide a rich environment to discuss and evaluate different sources of risk for an organization. The case could be taught in courses ranging from organizational behaviour and leadership to finance and accounting. In studying what happened at AIG, one can see the role of corporate culture, corporate governance, regulation, and financial risk management in the situation that AIG found itself in during the 2000s. The case provides a historical context which highlights how the events of 2008 should not have been surprising based on the history of the firm and how it had grown over the past 75 years. Instructors can consider the role of:
- Corporate culture, as AIG was focused on ever-increasing growth in the range of product offerings and profit margins across its offerings, without necessarily understanding the implications of this growth on the risk profile of the parent.
- Corporate governance, as AIG was structured with many different units, each of which had a certain degree of autonomy, allowing for differences in decision-making across units, but the overall organization was run by a strong CEO.
- Accounting and regulations, as AIG was able to benefit from regulatory arbitrage by setting up its operations as separate units, which were regulated by different agencies, allowing the risks of the different units to not necessarily be properly reflected at the parent level.
- Capital markets and risk modeling, as AIG was confident in its ability to handle the systemic market risk that it was increasingly facing as it expanded its operations into financial services, especially credit default swaps.
Finance and Insurance
United States, Large, 2008
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