American International Group

American International Group

American International Group

As we look back into the famous story of the collapse of American International Group, we can only wonder whether there was a bribe or corruption, was the company liable, socially responsible and accountable for the fall, and what the final outcome was. As I read further into the truth of AIG, I learned that it was a bribe and that AIG was both liable and socially accountable for the fall. As for the final outcome you'll see at the end.

By 1998, AIG had revenue of $500 million but never once did the company make a single credit default swap. In the same year JP Morgan decided to approach AIG with an interesting proposal. Morgan proposed that for a small fee, AIG should insure JP Morgan's complex corporate debt, in case of any default. Gary Gorton, a consultant to the unit stated, "There was a 99.85% chance that AIGFP would never have to pay out on these deals. Essentially, this would happen only if the economy went into a full-blown depression, in which case, the AIGers believed, the counter-parties would be wiped out, and therefore would hardly be in a position to demand payment anyway. With the backing of Cassano, the son of a Brooklyn cop, then the COO, Savage green lighted the deals and that is how the default swaps were born (Roth & Buchwalter, 2009). There was no reason for the credit default swap and this is where all the bribes began.

In 2002, the Justice Department (JP) was convinced that AIGFP had illegally helped another firm, PNC Financial Services, to hide certain assets from their books. JP found that AIGFP had set up a separate company, known as "special purpose entity" to take PNC's assets. Then in 2005, Greenberg, who has ran AIG since 1968, decided to step down as CEO. This brought more questions to the feds. After Greenberg left that company felt the effects: the credit rating fell, allegations of irregularities from AAA to AA, also triggered provisions in some of AIGFP's credit default swap, which required AIG proper to over $1 billion in collateral for the deal ((Roth & Buchwalter, 2009). The same year one of AIG's exec named Eugene Park looked closer into the company and saw that many of the CDOs were being insured contained too large a proportion of sub-prime mortgages, meaning the risk of default was high if housing market collapsed (Roth & Buchwalter, 2009).

In that same month Goldman Sachs demanded $1.5 billion in collateral from AIG, supposable to cover the mortgage-backed securities for the credit default swaps. This was only the beginning,