by Julio Viskovich MBA

Created on: April 12, 2009   Last Updated: April 17, 2009

AIG: Greed, Risk and Corporate Governance

AIG, officially known as American International Group, is an insurance company that has a shaded background for overzealously chasing profits and boasts a long history of misconduct. As early as 2000, AIG was renowned for its shoddy ethics and lack of internal controls. The firm was found guilty of reinsuring transactions with companies specifically created and designed to falsely inflate its loss reserves by up to $500 million. The firm's sole purpose in doing this was to falsely mislead critical investors and public confidence. AIG has a noted past for misrepresenting financial data by creating false or imaginary transactions in order to mislead public investors.

AIG has been fined for inaccurately reporting insurance claims, for receiving directed brokerage in return for providing preferential treatment to certain mutual fund companies, and for involving itself in transactions designed to disguise company losses and debts. Its financial practices were under fire and were at the heart of various investigations including the largest civil penalty ever invoked in Oklahoma which found AIG responsible for discrepancies in the way the company reported losses (Price, 2007). The fines and investigations continued to pile up on AIG through to 2007 when regulators found the firm guilty and civilly libel in numerous states for misrepresenting data and federally responsible for fraudulent accounting practices. This is when Martin Sullivan replaced then CEO Hank Greenberg, who was embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission and the Department of Justice. Greenberg had been finally been released by the firm during a trial for a previous accounting scandal that resulted in $1.8 billion in fines for AIG.

Sullivan realized that AIG was in severe trouble the firm and continued to make risky investments in order to drive short-term growth. AIG sold insurance on billions of dollars of debt securities backed by everything from corporate loans to subprime mortgages to auto loans to credit-card receivables. It promised buyers of the swaps that if the debt securities defaulted, the firm would pay these losses. The company further stated that if the prices of these securities collapsed, AIG would reacquire them. The majority of securities were called collateralized-debt obligations, or CDOs, that were backed by securities such as mortgage bonds. CDOs, in particular, were exceptionally complex,

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