CMGT500 Week 7: AIG

Former AIG Chairman Maurice Greenberg

This week our readings focused on how companies are engaging actively in corporate social responsibility but with mixed results and the need for greater transparency in corporate financial reporting.  In his journal article "Building Mountains in a Flat Landscape: Investor Relations in the Post Enron Era", Christopher Allen wrote about the need for easier to understand financial reporting and simpler accounting standards.  Allen noted that some companies were opening up their operations to investors who had questions. He wrote that AIG "was establishing an investor 'help' desk, dedicated to responding to individual and institutional investors'' (p. 210).  AIG Chairman Maurice Greenberg said this would reassure his investors because after all, "In the current environment, rumor, innuendo and other misinformation circulated by various sources can
generate unwarranted concerns" (p. 210).  Six years after this journal article, taxpayers would find there would me much to be concerned about AIG operations since they now owned 80% of the company.

A June, 2009 60 Minutes report did an excellent job at what exactly went wrong inside AIG and how it nearly tanked the global economy.

60 Minutes Correspondent Steve Kroft Reporting on AIG

    Watch the report here 

Greenberg had set up a small division inside the company.  Only about 20 people worked in AIG FP and they bought billions in mortgage-backed securities and insured them for other investors. These are called credit default swaps, and here's an illustration to explain how they work generally.

 AIG saw credit default swaps as easy money but either didn't realize or didn't care that many of these mortgages were toxic.  AIG exposed itself to the tune of $64 billion dollars and "didn't tell its shareholders about the risky positions until June of 2007 and even then the disclosure was limited to a single sentence buried in a 96-page report" (Kroft, 2009).  

Apparently AIG followed the same path as Enron took in 2001 when it used "derivatives, like swaps, options, and forwards to create contracts for third parties" (McLean, 2001).  Fortune Magazine questioned Enron's strategies but when a company is making double digit returns for its investors, very few others will be quite as inquisitive.  In Enron's case, its practices meant rolling blackouts for Southern California communities and the eventual dissolution of Enron.  In AIG's case, with its tentacles in so many businesses and pensions (Kroft, 2009), many feared its collapse would tip a deep recession into a depression. 

AIG's downfall is good to put into context when reading Franklin's "Just good business" when he talks about "managing risks to reputation".  Not only did AIG fail to consider the risk to its reputation leading up to the collapse, it also mismanaged its message following the taxpayer bailout (Kroft, 2009).   The new chairman, Ed Liddy was forced to keep the same people responsible for the defaults on staff so they could detangle the company from the toxic assets.  Then, in a move that outraged many, Liddy rewarded those people with 7-figure bonuses paid for by the taxpayers (Kroft, 2009). 
   
References:

Allen, C. (2002) Building Mountains in a Flat Landscape: Investor Relations in the Post Enron Era.
     Corporate Communications: An International Journal, 7 206-211

Franklin, D. (2008, January 19). Just Good Business: A Special Report on Corporate Social    The
     Economist. pp. 1-14

Kroft, S. (2009, June 24). Why AIG Stumbled and Taxpayers Now Own It. 60 Minutes. Retrieved   
       October 28, 2012 from http://www.cbsnews.com/stories/2009/05/15/60minutes
        /main501760.shtml?tag-mncol;1st;2


 McLean, B. (2006, January 19). Is Enron Overpriced? Retrieved October 18, 2011 from
      http://money.cnn.com/2006/01/13/news/companies/enronoriginal_fortune/index.htm