During these troubled economic times, both investors and average citizens are fascinated with the panic on Wall Street. One by one, giant corporations collapse into themselves like stars going supernova. With all the companies going belly up, it seems that one company in particular has gotten a great deal of press. As John Carney recently noted in an article for The Business Insider, AIG has received $180 billion dollars in bailout money. Carney asks the important question: “How could one company be worth $180 billion?” What makes AIG so special? Why does the government keep throwing money at AIG? Why are we told that AIG can not be allowed to fail, no matter what the cost?
AIG (American International Group) was founded in Shanghai by Cornelius Vander Starr in 1919. Starr established an insurance agency that became quite successful, and within decades the company has established itself as a prominent company worldwide. In 1962, Starr turned over management of AIG’s US division to Maurice “Hank” Greenberg. Greenberg shifted AIG’s focus from personal insurance to high-margin corporate coverage, and focused on selling through independent brokers instead of regular insurance agents. By using brokers instead of agents, AIG was able to cut costs on salaries, which helped AIG through times when they faced a drop in sales. Greenberg becomes CEO.
Flash forward to the 2000′s. AIG is involved in a series of investigations conducted by the Securities and Exchange Commission, the U.S. Justice Department, and New York State Attorney General’s Office. In February of 2005, Greenberg is ousted amid an accounting scandal in February 2005. AIG is fined $1.6 million after the Attorney General’s investigation, and several of it’s executives receive criminal charges. In quick succession, AIG goes through three CEO’s: Martin Sullivan, Robert B. Willumstad, and Edward M. Liddy. In 2008, AIG was ranked number 18 on the Forbes Global 2000 list. But by September, AIG had been booted out of its spot on the Dow Jones Industrial Average.
In late 2008, members of the House oversight committee questioned both Martin Sullivan and Robert Willumstad as to why they had not fired Joe Cassano, who was the president of AIG financial products division. Many members of the oversight committee place much of the blame on Cassano, and believe he was mostly responsible for toppling the insurance giant, due to his division’s increasing amount of credit-default swap transactions. AIG’s increasing involvement with CDS ultimately led to its collapse. Meanwhile, Cassano was raking in the profits. He earned $280 million in cash (more than AIG chief executives) and for every dollar his financial products unit made, 30 cents came back to Cassano and other top executives. After AIG’s rating dipped below AA, the company suffered a liquidity crisis, and the rest is history.
AIG’s financial woes can be traced back to several contributing factors. But why is it that the fall of AIG strikes terror in the heart of investors?
In addition to their insurance agencies all over the world (with literally millions of policies in force), AIG also owns a mortgage company, an aircraft leasing company, a real estate management company, a telecommunications company, and a ski resort. AIG’s list of subsidiary holdings is also extensive. AIG is truly a global company, and with such diversity of industries, it is clear that AIG’s failure is bound to have dramatic worldwide repercussions.
But perhaps the thing that frightens us most of all is that AIG’s greed seems to be insatiable. In the months after the Great September Bailout, AIG’s executives refused to tighten their belts and start exercising good judgment. The week after the September bailout, AP reported that AIG executives traveled to California for a decadent company retreat which cost a reported $444,000 and featured spa treatments and golf outings. Allegedly, the outing was a reward for top-performing agents, and it had been planned before the bailout. Then on the 17th of October, AP reported that AIG executives spent $86,000 on a hunting trip in England. News of this spending spree came just days after AIG received an additional $37.8 billion loan from the Federal Reserve, on top of a previous $85 billion emergency loan given to them the month before. On November 10, 2008, ABC News reported that mere days before renegotiating another bailout with the US Government for $40 billion, AIG spent $343,000 on a trip to a lavish resort in Phoenix, Arizona.
On March 2, 2009, AIG reported a fourth quarter loss of $99.29 billion: the largest quarterly loss in corporate history.
This announcement sent shock waves throughout the world’s financial markets; the FTSE100, DAX and Nikkei all dropped sharply. The Dow fell to below 7000 points, a twelve-year low. The same day, Reuters reported that the Treasury Department had anticipated ‘extremely high’ losses to the global economy if AIG were to collapse. The Times also reported on March 2nd that the Treasury Department had suggested that it was willing to continue investing in AIG to ensure it does not fail.
The real story behind AIG’s failure is two-fold. The initial collapse was due to greed associated with CDS. But the reason for AIG’s continuing financial woes is this: AIG refuses to alter its self-destructive course. AIG’s role on the world’s economic stage hasn’t been exaggerated. The simple fact is that if AIG doesn’t set the example for other corporations, this recession will take a nasty turn. If corporate greed is left unchecked, we may be closer to the next Great Depression than we thought.
