Finance and Accounting

American International Group

Project description
Aim: Understand the ethics behind insurance business.
Recommended layout of your work is given in the following:
1- Cover page.
2- Table of contents.
3- Introduction.
4- Analysis of evaluation.
5- Recommendations.
6- Conclusion.
7- References.

Maximum plagiarism allowed is 20%.
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Added on 30.11.2014 09:10
Rubric to be followed:
– Describes perfectly the dilemma in detail having gathered pertinent facts. Ascertains exactly what must be decided by considering the consequences.
– Determines with precision who should be involved in the decision making process and thoroughly analyzes the viewpoints of the stakeholders.
– Prescribe a large number of alternatives and evaluates consciously each according to their relative importance to all stakeholders.
– Formulates and recommend a rational and practical implementation plan that thoroughly describes of the potential effects of the chosen action.

American International Group (AIG) is the largest insurance company in the world, which went insolvent and was rescued by the US government during the global financial crisis. AIG- Financial Products division (AIG-FP) sold large quantities of derivatives called Credit Default Swaps (CDS). For American and international investors (mainly non-individuals) who purchased the CDS on Collateralized Debt Obligations (CDO’s) – which were originally sold by investments banks such as Goldman Sachs, Lehman brothers, Morgan Stanley, and others – CDS works like an insurance policy, any investor who purchased a CDS from AIG, paid AIG a quarterly premium. In return, if the CDO’s fail to pay off or lose their value, AIG promise to cover the investors for their losses by paying the periodical return or even buying the CDO’s. Not only the owners of CDS can pay a premium to insure their CDOs, but also any speculator can do the same with AIG although he never owns any CDOs. AIG didn’t have to put aside any capital to cover for the potential losses; instead, AIG paid its employees and insurance salesmen large amount of bonuses once they find any investor who is willing to pay the premium. AIG risk management division and CEO’s were all aware of the risk involved with underwriting these policies.

Answer the following questions:
1- Discuss how and what motivated AIG to be part of the derivatives business.
2- What are (if existed) the ethical and unethical sides of AIG’s derivative business?
3- Discuss whether the AIG management team was aware of the level of insolvency risk.
4- What are the outcomes of the AIG’s business practices on the company and its shareholders? What alternatives and solutions you would suggest to prevent this from happening?

To understand the case read more at:

http://www.forbes.com/2008/11/15/aig-credit-default-markets-equity-cx_md_1110markets24.html