‘Legacy is RP’s Version of the AIG mess’

The Fact of the Case

AIG’s played the role in the corporate culture is to be an insurance company that are educated
risk takers which utilizes models to determine how much insurance it can sell to insurers and its
pay-out. Aside that the AIG’s played such role, the said insurance company end up with its
downfall when AIG started the credit default swaps which are financial products that
transfers credit exposure of fixed income products between parties—which also equals to one
single credit default swap can be valued at hundreds of millions of dollars. Moreover, AIG did
also encounter its downfall when it happens to manipulate its financial statements, pays its
employees and other executives into two or three folds more than the irregular compensation in
order to stay due to such financial crisis. Thus, AIG’s corporate culture was more financially
complicated and complex.
With regards to the AIG’s reckless and failed assess system risk of counterparties of not paying
their obligations, insuring their insurers to invest higher swap defaults with risky loans, paying
employees three folds more than their regular compensation in order to hold the company, lacked
of transparency, action that withhold AIG stakeholders’ decisions and other AIG executives
ethical misconduct. A strong ethics programs can help AIG’s actions to be more transparent,
honest, and accountable towards their current and futures corporate culture, subsequently, since
AIG have difficulties of gaining back their insurers to invest, I believe, ethical conduct and
practices is a must—to gain back both its company’s corporate culture and the trust of its
stakeholder & consumers. Thus, the stronger ethics program can help the AIG’s ethical action for
its current & future corporate culture.

The problem of the Case

The key reason that the regulators didn’t notice this problem because of AIG FPs “regulatory
arbitrage” The root cause of AIG’s problem-CDS was as OTC product which was much less
regulated with no capital and margin requirements. Moreover, AIG also set up the major
financial services in London which is unregulated. As CDS was an OTC derivatives not an
insurance product, it was regulated by OTS which is a weaker regulator. The state insurance
supervisors were not able to regulate the CDS products in that manner. However, as OTS was in
charge of regulating AIG Financial Services and not to focus to on AIG FP, which was only
uninsured subsidiary of AIG, ass such they don’t have any authority over AIG FP. AIG FP was
exploiting this regulation gap to avoid any regulation from the authorities.
Alternative Course of Action with Explanation
The Alternative Course of Action is to develop interventions, first of all, AIG should not set up
AIG FP’s structure as a hedge fund which is to speculate profits. It makes the employees too
aggressive in obtaining short-term return and neglecting potential risk for AIG. Secondly, AIG
should not exploit the regulation gap by setting up AIG FP to escape from being regulated. And
there should be more internal risk management for AIG’s financial services. Moreover, AIG in
the beginning should not be underwriting systematic risks, like the risk of default of mortgages,
which has expose AIG to the systematic risks of the financial market. As AIG use models to
price the OTC CDS, they should consider more extreme conditions in its models and model all
the possible conditions instead of neglecting certain extreme conditions. AIG should also
conduct stress test to make sure the extreme conditions are in a controllable range. And lastly if
they could have been financially transparent, assess low-risk to its systems, and create both high
and low-risk incentives that conglomerates their insurer’s assets, and did not recklessly
upgrade just to contract what is left in the company that affects their ethical conduct, I
believe AIG could have prevent its failure and bailout by doing such.

Conclusion
Therefore I conclude that AIG should receive a government bailout, as bailing out AIG is a key
act to stabilize the financial market during the crisis. If AIG was not bailed out, it might cause
more severe consequences for all the companies that are insured by AIG all over the world. The
people and business insured by AIG are indirectly protected by Fed’s bailout act. Bailing out
AIG could help to take some of the CDS underwritten by AIG out of the market and reduce the
overall risk in the financial market at that time.

Submitted by: Hazel B. Pajes BSBA 1

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