American International Group, Inc.—The Financial Crisis

Abstract

The case details the history of AIG, its organizational structure, and involvement in the market for credit default swaps and the financial crisis. Edward Liddy has been appointed by Treasury Secretary Henry Paulson as CEO and chairman of AIG during the government's bailout of the insurance giant. He is preparing to address the U.S. House of Representatives' Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises to provide testimony related to AIG's payment of $165 million in bonuses to several of its managers at the same time the government had been injecting billions of dollars into the company to help keep it afloat. Students are asked to reflect on the bonus payments, what factors in the organization might have contributed to the issues AIG faced in the financial crisis, and how to ensure the company did not face similar issues again in the future. Excerpt UVA-C-2322 June 7, 2011 AMERICAN INTERNATIONAL GROUP, INC.—THE FINANCIAL CRISIS Edward Liddy was preparing to address the U.S. House of Representatives' Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. It was March 2009, just six months after Liddy was appointed by Treasury Secretary Henry Paulson as CEO and Chairman of American International Group, Inc. (AIG), during the government's bailout of the insurance giant. He was being asked to provide testimony related to AIG's payment of $ 165 million in bonuses to several of its managers at the same time the government had been injecting billions of dollars into the company to help keep it afloat. For an annual salary of $ 1 and no bonus, he had returned from retirement to lead the efforts in restructuring the company and paying back the government. Although he was receiving equity compensation, it remained to be seen if it would be worth anything by the time this was over. Regardless, Liddy was now in charge of the company and had to assume responsibility for the employee bonus payments. He was facing an emotional yet powerful committee and needed to be prepared. As he both reflected on what had happened and pondered his upcoming testimony, he undoubtedly considered several questions. How could a company such as AIG find itself in this position? It was unable to remain solvent on its own and had received billions of dollars in aid from the U.S. government as a result. The head of its Financial Products Group had been cited as one of the people most responsible for the recent financial crisis. And now, it was the subject of widespread publicity and heavy scrutiny related to the payment of millions of dollars in bonuses at the same time. How could this have been prevented? Where did things go wrong, and how could the company ensure it did not end up in a similar situation again in the future? . . .