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Case Title:

AIG, A Meltdown Victim: Is Federal Bailout the Solution?

Publication Year : 2010

Authors: R Ganesh Ram and S Gollapalli

Industry: Banking, Insurance and Financial Services

Region:USA

Case Code: GBE0079IRC

Teaching Note: Not Available

Structured Assignment: Not Available

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Abstract:
American International Group (AIG), one of the stellar insurance companies of the US, saw its fortunes slide downhill after it reported consecutive quarterly losses on account of sub-prime mortgage security exposure in the form of credit default swaps. It had to seek a huge federal bail out package to meet its mounting losses, which inexorably led to a ratings downgrade and loss of confidence, raising questions as to whether it would be able to honour its payment obligations. The case reflects a collective failure of corporate leadership and risk management systems. It also focuses on the consequences that arose when a business digressed from its core business into unknown, exotic lines of business without understanding the risks, and without adequate risk management systems in place. The case discusses the leadership travails at AIG, the remedies which were adopted, and the difficulties faced in managing such a huge and complicated organisation.

Pedagogical Objectives:

  • To the organisational make up of AIG as a holding company of numerous subsidiary companies venturing into innumerable insurance products and services.
  • To mismanagement at leadership level and the lack of deftness to understand and handle issues relating to sub-prime mortgages.
  • To the consequences of deviating from the core business of underwriting insurance.
  • To failure to establish adequate risk management mechanisms.

Keywords : Core business, Leadership, Insurance policies, Financial services, American International Group financial products (AIGFP),Property / casualty industry, Credit rating, Bail out, Financial crisis, Mortgage backed assets, Federal Reserve, Credit default swaps, Credit derivatives, Risk management, Corporate governance

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