Friday, August 23, 2019

AIG Ethics Essay Example | Topics and Well Written Essays - 750 words

AIG Ethics - Essay Example The corporate culture of AIG thrived in a highly deregulated global economy, one where speculation has more than eclipsed any real production (Gupta, 2008). â€Å"Furthermore, the banks would "hedge" the tranches, another way of distributing risk, by purchasing credit default swaps (CDSs) sold by companies like AIG and MBIA. The swaps were a form of insurance. This was seen as a way to make tranches more secure and hence higher rated. For instance, say you're Goldman Sachs and you have $10 million in AAA tranches. You go to AIG to insure it, and the company determines that the risk of default is extremely low so the premium is 1 percent. So you pay AIG $100,000 a year and if the tranche defaults, the company pays you $10 million. But CDSs started getting bought and sold all over the world based on perceived risk. The market grew so large that the underlying debt being insured was $45 trillion—nearly the same size as the annual global economy† (Gupta, 2008). While it was n't just AIG that led to the meltdown, AIG was playing in a world where they were expected to subsidize the entire global economy, with insurance payouts in the trillions. Not only could no company possibly pay this insurance debt, but no country could, not immediately. AIG had violated a primary fiduciary responsibility. It wasn't just the amount being insured, though, but the type of debt. $64 billion of its exposure was to sub-prime packages. These packages, being high-risk, were highly sensitive to changes in their value, which meant that AIG could expect volatile explosions in their assets and responsibilities. To be fair to AIG, it was less than fifty people that brought down a company of thousands (Ferrell and Fraedrich, 200

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