The Ethics of AIG’s Commission Sales
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American International Group (AIG) had been a big player in the financial crisis of 2007-2009. The company had been selling credit default swaps and making a commission on the sales (Brooks & Dunn, 2018). AIG had not expected the market to turn south in subprime lending as quickly and devastatingly as it did. The result was disastrous for the global economy as many were left holding toxic debt.
The credit default swaps (CDSs) were like insurance on the bundles of home loans sold to investors. Investors would buy the mortgages for the fixed return and then savvy investors would buy insurance on the investments (the CDSs) in case the mortgages were not repaid. The bundles of loans were supposedly mortgages of home owners who were unlikely to default, according to their AAA-rating. However, many of the bundles consisted of tranches that were full of sub-prime loans with a high default risk. Investors who saw this immediately starting buying up CDSs anticipating a huge default blow-up.
AIG was mostly oblivious to this and did not mind collecting the commission sales on the CDSs. As far as it was concerned, it was selling insurance on something that would never be needed. Then the bottom fell out and suddenly a flood of defaults came in, starting right with the sub-prime mortgages that filled up all the bundles of loans that were being sold. Those with insurance now wanted to sell back the CDSs but just at a higher price. This in essence was their “big short” play, which Lewis (2010) describes in detail in his book by the same name.
The biggest buyer of AIG’s CDSs was none other than Goldman Sachs—and Goldman wanted to make sure it got paid, so that is why AIG got a bail-out from the government: Goldman always has friends in high places—like Henry Paulson who was former CEO of Goldman and served as U.S. Treasury Secretary at the time of the economic crisis—so he made sure to see to it that AIG could make good on its CDSs sold to Goldman (Taibbi, 2010).
AIG’s sales agents didn’t mind one way or another—they got to...
References
Brooks, L. & Dunn, P. (2018). Business & Professional Ethics for Directors, Executives & Accountants. Cengage.
Huston, J. H., & Spencer, R. W. (2018). Quantitative easing and asset bubbles. Applied Economics Letters, 25(6), 369-374.
Lewis, M. (2010). The Big Short. NY: W. W. Norton.
StatelessLiberty. (2013). Stagflation was not caused by Cost-Push factors—Milton Friedman. Retrieved from https://www.youtube.com/watch?v=qQjAbHR40nk
Taibbi, M. (2010). Griftopia. New York, NY: Spiegel & Grau.
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