Case_37_AIGTN_rev - Teaching Note: Case 37 American...

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Teaching Note: Case 37 – American International Group and the Bonus Fiasco Case Objectives 1. To help students understand how the ethical orientation of leadership is a key factor in promoting ethical behavior. 2. To help students understand the role of strategic control mechanisms in aligning the interests of all organizational stakeholders. 3. To encourage discussion of the effectiveness of external regulations in dealing with issues of ethical corporate behavior. See the table below to determine where to use this case: Chapter Use Key Concepts Additional Readings or Exercises 4: Intellectual Assets Intellectual, human and social capital 9: Strategic Control & Governance Strategic control; traditional vs. contemporary control system; informational vs. behavioral control; corporate governance mechanisms; stakeholder management; external governance control mechanisms NOTE – see news stories, web links and video links embedded in this section. 11: Strategic Leadership Leadership; ethical orientation; integrity- based vs. compliance-based ethics NOTE – see news stories, web links and video links embedded in this section. See also the Case video on DVD. Case Synopsis In 2008 the financial crisis began with sharply declining housing prices, leading to an escalation of a broader economic crisis involving banks and investment banking firms. This impacted both regulated and unregulated industries, including insurance companies. AIG was an insurance company trading in an unregulated industry using Credit Default Swaps (CDS). A CDS is insurance on a mortgage-backed security, providing the difference of loss on the security. When the housing market tumbled, AIG had to pay out on the CDS since the value of the house fell below the face value on the original mortgage. To keep AIG from going bankrupt, the U.S. government provided an $85 billion loan to cover initial CDS loses. AIG received a second loan of $37.8 billion later in 2008. After receiving this government bailout money, AIG then made a series of publicly embarrassing mistakes by treating employees to a lavish retreat in California and an extravagant trip to England. AIG then paid $218 million in bonuses to its financial services division employees in March 2009 leading to a public outcry. While the media revisited the poorly managed Federal monies, several State's Attorneys began to mobilize
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to protect its citizens, and the U.S. House moved to limit the bonuses through a 90% tax on the distributions. Edward M. Liddy, AIG's chief executive, caved under the questioning of the House, suggesting that the tax was appropriate. Jake DeSantis, an AIG financial services vice president, provided a different perspective. Only a small portion of financial services managers had worked with the dysfunctional
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Case_37_AIGTN_rev - Teaching Note: Case 37 American...

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