Aig bailout summary

What unethical business practices have you personally encountered?

What steps would you take as leader of the organization to prevent this behavior?

Please read the American International Group (AIG) and the Bonus Fiasco (Case 6) in the textbook as we discuss this subject.

Case 6: American International Group and the Bonus Fiasco*
After two decades of rapid growth and expansion in an environment of very little regulatory oversight and unbounded optimism about the power of the markets to create limitless wealth, the U.S. financial system came crashing down in the second half of 2008. What started as a sudden decline in housing prices after years of speculative growth very soon snowballed into a full-fledged financial crisis. Major banking companies such as Citicorp and Bank of America found their equity base wiped out by loan losses. Investment banking firms such as Merrill Lynch and Bear Stearns, which operate largely outside the regulatory framework of the Federal Reserve, were in even bigger trouble because they were highly leveraged. Fearing a complete financial meltdown, Henry Paulson, secretary of the Treasury in the Bush administration, announced a bailout package of $750 billion on September 16, 2008, to restore confidence in the banks and to jump-start the credit markets.

What exactly does the government do in a bailout? A bailout can take many forms. For example, the government can buy stock in a troubled institution, thus shoring up its equity base.

The very fact that the government has an equity stake may be taken as an implicit government guarantee by creditors, suppliers, and clients because concerns about solvency and ability to stay in business are assuaged. Alternatively, the government can extend a loan to the institution, to be paid back when the company becomes profitable again. Another approach is for the government to buy preferred stock in the company. In this case the government is entitled to a fair return on the investment. Finally, the government can buy distressed assets of the institution, thereby helping it to clean up its balance sheet. Irrespective of the form of the bailout, all bailouts represent a temporary or, in some cases, long-term commitment of public money to private companies.