AIG Case Study Example | Topics and Well Written Essays - 1000 words

AIG - Case Study Example The risk management division at AIG knew very well of the risks they were taking but still they carried on with this unstable, fraudulent yet lucrative opportunity. In the end, the company almost got to the brink of bankruptcy. Greed and negligence led AIG to be a part of the derivative business. The derivatives are risky investments and many wise investors avoid these instruments because of their highly unpredictable nature as well as the loopholes for exploiting them through scams and frauds. This payment comes in the form of collateralized debt obligations (CDOs). Before the crisis began these instruments were in huge demand because they were offering higher returns than other bonds that had the same credit ratings. Therefore, speculators as well as investors heavily purchase these instruments from insurers such as AIG. Before the crisis the US financial market was going through bullish trends and it appeared improbable for bond issuers to go through bankruptcy (Xinzi, 2013). Hence, CDS seemed the most lucrative selling financial tools for collecting premiums. By the end of 2007 the CDS contract grew to about $60 trillion and there was no doubt that when the times were good CDS were generating huge reve nues for AIG (Xinzi, 2013). In addition, many banks and underwriters of CDS covered their short positions in one instrument while staying long in other CDS (Xinzi, 2013). AIG did not play on both sides of the trade (Xinzi, 2013). The unethical side of AIGs derivative business was not to fully cover the insurance it was providing. When the risk management is underwriting the risks they should keep track of the companys resources in case they have to pay the claim. The company was not oblivion about the risky nature of the securities it was insuring. The management only considered the quarterly premium that kept coming in. In other words AIG failed