American International Group, Inc. (AIG)

was the world’s largest insurance company with major offices in New York, London, Paris, and Hong Kong. From 2005 to 2008, the company had a series of accounting problems. First, it was convicted of fraudulent financial reporting and then of reporting mammoth unrealized losses that led to the company being taken over by the government. Throughout this period, it went through four CEOs.

On June 6, 2005, the SEC laid charges against executives at AIG and General Re alleging that they committed securities fraud by engaging in two reinsurance sham transactions that artificially increased the loss reserves of AIG by

\($500\) million, thereby making the financial results of AIG look better than they were in the fourth quarter of 2000 and the first quarter of 2001. According to the SEC,

“The transactions were initiated by AIG to quell criticism by analysts concerning a reduction in the company’s loss reserves in the third quarter of 2000.”1 Billionaire Warren Buffet, who owned General Re, was not involved in the SEC suit, but Maurice Greenberg, the then CEO of AIG, was identified as an unindicted coconspirator who was aware of the sham transactions.2 Afterward, Greenberg was pressured to leave the company........

Questions:-

1. The argument is that M2M accounting caused AIG to record huge unrealized losses. These losses led to a downgrade in the quality of AIG stock. The downgrade and frozen credit markets led to eventual bailout.
So, do you agree that the accounting rules contributed to AIG’s demise?
2. The government said that AIG was “too big to fail.” It was concerned that if AIG declared bankruptcy, then individuals holding personal insurance as well as other investments would have no insurance and would be in danger as the financial and liquidity crisis deepened. But many felt that the federal government should not be investing in publicly traded companies. There is risk in the marketplace, and one such risk is that occasionally businesses go bankrupt.
Should the federal government have bailed out AIG, especially when it had not rescued Lehman Brothers and had let Merrill Lynch be taken over by Bank of America?