AIG Case Study: Forensic Accounting and Financial Fraud Analysis

This report provides an executive summary of the AIG financial crisis, focusing on the investment strategies and fraudulent activities that led to its downfall. It details AIG's involvement in the insurance of mortgage bonds, the collateral risks associated with its synthetic investments, and the fraud perpetrated by the company, including misleading transactions and inflated reserves. The report outlines the detection of fraud, the subsequent investigations, and the impact and fallout of the crisis, including the government bailout. It also highlights key lessons learned, such as the importance of transparency and the role of government intervention, and concludes with recommendations for preventing similar financial disasters. The analysis covers the impact of credit default swaps, collateralized debt obligations, and the organization's handling of subprime loans. It emphasizes the importance of understanding the financial instruments and strategies employed by AIG and their contribution to the global financial crisis.

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R S C ACCFO EN I OUNTING

AIG
Executive Summary
The major information in relation to the investment strategy used by the organization was
bigoted by the analogy of insurance. In simple language, it can be conveyed that the
organization was trying to ensure mortgage bonds which were backed by banks. In this case
study the select of Rio Tinto has been and matters pertaining to financial analysis has been
worked.
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Contents
ntroductionI .............................................................................................................................................4
ackgroundB ............................................................................................................................................4
raud perpetratedF .................................................................................................................................5
 he Collateral riskT ..........................................................................................................................5
 igh fl yingH ........................................................................................................................................5
Detection of fraud...................................................................................................................................5
nvestigation and aftermathI .........................................................................................................................6
mpact alloutI & F ....................................................................................................................................7
essons learnedL .....................................................................................................................................7
Recommendations...................................................................................................................................8
References.............................................................................................................................................9
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Introduction
The Organisation was an unsophisticated and passive player in the market and was also said
to ensure the financial products which are created by it (Angelides, 2011). The Organisation
was observed to be involved in these kinds of situations from the starting of the contract to
the scrutinizing of assets. It was conducting business on the assets backed with securities and
further, it was also trying to by the securities. The financial professionals of the organizations
also helped them to get deals insured by underwriters. This made the organization active
participant in the market with a risky strategy for investing in housing Markets and
infrastructure projects.
Background
AIG as a buyer of risk
The financial products that were provided by the organization were treated as synthetic
buyers of a variety of assets were backed with securities including the mortgages and
infrastructure linked with bonds in the Wall Street. The farm was worker trying to sell credit
default swaps that can perform for the organization in the much ordinary manner just like the
bond investors (Angelides, 2011). The Organisation was going to earn revenue as long as the
insurance bonds were performing and Buyers were making regular payments of interest and
principal that is to be received by the bondholder. The Organisation was investing in bonds
without actually buying them which have helped it to perform as a very essential financial
product without having to make any kind of down payments (Shelp, 2006).
After a clear analysis, it was observed c. A major part of the organizations capital was
operating in order to regulate insurance business which states that despite having a
complicated balance sheet, the organization code deploys investment assets in very few ways.
the strategy of ensuring bonds rather than buying them help the organization to get into a
position where it can earn revenue from the mortgages without making any kind of down
payment upfront for making the investment (Shelp, 2006). Also in relation to this, the
organization received regular fees from the buyer of the swaps. Hence, it can be stated that
the organization was receiving money for making its synthetic investments in asset-backed
bonds.
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Fraud perpetrated
 The Collateral risk
The strategy of the organization to invest in the synthetic investments in bonds was very risky
for the business. Therefore, when the value of bonds declined the Organisation was having
the contractual obligation to make the related parties aware of it. Of all the points insured by
the company, there were many which were relatively illiquid because of which the judgment
calls were not collateral and were also important to be posted.
Some of the banks that indulged in business with the organization and had made synthetic
deals with it were hesitating to demand any kind of collateral because of the large portfolios
of mortgage-backed bonds. If they forced the organization to decline in value, they will
default in order to undertake and write down the value of similar bonds they were holding at
the face value (Ng & Mollenkamp, 2009). There was a huge self-deceiving cycle observed
between the organization and its customer for the value of insured assets during the year
2007.
 High flying
The major centre of the collapse of the organization was an office in London. A separate
division of the company generally stated as AIG financial products were said to lead the
pillar of American capitalism to a downfall. It has been observed in the previous year that this
division of the organization was selling insurance against Investments which were not
appropriate and were having protection against the interest rate changes or any other
unforeseen economic problem that the company may face and future (Davies, 2010). Later in
the 90’s, the organization found new methods that would have helped it to earn profits.
Detection of fraud
The Attorney General of the insurance department and SEC started investigating a series of
fraudulent transactions that were made by the organization and its senior officers in order to
earn huge profits. These transactions included the transfer of loss results from General Re
Corporation to AIG which helped to boost the public view of the organizations underwriting
performance for the year 2000 and early 2001 (Morgensen, 2008).
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It was on May 26th, 2005 that the insurance Superintendent and the Attorney General stated
that the organization was using illegal methods and making several violations of the New
York Martin Act and other state laws while conducting business like:
• The General Re transactions and other efforts that were made by the organization to
inflate the reserves.
• Transactions that are designed and fabricated in order to hide the underwriting process by
converting them into capital losses.
• Misleading the insurance department of New York about Offshore transactions.
• Making false reports of the worker’s compensation premiums.
A new financial tool commonly named as Collateralized debt obligation was becoming
famous among the large investment banks and Institutions which will help them to earn high
revenues. This financial tool helped to group various types of beds which will turn their risky
nature to safe with the help of the creation of bundles (Insurance Journa, 2006). There are
various types of beds commonly called tranches. Many nights Institutions and investors who
were having mortgaged-backed securities used the tool in order to group the subprime loans.
That particular sector of the organization was presented with an option to ensure the financial
products with the help of credit default swap against the CDO. The chances of pain the
insurance were very unlikely because of which the CDO insurance plan was successful in
nature. It was stated that in about 5 years the organization would have earned revenue
amounting to $737million to $3 billion which constitutes 17.5% of the entire total of the
company (Davidson, 2008).
Investigation and aftermath
A huge part of the insured CDO’s was kept in the form of bundled mortgage and comprised
of subprime loans having low rated tranches. The Organisation was having a belief that
whatever was insured by it would never have to be covered and even if there's a risk for
covering insurance, it would be in an insignificant amount that would be very small in front
of the capital. But, when it was observed that the risk levels are incredibly high, the
Organisation was to pay out on what it promised to cover (Davidson, 2008). This situation
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made it really hard for the organization to survive because of the collateral attacks on the
revenue streams. The decision of the organization was set to enquire losses over 25 million
dollars which have also affected the stock price of the organization drastically.
The accounting problems present in this division were also one of the major factors for the
decline. This incident not only decreases the credit rating of the organization but also increase
the worry of the organization in relation to the financial situation it was facing. After this
incident, the organization was in danger of insolvency and in order to prevent that, the help of
the Federal government was needed.
Impact & Fallout
The organization became one of the biggest sellers of the credit default swaps when it was
attempting to increase the revenue margin. These swaps also had to ensure that the insurance
for backed by the assets that would have helped the corporate debts and mortgages. Also, it
was clear that if the organization went bankrupt it would trigger bankruptcy of many other
organizations that have helped it to bring in these swaps (Morgensen, 2008).
The Organisation was having a very large business that could affect the global economy if it
went bankrupt. This can be clearly understood after taking an example of the $3. 6 trillion
worth money, market fund industry invested in the debt and security sector (Morgensen,
2008). Also, most of the mutual funds were owned by AIG stock and many financial
Institutions around the world were backed by the organization's debt (Bauer & Hann, 2010).
Lessons learned
The government has enormous financial power: in today's business world it has been
observed that the investors have started to buy distressed companies at a discount which can
be turned profitable by making serial changes in it. But, in the case of AIG, there was no
investor who was having the capacity aura resources to take over the organization. Hence, the
government stepped in (Boyd & Rogy7, 2010) The major power exercise by the government
is not the best resources for the ability to print money but it is the power of the fact that it can
hold assets as long as necessary. Hence, this was one of the most important factors that
allowed the organization to sell the Assets and revamp its finances and stabilize itself. One of
the most valuable Assets of the organization was considered to be sold in the year 2008 for
the desperate need of cash. But this time was horrible for selling it’s because of the fact that
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no buyer would give a suitable amount of price to a distressed seller who is in need of cash
(NS & Mollenkamp, 2009).
The government helps the organization to wait for favourable conditions and later the
organization agreed to sell the aircraft unit to a Chinese outfit for a $5.5 billion deal. The
government was also able to make a profit which also helped to improve the economy.
Hence, it can also be stated that the government is the most effective buyer for the last resort
with no net loss of taxpayers’ money (Davidson, 2008).
Transparency is vital: one of the most controversial events in the bailout of the organization
was the taxpayer’s fund of more than $62 billion that went to the big banks which were
involved in contacts with the organization. The transactions were very complicated and
would have led to the bankruptcy of the organization in a fraction of seconds. The
government was also not having the courtesy to create a horrible impression of funding the
Wall Street with the help of taxpayers’ money.
Recommendations
The bailout of the firm was not carried out without any kind of controversy. Several criticized
the appropriateness of government to use the taxpayer’s money for investment in Wall Street.
There were also people who were stating that the taxpayers will be benefited on the
government shares of the company's equity. No matter what, the involvement of the
organization in the financial crisis was one of the major factors that may have disturbed the
world's economy.
Hence, the rationale for these Redemptions would have been logical and have helped to
improve the integrity of the financial systems and also the sanctity of the legal contracts of
the organization. This was one of the worst methods to invest the taxpayer’s dollar. Also, the
fact that there was no public notice generated by the government created an outrage among
the people. Any such further bailouts will force the congressional hearings to be carried out
and the politicians will be liable to convince the voters and explain them everything in this
regard.
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References
Angelides, P. (2011). Financial Crisis Inquiry Report. DIANE Publishing.
Boyd & Roddy (2011). Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide. Hoboken,
NJ: Wiley. ISBN 978-0-470-88980-0.
Bauer, R & Hann, D. (2010). Corporate environmental management and credit risk.
Maastricht University.
Davidson, A. (2008). How AIG fell apart. Retrieved from:
https://www.reuters.com/article/us-how-aig-fell-apart-idUSMAR85972720080918
Davies, P.J. (2010). Learning the lessons of AIG fall. Retrieved from:
https://www.ft.com/content/344df286-e133-11df-90b7-00144feabdc0
Insurance Journa. (2006). IG Settles Fraud, Bid-Rigging and Improper Accounting Charges with SEC. N.Y.
Retrieved from: https://www.insurancejournal.com/news/national/2006/02/09/65212.htm
Morgensen, G. (2008). Behind Insurer's Crisis, Blind Eye to a Web of Risk. Retrieved from:
https://www.nytimes.com/2008/09/28/business/28melt.html
Ng,S & Mollenkamp, C. (2009). Goldman Fueled AIG Gambles. Retrieved from:
https://www.wsj.com/articles/SB10001424052748704201404574590453176996032
Shelp, Ron (2006). Fallen Giant: The Amazing Story of Hank Greenberg and the History of
AIG. Hoboken, NJ: Wiley. ISBN 0-471-91696-X.
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