When accounting problems at American International Group surfaced last winter, it looked like a small matter next to the corporation-busting scandals of the Enron era. Even after AIG issued a statement March 30 detailing the issues, it said only $1.77 billion in shareholder value was threatened -- not so much for a multinational company then valued at more than $81 billion.
But AIG directors acted as if the company's very survival was at stake, removing Maurice Greenberg as CEO and later forcing him to step down as chairman. According to press reports, the tipping point came when directors and regulators learned that documents may have been removed from an AIG building or destroyed. New York Attorney General Eliot Spitzer then threatened criminal charges against AIG itself. No major financial firm had survived such a blow.
But there were other problems. The stock price was plummeting as investors worried about what else would be uncovered, how the management purge would affect the future, and whether a tainted AIG would lose customers.
The heart of the problem: No one can be sure how big the scandal will grow, because it involves business relationships, insurance products and accounting practices so arcane that few people understand them -- including a controversial product known as "finite insurance." "This is an obscure product that seems to have been used in ways other than what it was intended for," says Stephen H. Shore, professor of insurance and risk management at Wharton.
The investigation began last year when Spitzer's office started to look at practices about which most outside the industry have little or no knowledge. At issue is a deal between AIG and General Re, a reinsurer owned by Warren Buffett's Berkshire Hathaway. Investigators are looking at whether the deal was used to improperly bolster AIG's balance sheet in order to shore up the company's stock price.
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