AIG and the 2008 financial collapse

AIG and the 2008 Financial Collapse
Name:
Institution:
Date:
Assessments of the financial crisis began in August 2007. Most of these assessments identify the sources of the global financial crisis as poor control of risks, excessive leverage, and an almost willful blindness to the bubble- like conditions within the housing market CITATION Gre08 \l 1033 (Grey Court, 2008).
Since 2007, sentiments have been that the financial crisis in which the global economy has been immersed in is an ethical crisis. Evidence that originates from studies of the behavior of agents who were responsible for decision making leading to the crisis reveals tremendous incidences of unethical mistakes CITATION Arg12 \l 1033 (Argandoña, 2012). Early explanations were of the idea that most scandals that led to the financial crisis were due to a few individuals. However, recent research revealed that it is not a few individuals who engage in unethical practices, but almost every individual is susceptible to forces that result into questionable decision making CITATION DeC10 \l 1033 (De Cremer, Van Dick, Tenbrunsel, Pillutla, & Murnigha, 2010).
Most individuals and organizations in the world of business are aware of the range of behaviors that are unacceptable in the work and marketplace. In addition, these business individuals are aware of the ethical and appropriate rules of decision making and moral behaviors including their promotion. However, decisions and behaviors that are unethical and irresponsible still emerge CITATION DeC10 \l 1033 (De Cremer, Van Dick, Tenbrunsel, Pillutla, & Murnigha, 2010).
Ethical crisis due to moral errors provide a clear explanation of why economic and political failures lead to crisis. The global economic crisis is often presented as a crisis of leadership or governance in various organizations CITATION Arg12 \l 1033 (Argandoña, 2012). For example, cases of bad governance and lack of professional competence from directors, senior managers and analysts in organizations. The role of asset analysis, valuation and buying or selling decisions, were entrusted to young professionals with minimal experience. They utilized complex models and based them on very simplistic assumptions and received no criticism as there was a lack of better models CITATION Arg12 \l 1033 (Argandoña, 2012).
The superiors here did not comprehend their subordinates' approaches and exercised inadequate oversight. That is, there was no understanding of mechanisms of structured products to be combined with economic knowledge to contextualize them and management skills to run organizations that marketed them CITATION Arg12 \l 1033 (Argandoña, 2012). Such failures in the financial crisis manifested mainly in risk analysis and management that resulted to key personnel in almost all major financial institutions taking excessive risks.
Several reasons related to organizational ethics have been attributed to the above. For example, financial institutions established rigorous mechanisms that they used to define and monitor risks. However, these were based on excessively optimistic assumptions based on the notion that catastrophic events were unlikely to occur CITATION Arg12 \l 1033 (Argandoña, 2012). Mechanisms for risk portfolio coverage were based on the fact that in the past decades, they were stable and also that the risks of assets were independent of each other which were later proven wrong during the financial crisis. Such assumptions resulted to an illusion that the risk had been mitigated from institutions' portfolios by the Credit Default Swaps (CDS), disregarding the fact that risk was introduced in new ways CITATION Arg12 \l 1033 (Argandoña, 2012). Organizations, therefore, created huge public offices for supervision and control, however, these were acting locally, therefore, there was no systemic risk and eliminated mechanisms and institutions they had established to monitor its effects CITATION Arg12 \l 1033 (Argandoña, 2012).
The perverse incentives in the management of financial institutions led to the financial crisis. Incentives should promote behaviors that achieve desired results. However, the same incentive when poorly managed can result into unwanted results. Unethical behaviors in the 2007-08 global financial crises are related to existence of perverse incentives CITATION Arg12 \l 1033 (Argandoña, 2012). For example, attempts to align the interests of managers and analysts with the shareholders led to compensation systems that emphasized short-term results that resulted to undesirable effects, for example, taking excessive risks and manipulating financial results or the price of stocks CITATION Arg12 \l 1033 (Argandoña, 2012).
Apart from the above unethical practices on the part of organizations, the financial crisis comprised of other ethical problems that include; regulatory arbitrage that involves moving operations to other countries possessing lax controls or changes its nature of operations to avoid regulations CITATION Arg12 \l 1033 (Argandoña, 2012). Lack of transparency also exists within organizations that may be in various forms such as opacity of operations or concealing of information. The regulatory aspect also failed due to certain changes such as abolition of the Glass Steagall Act in the United States laws that separated commercial banking activity and investment activity. As much as such these technical problems, the involvement of a human factor in decision making bring in an ethical dimension CITATION Arg12 \l 1033 (Argandoña, 2012).
The importance of ethical standards in financial markets rests on the purpose of the financial institutions that operate using the money of their customers. The financial crisis had a significant economic implication globally, but it also revealed a considerable lack of moral values within the financial organizations, for example, the American Insurance Group (AIG) CITATION Bel13 \l 1033 (Belás, 2013). The crisis also led to a fundamental shift in public opinions in regards to financial institutions and piled a lot of pressure on the application of moral principles within these institutions CITATION Bel13 \l 1033 (Belás, 2013).
The cause of the global financial crisis originated from the stock market (dot-com bubble) and the confidence crisis that resulted from World Trade Centre Att...