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AIG Sends CEO Packing


Insurance giant hopes to reverse fortune with management shakeup.

Reeling from huge losses in its financial products division, a federal inquiry over questionable accounting and a barrage of angry shareholders, American International Group (AIG) is the latest big financial services firm to shake up its top brass.

The Wall Street Journal reported over the weekend that AIG's board of directors forced out CEO Martin Sullivan, replacing him with its chairman, Robert Willumstad. Sullivan had been under pressure for months ater unexpected writedowns and faltering shareholder confidence overwhelmed the insurance giant.

The company joins a dubious group: Citigroup (C), Merrill Lynch (MER), Bear Stearns, Wachovia (WB) have all sent their chief executives packing since the credit crisis began 12 months ago.

Late last year, AIG assured investors its balance sheet was safe and that its investments were sound and well-hedged. Months later, the firm announced massive losses and raised $20 billion in fresh capital. Shares plunged and now hover at levels not seen since 1998.

Professor Shedlock notes that, according to the Financial Times, AIG had written $78 billion in credit default swaps on ill-fated collateralized debt obligations (CDOs). Translated into English, AIG was on the hook if the CDOs went sour. They did, it was.

AIG's largest shareholder, Hank Greenberg, who ran the company for four decades, led a group of angry investors in slamming management for its missteps. Regulators joined in, alleging the company misrepresented the value of various mortgage-linked assets. The board succumbed to the pressure, ousting Sullivan at a special board meeting yesterday in New York.

Willumstad now has the herculean task of repairing the massively complex company Greenberg engineered from what was once a relatively simple insurance business. According to The Journal, AIG has its fingers in insurance, derivatives, asset management and aircraft leasing. The former Citigroup president and co-founder of private equity firm Brysam Global Partners hopes to draw on a long banking career to turn the firm around.

AIG is emblematic of the far-reaching effects of the credit crunch. The company didn't originate or securitize subprime mortgages, but it played an active role in the shadow banking system. What was once a significant profit center is now a cancerous tumor, destroying the firm's balance sheet from the inside. As we enter the second year of the ongoing crisis, we can expect the fallout to extend outward, ensnaring companies further and further from its epicenter.
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