[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                 AMERICAN INTERNATIONAL GROUP'S IMPACT
                 ON THE GLOBAL ECONOMY: BEFORE, DURING,
                     AND AFTER FEDERAL INTERVENTION

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                             MARCH 18, 2009

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-15

                 AMERICAN INTERNATIONAL GROUP'S IMPACT

                 ON THE GLOBAL ECONOMY: BEFORE, DURING,

                     AND AFTER FEDERAL INTERVENTION



                 AMERICAN INTERNATIONAL GROUP'S IMPACT
                 ON THE GLOBAL ECONOMY: BEFORE, DURING,
                     AND AFTER FEDERAL INTERVENTION

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 18, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-15



                   U.S. GOVERNMENT PRINTING OFFICE
48-868 PDF                  WASHINGTON : 2009
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 18, 2009...............................................     1
Appendix:
    March 18, 2009...............................................   129

                               WITNESSES
                       Wednesday, March 18, 2009

Ario, Hon. Joel, Insurance Commissioner, Pennsylvania Insurance 
  Department, on behalf of The National Association of Insurance 
  Commissioners..................................................    18
Clark, Rodney, Managing Director, Insurance Ratings, Standard & 
  Poor's Ratings Services LLC (S&P)..............................    22
Liddy, Edward M., Chairman and Chief Executive Officer, American 
  International Group (AIG)......................................    53
Polakoff, Scott M., Acting Director, Office of Thrift Supervision 
  (OTS)..........................................................    17
Williams, Orice M., Director, Financial Markets and Community 
  Investment, United States Government Accountability Office 
  (GAO)..........................................................    20

                                APPENDIX

Prepared statements:
    Bachmann, Hon. Michele.......................................   130
    Carson, Hon. Andre...........................................   132
    Jenkins, Hon. Lynn...........................................   133
    McCarthy, Hon. Carolyn.......................................   134
    Ario, Hon. Joel..............................................   136
    Clark, Rodney................................................   148
    Liddy, Edward M..............................................   157
    Polakoff, Scott M............................................   210
    Williams, Orice M............................................   231

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Letter from Hon. Timothy F. Geithner, Secretary of the 
      Treasury, dated March 17, 2009.............................   254
Garrett, Hon. Scott:
    Excerpt from July 10, 2008, Committee on Financial Services 
      hearing entitled, ``Systemic Risk and the Financial 
      Markets''..................................................   257
Hensarling, Hon. Jeb:
    Article from the Wall Street Journal entitled, ``The Real AIG 
      Outrage,'' dated March 17, 2009............................   261
Liddy, Edward M.:
    Written responses to questions from Chairman Frank and 
      Chairman Kanjorski.........................................   263
    Written responses to questions posed during the hearing 
      (questions are provided directly before responses) by:.....
        Hon. Barney Frank.......................................270-274
        Hon. Michael Castle.....................................275-289
        Hon. Brad Sherman.......................................290-294
        Hon. Ed Royce...........................................295-302
        Hon. Judy Biggert.......................................303-308
        Hon. Michele Bachmann...................................309-311
        Hon. Jackie Speier......................................312-314
        Hon. Mary Jo Kilroy.....................................315-321
        Hon. Carolyn Maloney....................................322-324
        Hon. Alan Grayson.......................................325-328
        Hon. Marcy Kaptur.......................................329-331
        Hon. Joseph Crowley.....................................332-350
        Hon. Elijah Cummings....................................351-359
        Hon. Dennis Moore.......................................360-362
    Written responses to additional questions submitted after the 
      hearing by Hon. Elijah Cummings............................   363
    Written responses to additional questions submitted after the 
      hearing by Hon. Al Green...................................   365
    Written responses to additional questions submitted after the 
      hearing by Hon. Andre Carson...............................   366
    Written responses to additional questions submitted after the 
      hearing by Hon. Keith Ellison..............................   367
    Written responses to additional questions submitted after the 
      hearing by Hon. Marcy Kaptur...............................   369


                     AMERICAN INTERNATIONAL GROUP'S
                     IMPACT ON THE GLOBAL ECONOMY:
                       BEFORE, DURING, AND AFTER
                          FEDERAL INTERVENTION

                              ----------                              


                       Wednesday, March 18, 2009

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Ackerman, 
Sherman, Capuano, Baca, Lynch, Miller of North Carolina, Scott, 
Maloney, Moore of Wisconsin, Hodes, Klein, Perlmutter, 
Donnelly, Carson, Speier, Childers, Wilson, Foster, Minnick, 
Adler, Kilroy, Kosmas, Grayson, Himes, Peters; Garrett, Price, 
Castle, King, Manzullo, Royce, Biggert, Capito, Hensarling, 
Putnam, Barrett, Gerlach, Campbell, Bachmann, McCotter, 
Neugebauer, McCarthy of California, Posey, and Jenkins.
    Ex officio present: Representatives Frank and Bachus.
    Also present: Representatives Waters, Watt, Moore of 
Kansas, Clay, Green, Ellison, Maffei, Lee, Crowley, Cummings, 
and Kaptur.
    The Chairman. [presiding] To start the hearing, I want to 
make an announcement. I do appreciate the restraint shown and 
that nobody tried to blockade Mr. Ackerman this time. But this 
hearing, while it's going to be conducted by Mr. Kanjorski, 
will be conducted in an orderly fashion. There will be no 
disruptions. There will be no heckling.
    If there is, I will ask the police officers to escort any 
disrupter out of here. And if it is unfortunately required, I 
will ask them to press charges if that is justified by the 
degree of disruption. We have an important subject. We are 
going to deal with it in a reasonable way, and I do want to 
instruct everyone that we will not accept interference with the 
process. The process will work best in the public interest if 
it is allowed to proceed in that manner. As I said, Mr. 
Kanjorski will be presiding. But as the chairman of the full 
committee, I just wanted to make that very clear.
    On the other hand, this is not homeroom, and talking is 
permitted now among yourselves until the hearing is started.
    [pause]
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order. I ask unanimous consent that 
the following members have permission to participate in today's 
hearing: Mr. Crowley, Mr. Cummings, and Ms. Kaptur. Pursuant to 
an agreement with the ranking member, opening statements today 
will be limited to 20 minutes on each side. Without objection, 
all members' opening statements will be made a part of the 
record.
    We meet today to scrutinize American International Group, a 
company that has so far gained access to more than $182 billion 
in taxpayer assistance. At this hearing, we will learn more 
about why we needed to save AIG. We will also examine how AIG 
is using the money it has received. Additionally, we will 
explore when AIG expects to repay the American taxpayer in 
full, and with interest.
    Our committee has previously held hearings on the banks 
that have received assistance from the Troubled Assets Relief 
Program (TARP), but I wanted to address AIG's situation 
separately. AIG is unique from other TARP recipients in at 
least two respects. First, it is not a bank. Second, the 
Treasury Department and the Federal Reserve have provided AIG 
with extraordinary assistance, above and beyond any other 
financial institution participating in TARP.
    Without question, today we will engage in a lively and 
energetic debate with our witnesses. Because of the scheduling 
concerns, however, the Treasury Department and the Federal 
Reserve could not accommodate our request to join us today. 
They are now the overseers of AIG, and we need to hear from 
them directly and publicly.
    As a result, I have worked with Chairman Frank to convene a 
full committee hearing on March 24th. I am pleased that 
Treasury Secretary Geithner and Federal Reserve Chairman 
Bernanke will join us at that time to discuss AIG. They have 
much to explain not only to us but also to the American people. 
I look forward to their appearances.
    During our first panel, we will hear from the Office of 
Thrift Supervision, AIG's holding company regulator. We will 
also hear from the Pennsylvania Insurance Commissioner on the 
regulation of AIG's insurance subsidiaries. I expect both of 
them to speak frankly about the failures of the current 
regulatory system in monitoring AIG's regulated and unregulated 
operations. Now is the time for them to accept responsibility, 
not to provide excuses.
    Additionally, the Government Accountability Office is here 
to discuss its study, which Member Bachus and I requested, into 
how AIG is spending the government funds it has received, and 
whether the company might be using this money to undercut 
competition. Standard & Poor's will also discuss how it rates 
AIG and the need for providing ongoing Federal assistance to 
AIG. I look forward to hearing from both of them about these 
important matters.
    Most significantly, we will hear from Mr. Edward Liddy, 
AIG's CEO. Immediately after the government intervened for the 
first time 6 months ago, Mr. Liddy took over the company's 
helm. He assumed a treacherous job, and he has traveled down a 
rocky road since then. This road became considerably more 
difficult to navigate this past weekend when the public learned 
the identity of AIG's counterparties receiving billions of 
dollars of the taxpayers' money.
    Even more troubling, the taxpayers also learned that their 
money helped to cover the million dollar plus retention bonuses 
of executives at the very unit that caused AIG to teeter on the 
brink of collapse. A million dollars is a sizable sum to the 
typical American family earning just $60,000 a year, and a 
million dollars is a lottery prize for anyone who has just lost 
a job.
    Something is seriously out of whack, and AIG needs to fix 
it now. We face the most challenging economy since the Great 
Depression. Many have made personal sacrifices to survive these 
difficult times. AIG and its employees should do the same.
    Moreover, it is regrettable that we have even reached this 
point. When the press first reported about the AIG Financial 
Products retention bonuses in late January, I called Mr. Liddy 
to express my concerns that paying out such sums to the very 
division that engaged in the risky behavior that warranted the 
government's bailout would rightly incite a public outcry.
    My colleague, Joe Crowley, and I had previously worked 
cooperatively with Mr. Liddy to withhold $93.3 million in 
planned deferred compensation distributions. I had hoped that 
AIG might take similar actions again. Unfortunately, my sound 
advice went unheeded, the company hid behind legal 
technicalities, and the public outcry that I predicted 
happened: AIG has become the subject of considerable public 
scorn, and the public's interest in providing ongoing, 
sustainable support to repair our struggling financial system 
has plummeted.
    We will undoubtedly spend much time today discussing these 
retention bonuses and counterparty payments, but I must urge my 
colleagues to focus on the bigger picture, too. We need to ask 
what happened, why it happened, what is happening now, and what 
we can do going forward to prevent similar situations. To 
protect the taxpayers, we must also ensure that AIG acts 
prudently and pays back its borrowed funds promptly. I am 
committing to doing just that.
    We will now hear from the gentleman from New Jersey, 
Ranking Member Garrett.
    Mr. Garrett. And as I say, without my glasses, so. Thank 
you, Mr. Chairman. There has been much outrage expressed this 
week, and rightfully so, from almost all quarters regarding the 
bonuses for employees in AIG's Financial Products Unit.
    But where was the outrage, at least from some quarters, 6 
months ago, when AIG's bailout was hastily crafted and the 
American taxpayer became 80 percent owners of the company? And 
where was the outrage when $40 billion in TARP money was pumped 
into AIG for the benefit of its counterparties last November? 
But we didn't find out about the identities of those 
counterparties until this past weekend.
    And why didn't the Fed, which I understand has known about 
these bonuses for at least a couple of months, raised this 
issue with us earlier? Did it raise this issue with Secretary 
Geithner, who has been called the architect of the AIG bailout, 
and from whom the Fed has been working so closely with the 
ongoing management of AIG's affairs? And why didn't Secretary 
Geithner raise this issue just last week with the President 
when we knew that he was briefed in detail about the bonuses 
from the CEO of AIG? What about the fact that the Fed and the 
Administration still have not outlined an exit strategy from 
this whole situation?
    You know, some of us were expressing concern from the 
original bailout of Bear Stearns which was conducted by the Fed 
over a year ago, when I and 16 of my colleagues even sent a 
letter to Chairman Frank demanding a hearing on how the Fed was 
putting American taxpayers at risk in such financial 
institutions. But it took him over 3 months to schedule one. I 
also sent a letter to the Fed in early December expressing 
concern about the Fed's lack of transparency and asking who it 
was had specific counterparties of AIG and who directly 
benefits from AIG's government assistance. Part of me wants to 
say some to some of the loudest critics, what did you expect? 
And why weren't you asking more questions before? I would argue 
that the real outrage now is the $170 billion of taxpayer 
monies that has been pumped into this company and to what 
effect.
    So I realize that recent events have now, to some extent, 
overtaken this hearing, but there are some other issues to 
explore as well. We have heard repeatedly, for example, from a 
number of voices that AIG's Financial Products Division wasn't 
even regulated. But my understanding, and we have the OTS here 
to testify, is that the OTS was in fact looking at the 
activities in this unit. So I would like to explore that a 
little further.
    Also, I wish that the Fed could have joined us here today, 
but they have an FMOC meeting here today, so they couldn't be 
with us, and so they have asked to be excused. But I think this 
basically highlights the tension, I think, between the Fed's 
duties relating to monetary policies and their regulatory 
policies.
    Furthermore, we have a representative from S&P here today. 
And I hope they can shed some light on issues relating to 
credit downgrades, and what role they may have played with 
regard to AIG to come up with additional funds at the current 
time, and which led to the government interference in the first 
place, and most recently, to the restructuring. And secondly, 
on this point, should Congress and the American taxpayers be 
bracing for further downgrades, and will that affect our 
responsibilities or liabilities going forward?
    Well, I'm sure we will spend a lot of time this morning 
talking about the bonus issues. As important as that is, I also 
hope--as I assume the chairman does--that we can get into the 
weeds a little bit more and talk about the current state of the 
company, efforts to wind down the company, and the counterparty 
obligations, and the progress that has been made in selling off 
the company's assets and divisions as well.
    And with that, I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Garrett. And 
we will now hear from our full committee chairman, Mr. Frank of 
Massachusetts, for 5 minutes.
    The Chairman. Thank you, Mr. Chairman. I had hoped we could 
focus on the subject at hand, but I do have to respond to Mr. 
Garrett's complaint that he didn't get a hearing quickly 
enough. Yes, Mr. Garrett did ask for a hearing on the role of 
the Fed. We had a number of other things going on legislatively 
at the time. We did have the hearing in July of 2008. And 
because I was concerned about the gentleman from New Jersey's 
views here, I did check. At that hearing, he asked no questions 
about this program. He did ask a question about covered bonds. 
So the gentleman was asking could we have the hearing. We had 
the hearing on specifically this general subject, and he 
declined to ask any questions about it. I suppose--I understand 
he's disturbed that we didn't give him a chance not to ask any 
questions a month earlier, but I am unconvinced that would have 
made any difference. We did have a hearing about the role of 
the Federal Reserve well in advance of the decision by the 
Federal Reserve to--
    Mr. Garrett. Will the gentleman yield?
    The Chairman. I will yield.
    Mr. Garrett. My understanding is that I began on the issue 
of covered bonds but then went into other issues as well.
    The Chairman. Well, that wasn't my reading of the 
transcript, which I thought might come up. But the fact is that 
we did have the hearing, and in 5 minutes I would have to say 
maybe at the end the gentleman touched on it. I didn't recall 
that. But covered bonds hardly seem to me to be the major topic 
that the gentleman insisted on having the hearing about, and we 
did have the hearing, and I would have thought he would have 
used all of his time on this topic. Five minutes is, as we 
know, often too little for us to deal with it.
    But the point is that the committee did have a hearing on 
this well before the decision to go into the AIG. The Federal 
Reserve came to us in September and told us they were doing 
AIG. We have had subsequent hearings, and I do believe it is 
important for us to amend that statute under which the Federal 
Reserve operates, although I think doing it in the midst of 
this current financial uncertainty would be a mistake. But the 
point is, we did have a hearing well in advance of the AIG 
situation, and I guess we will just release the whole 
transcript and people can decide how vigorously these questions 
were pursued. It is not my recollection. I think a number of 
people left their fight in the gym when it came to the actual 
confrontation with Mr. Bernanke.
    Now as to AIG, and the subject of the hearing, I do believe 
that it is time for us to assert our ownership rights under 
this arrangement. The bonuses are wholly unjustified, and they 
are an example of the problem with the financial incentives 
that the compensation gives in general. This is an issue that 
many of us raised in 2006 when we were in the Minority. We 
brought it up again in 2007 in the Majority. We brought to the 
Floor a bill on executive compensation. It was just the 
beginning. It was very strongly opposed by most on the other 
side.
    The problem is not the dollar amount but the incentive 
structure. It's a head they win, tails they break even. I look 
at the contract that is being invoked as unassailable, and 
here's what it says: ``The bonus pool for any compensation 
year, beginning with the 2008 compensation year, will be 
affected by the incurrence of any realized losses arising from 
any source subject to the limitations set forth in Section 
3.07.'' And Section 3.07 says, ``Not withstanding any other 
provision of the plan, for any compensation year beginning with 
2008, there shall be a $67.5 million limit per year on the 
extent to which the pool can be reduced.''
    So that it means that if in fact they have a net loss for 
the year, they still get the bonuses. This is the problem. This 
is the problem with those contracts, and I think whoever signed 
these contracts ought to be called to account on the part of 
the company. It's a problem with compensation structure going 
forward. What it says is here, given the 70/30 split of 
distribution income, if the losses in the year exceed $225 
million, then that loss above $225 million is irrelevant to 
reducing the bonus pool; $225 million turned out to be a 
rounding error in their losses.
    So they give themselves contracts which effectively 
insulate them from losses. That's one of the things we have to 
look at, this situation in which you get a bonus when it goes 
up. So what they do is they count any gain, and that goes into 
the bonus pool. If those gains are offset by huge losses, 
there's a very limited effect to which they go into the bonus 
pool.
    What I think we should be doing is exercising our rights as 
the owners of this company and bring lawsuits. It is one thing 
for the Federal Government to say because the Federal Reserve 
lent the money and then Treasury followed up, we are going to 
invalidate these contracts where both parties to the contract 
say they want to go forward. That causes some problems in 
people's minds. The question of the Federal Government 
abrogating a contract is not something we should do 
statutorily. But we're the effective owners of this company.
    What we ought to be doing is exercising our rights as the 
owners to bring lawsuits to say these people performed so 
badly, the magnitude of the losses was so great, that we are 
justified in rescinding the bonuses. That may be a 
controversial lawsuit, but it is a better one than trying to 
interfere under our regulatory authority. And I think it is 
worth trying, and I think that there could be a good case made 
that the bonuses granted by people who in fact incurred great 
net losses by their work, ought not to be granted.
    We will also be asking Mr. Liddy to give us the names of 
the recipients. They have sent us some information under the 
confidentiality rules. I have spoken to Chairman Kanjorski 
about this. We will be asking for the names. If Mr. Liddy 
declines to give us the names, then I will convene the 
committee to vote a subpoena for the names. So we do intend to 
use our power to get the names of the people here.
    Let me say that if you read this contract, it appears to me 
to have been signed in contemplation of serious losses, because 
it has this limitation on the amount to which--again, it's an 
incentive bonus. The final--what it says is, if you make money, 
you get money. But if you make money which is outweighed by 
losing money, you still get the bonus. As I said, I think those 
are bad incentives.
    And as to retention, no, I do not think these are the 
people you want to retain. The argument is, you need to have 
the people who made the mistakes so they know how to undo them. 
Human nature being what it is, I think there's a lot to be said 
about having people who were not the ones who made the mistakes 
undo them. The natural tendency to protect your own mistakes 
comes into play. So, as I said, I will be urging the Secretary 
of the Treasury--I have written him a letter--that we exercise 
our ownership rights, and let's bring a lawsuit as the owners 
against people who in fact did damage to the company.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Frank. And now 
we will hear from Mr. Bachus for 2 minutes.
    Mr. Bachus. Thank you, Chairman Kanjorski. As Chairman 
Kanjorski said, he and I requested the GAO to do an 
investigation on the motivations behind the government 
intervention and bailout of AIG and who it was actually 
intended to help. And I'll be very interested to find out the 
results of that study.
    For several weeks now, and even today, we continue to play 
kind of a game that children used to play, pin the tail on the 
donkey. Trying to put the blame somewhere else. And in truth, 
there's plenty of blame to go around. AIG, their company 
engaged in very reckless, risky behavior, and I think we all 
have a right to be angered that such a fine company at one time 
is in the mess that it is in and the effect that it has had on 
our economy. That's justified anger, so we could certainly pin 
the donkey on AIG and those within that company, most all of 
them long gone, who caused that. Washington, the regulators, 
they failed to do their job. We ought to blame them. That's 
justified. This Congress, some of our policies have contributed 
to some of that behavior, the failure to regulate, the failure 
of oversight by this Congress. We're to blame.
    The one faction who probably aren't to blame but seem to be 
paying the tab is the American people. They're paying for it. 
All this bad behavior by the company, all this bad behavior by 
our failure to regulate, all the failure of us to take action 
in numerous different areas, we all should bear the blame. But 
I think at this point that anger shouldn't distract us from 
really the true issue and our goal today, and that's to try to 
recover as much of the taxpayers' money as we possibly can. 
That ought to be our motive. And the blame game needs to be 
secondary, because we're all to blame.
    Now the only possible successful outcome to this is to 
manage our way out of the current problems. Now how do we do 
that? Do you think Congress can manage AIG? I don't think so. 
Take a walk through the Capitol Visitor's Center--3 times over 
budget, 5 years late. We can't manage AIG. How about the 
regulators? There are a lot of empty desks at Treasury. I don't 
think that the Fed or the Treasury has done a very good job. 
How about a poll on TV? Should we just take some poll results 
and act from there? I don't think so.
    As unpopular as it may be, I think the best opportunity 
that we have is to let that new team at AIG--we're all upset 
over the bonuses. The bonuses were awarded and signed as 
contracts in 2007, long before Mr. Liddy and the new team was 
in place. And we're justifiably angry at him for maybe not 
doing a better job of getting out of it. But he came in after 
the collapse of AIG with a $1 salary and you can vilify this 
new management team if it makes you feel better, but resolving 
a company as large and as complex as AIG is no easy task. It 
was in a mess, and it will require a lot of good fortune. It 
will require an economic recovery, and that's what they're 
doing now. They're unraveling the deals. They're shutting down 
this Financial Products Division that has caused all of us 
heartbreak and harm, and that's going to take time. The people 
who set the policies that brought AIG to the brink of total 
collapse are gone. We need to give this new management team the 
time it needs to get the job done. They were assigned that job 
in September, and when we did it, and when the Fed did it, they 
said it would take 2 years or 3 years to do it. The government 
trying to get more involved than it is, is just going to be a 
sad experience. We need to let, as I say, we need to--and I'll 
close by again saying it. The solution here is not the 
government running this company. It's a private team. And 
they're going to need all the help they can get.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Bachus. And now we will 
hear from the gentleman from New York, Mr. Ackerman, for 1 
minute.
    Mr. Ackerman. I'll try to observe the time. Mr. Chairman, 
there's a tidal wave of rage throughout America right now, and 
it's building up, and it's expressing itself at this latest 
outrage, which is really just the tip of the iceberg. And that 
rage is because the taxpayer knows that they are the ultimate 
sucker on the list of who pays for all of the greed that has 
been going on in the marketplace for years and years.
    And the real question that we're going to have to face here 
is not just these bonuses, which are minuscule compared to the 
outrageous sums that we really have to be talking about, but 
how a previously venerable company that was an icon in the 
industry selling legitimate insurance products on the financial 
market succumbed to this greed and figured out how to package 
smoke and sell it on the marketplace for billions of dollars 
without any bit of supervision by any agency, regulation, and 
without the watchful eye of the Congress.
    Chairman Kanjorski. And now the gentleman from Georgia, Mr. 
Price, for 2 minutes.
    Mr. Price. Thank you, Mr. Chairman. I was remarkably 
disappointed to learn that Secretary Geithner declined to 
testify at today's hearing, considering the primary role that 
he played in the governmental intervention into AIG. Make no 
mistake, everyone is up in arms over the bonuses provided to 
AIG executives. It seems to me, however, that the outrage 
should more appropriately be directed at the fact the taxpayers 
were put in this position in the first place.
    This is exactly why the Federal Government should not be in 
the business of bailing out private companies. This is what a 
political economy looks like. And it's a very dangerous place 
to be. Misguided past governmental intervention has put us in 
precisely this position. The bonus money distributed by AIG is 
indefensible, but the taxpayer bailout afforded to AIG by the 
government is remarkably more egregious. The government has 
already poured over $170 billion taxpayer dollars into AIG, 
over 1,000 times the amount paid out in bonuses.
    President Obama has said he's going to ``pursue every legal 
avenue to block these bonuses and make the American taxpayer 
whole.'' Well, I wish the President demonstrated the same level 
of outrage over the repeated taxpayer-funded bailouts that we 
have seen in recent months. I wish he demonstrated the same 
commitment to making sure that the taxpayers were made 
completely whole. I wish he demonstrated the same commitment to 
fundamental American principles.
    What we desperately need is an exit strategy that will get 
back the $170 billion that the taxpayers have already 
sacrificed to keep AIG running. To that end, we need a 
comprehensive strategy that is going to recoup all taxpayer 
subsidies, get the government out of the business of running 
private companies, picking winners and losers, and taking us 
further into a political economy.
    AIG should be held accountable for every bad decision it 
has made. We simply must, however, restore accountability and 
the market discipline in the system so that our economy will be 
able to grow again. We need to make it recognize that to those 
who still believe it ought to be the most vibrant and robust 
economy in the world, and the best way to accomplish that is to 
embrace and restore fundamental American principles that made 
this country great.
    Chairman Kanjorski. Thank you very much, Mr. Price. As a 
matter of fact, it was excellent. It was exactly 2 minutes. Now 
we will recognize the gentleman from California, Mr. Sherman, 
for 1 minute.
    Mr. Sherman. Mr. Chairman, at the appropriate time, I'll 
ask that Mr. Liddy be sworn. We should impose a high surtax on 
those executives who choose to retain excessive compensation, 
and that should apply to all the big bailed-out firms. 
Securities laws require timely disclosure of material 
information to shareholders and impose criminal penalties on 
those who conspire to withhold that information. If the 300 
million shareholders of AIG, namely the American people, had 
been fully informed on a timely basis about these bonuses, we 
would not have invested $170 billion. We certainly would not 
have invested the additional $30 billion that was put in just 2 
weeks ago. We would have insisted on receivership. This would 
have saved us tens of billions of dollars, prevented billions 
of dollars from being disbursed to foreign banks, prevented the 
bonuses from being paid, and voided the bonus contracts.
    I have urged receivership. Some can argue against 
receivership. But no one can argue in favor of a criminal 
conspiracy to withhold information from the American people so 
as to deprive them of the right to decide whether we should 
have receivership.
    I yield back.
    Chairman Kanjorski. Thank you, Mr. Sherman. And now we will 
hear from the gentleman from Delaware, Mr. Castle, for 1\1/2\ 
minutes.
    Mr. Castle. Thank you, Mr. Chairman. While we seem to all 
agree that AIG employee bonuses are a poor use of taxpayer 
dollars at this critical point in time, I am concerned we 
aren't getting the full story here. The Fed and the Treasury 
are stewards of the American taxpayer investment in AIG, an 
amount approaching an 80 percent ownership share of that 
company since September of 2008.
    It is my understanding that the Treasury, the Fed, and AIG 
executives have been discussing these bonus payments amongst 
themselves for the last 3 months. I would like to know what was 
said between these agencies, what options were weighed, and how 
the bonus decisions were ultimately made. Any details on this 
matter that can be provided are of utmost concern to me and the 
American public. I realize Mr. Liddy is relatively new to his 
position. I'm sure he can describe AIG's role in these 
decisions. However, I am disappointed, Mr. Chairman, that we 
will not be hearing today from the Fed and Treasury to discuss 
their role during today's hearing. And I heard you state 
earlier we will hear from them in a week or so, but I think 
they should have been here today.
    The American taxpayer is being asked to trust government 
now more than ever. The Treasury and the Fed are overseeing the 
expenditure of billions, if not trillions of dollars to 
stabilize our financial infrastructure and get our economy on 
solid ground. We understand that this role is difficult, but 
transparency and honesty is paramount as we work to regain 
fiscal stability. I look forward to hearing from our witnesses 
today, and I look forward to hearing from Treasury and the Fed 
when they arrive here.
    I yield back the balance of my time, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Castle. Now, 
we will hear from Mr. Capuano of Massachusetts for 1 minute.
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, this 
first panel is made up of thrift regulators, insurance 
regulators, and credit rating agencies. I want to know where 
were you or your agency, or more importantly some of your 
sister agencies at a different level? Where were they when AIG 
was getting ready to do this? Not today. I want to know how we 
got where we are. I want to know, do you believe that what we 
have done so far, the path we have taken, is it better or worse 
than simply declaring bankruptcy for this company and getting 
it over with? I want to know whether you believe that AIG, 
whether they will ever return to profitability, whether the 
taxpayers will ever see their money back, and if so, when?
    Thank you, Mr. Chairman. I return my time.
    Chairman Kanjorski. Thank you, Mr. Capuano. Now we will 
hear from Mr. Manzullo of Illinois for 1 minute.
    Mr. Manzullo. Mr. Chairman, I examined Mr. Kashkari from 
TARP on December 10th and asked him if he was going to ask for 
a $3 million bonus back from one individual. He said it could 
be deferred compensation and ostensibly not returnable. 
Deferred compensation for what? I represent Rockford, Illinois, 
the largest city with 14 percent unemployment. People are 
losing their jobs. Factories are closing.
    They're taking cutbacks, working odd shifts, and taking 
late night shifts. They aren't being paid to destroy the 
economy. They're being paid to invigorate it. They're sitting 
in this seat today, all 740,000 of them, wondering how could 
government do something so stupid as to allow these people to 
make that kind of money and then sit back and everybody point 
fingers at each other. We want some answers today.
    Chairman Kanjorski. Thank you very much, Mr. Manzullo. Now 
we will hear from Mrs. Maloney of New York for 1 minute.
    Mrs. Maloney. Thank you. American taxpayers are justifiably 
outraged. AIG will be remembered as one of the worst financial 
disasters in American corporate history. Six months into the 
crisis, AIG executives still have not read the memo from the 
American taxpayer. It is morally reprehensible and fiscally 
irresponsible to expect bonus money for bringing a corporate 
giant to its knees and paralyzing a national economy.
    There are many proposals before Congress now to address 
this outrage. I have authored legislation which would tax at 
100 percent any bonus compensation where the U.S. taxpayer has 
majority ownership of the company. This would bring back the 
$125 million in bonus money. Bonuses should be based on 
creating value, not destroying it and a formerly great company, 
AIG.
    Chairman Kanjorski. Now we will hear from Mr. Royce of 
California for 1 minute.
    Mr. Royce. Thank you, Mr. Chairman. I voted against the 
bailout of AIG, and I wrote an editorial at the time, ``Bailout 
Plan Could Mutate into a Gravy Train of Tax Money.'' Well, it 
has. And rewarded in this are the counterparties around the 
world that made poor investments with AIG. Rewarded with 
bonuses are the members of the very Financial Products Division 
that contributed to AIG's demise. Rewarded is AIG, that now 
appears to be using their new systemically significant label 
issued by the Federal Government to charge artificially lower 
rates in the commercial lines and undercut responsible small 
private insurance companies in this country.
    Central to this discussion on AIG is what Chairman Bernanke 
told us. He said 54 various State insurance regulators didn't 
have the capacity to deal with a global insurance company. I 
have been warning about the systemic risk here since 2006. 
Congresswoman Melissa Bean and I have been pushing a bill that 
will close that gap. And until we establish a world class 
regulatory alternative that is able to deal with a global 
insurance company like this, that gap will remain. Now in the 
meantime, we should strike these bonuses.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Royce. And now we will 
hear from Mr. Hodes of New Hampshire.
    Mr. Hodes. Thank you, Mr. Chairman. You know, as far as the 
American people are concerned, I think AIG now stands for 
Arrogance, Incompetence, and Greed. It is unacceptable that 
TARP funds are being pocketed by AIG executives, and it must 
not be allowed to stand.
    I agree with Chairman Frank. I think his approach is a good 
one. It is ridiculous to stand on these contracts as 
justification for paying the bonuses, given the circumstances 
that AIG found itself in. As representatives of the taxpayers, 
I believe that the contract provisions which allow bonuses for 
failure are unconscionable and should be held to be invalid or 
unenforceable on the grounds of public policy. I think it's a 
good thing that we explore that tack, and I look forward to 
supporting any way we get this money back for the American 
taxpayers.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you. Now we will hear for 1 
minute from Mrs. Biggert of Illinois. Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman, and thank you for 
holding this hearing. Let me be clear. We want the money back. 
It should never have gone to the recipients in the first place. 
Today I want to know, did taxpayers who own 80 percent of this 
company get to vote on these bonuses? Did anyone represent the 
U.S. taxpayer?
    While preaching transparency and accountability, did the 
Administration and the leaders in Congress drop the ball? Did 
the regulators drop the ball? I would also like to know how 
much would the recipients have received in bonuses if the 
Federal Government had not stepped in in September and October 
and November and now in March. I don't think that there would 
have been any bonuses. So I think that AIG should either return 
the bailout money with or without the bonuses.
    We need to reverse this travesty. Perhaps we need to take 
legal action. This is not the direction that my hardworking, 
tax paying citizens want us to go. We can do better, and we 
must do better.
    With that, I would yield back.
    Chairman Kanjorski. Thank you, Mrs. Biggert. And now for 1 
minute, Mr. Klein of Florida.
    Mr. Klein. Thank you, Chairman Kanjorski, for holding this 
important hearing. As most Americans are, we're pretty 
disgusted by the deplorable saga of AIG, and I certainly join 
my constituents in their outrage about the millions of dollars 
in bonuses that are being awarded to AIG employees. The 
American people understand that we are going through a 
difficult time and are prepared to sacrifice and work together 
to get our country back on track. But they will not stand for 
taxpayer dollars being wasted on bonuses for people who bear 
responsibility for this crisis in part, and neither will I.
    When I'm back in my district in South Florida, I talk to 
people who have lost their jobs, their health care, their 
homes, or the value of their pension investments. And here we 
are sitting today, or we will be sitting before the Chairman 
and CEO of AIG who distributed million dollar bonuses to those 
who drove the company and possibly our economy into the ground.
    There's a tremendous disconnect between the American people 
and the executive officers of AIG. And I certainly want to know 
what were they thinking when they allowed these bonuses to go 
forward. I look forward to the testimony and a frank discussion 
about how to resolve this.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Klein. And now 
we will hear from Mrs. Capito of West Virginia for 1 minute.
    Mrs. Capito. Thank you. Mr. Chairman, I would like to thank 
you for convening this hearing this morning. As I was on my way 
to work this morning into the office, the first person I 
encountered looked at me and said, ``something isn't right 
here,'' in reference to the recent news of the AIG bonuses. And 
to be honest, I couldn't agree more.
    When this body first considered the proposal that would 
become the TARP program, I and others expressed significant 
concerns that we were moving too quickly, there was too much 
risk for the taxpayer, and too little oversight. News accounts 
from this week only reconfirm what many of us said from the 
beginning. There was not adequate understanding or transparency 
surrounding these dollars.
    All across the Nation, American families and small 
businesses are tightening budgets, cutting back on costs, and 
making tough decisions. And the recent news of these bonuses 
has just added an insult to the prudence of these small 
businesses and families who are making difficult decisions 
every day.
    Whether we like it or not, or whether they like it or not, 
the companies that have received TARP are under intense 
scrutiny understandably. The light is shining brightly on their 
actions, and it is my hope we can resolve the current economic 
challenges so the taxpayers are no longer on the hook for this 
type of excess.
    I would like to thank the witnesses for being here today 
and I look forward to the testimony. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mrs. Capito. And now we will 
hear from Mr. Peters of Michigan for 1 minute.
    Mr. Peters. Thank you, Mr. Chairman, and I want to thank 
you for holding this hearing here today. I'm one of the many 
members of the subcommittee who are outraged by news that 
employees of AIG were paid $165 million in bonuses. AIG has 
received over $170 billion from taxpayers, and my constituents 
are finding it harder and harder to believe that such support 
is justified.
    In my congressional district in Michigan, there are 
thousands of UAW employees who have employment contracts, and 
they have been told that they need to re-negotiate those 
contracts and make concessions to justify taxpayer investments. 
There are thousands of white collar employees with employment 
contracts who have foregone promised bonuses and benefits and 
have taken pay cuts in order to save the companies that they 
work for.
    People are sick of this double standard where working class 
and middle class workers are treated differently than the 
financial industry executives. What people are looking for is a 
sense of shared sacrifice. Wall Street does not seem to 
understand that yet, but they need to understand it 
immediately. I know that Mr. Liddy has outlined some 
reductions, but I look forward to hearing more from Mr. Liddy.
    And, again, thank you, Mr. Chairman, for this opportunity.
    Chairman Kanjorski. Thank you very much, Mr. Peters. And 
now we will hear from the gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. With respect to 
the TARP program, this AIG bonus scandal is simply the outrage 
of the week, and the week is not yet half over. The greater 
outrage should be the almost $180 billion and growing of 
taxpayer exposure. The greater outrage ought to be four 
bailouts later, no end in sight, and no plan of sustainability 
or exit strategy that has been explained to this committee, the 
greater outrage ought to be taxpayer money used to sustain 
counterparties to make them whole, counterparties who undertook 
a risk versus taxpayers who did not take the risk.
    And finally, the greater outrage ought to be over a 
Congress and a President who could have prevented all of this. 
With respect to comments out of the Administration, I am 
reminded of that famous scene in the Humphrey Bogart movie, 
Casablanca, ``I'm shocked to find gambling going on here,'' as 
the character stuffs the gambling winnings in his pockets.
    I have two suggestions: No more taxpayer funds without the 
ability to place these firms in receivership; and no more 
bonuses until the taxpayer is made whole.
    Chairman Kanjorski. Thank you very much. Next, Mr. Scott of 
Georgia for 1 minute.
    Mr. Scott. Thank you very much, Mr. Chairman. I just want 
to say how very important it is for us to quickly restore the 
confidence of the American people in what we're doing. In order 
to do that, we have to get to the bottom of how we got into 
this situation in the first place.
    I think it's very important, Mr. Chairman, to get to the 
bottom of this, to look at the fraud elements of this case. We 
have to remember that this started in March of 2008. How in the 
world could they justify putting out contracts of $450 million 
for a Financial Products Department in AIG that had only 367 
employees? Also it's very important that this $165 million at 
the outset is only the tip of the iceberg. What they have put 
forward here comes to a total of $1.2 billion in bonuses that 
have been given throughout the firms for this year.
    The other point I want to make, Mr. Chairman, is, in order 
for us to really get the confidence of the people back, we have 
to put a pause button on these bailouts and get to the bottom 
of it. And we in Congress have that responsibility to do as 
well, and we have a role to play. So as we point fingers here 
in Congress, we have to recall that there are three fingers 
pointing right back at us. We have to make sure we're doing our 
job in order to have the confidence of the American people.
    Chairman Kanjorski. The gentleman from South Carolina for 1 
minute.
    Mr. Barrett. Thank you, Mr. Chairman.
    Last fall, President Bush asked for my help to avoid a 
total collapse of the economy, a collapse which would have 
pushed our country into great economic peril. Back home, small 
business owners and major corporations called me to let me know 
that if we didn't take extraordinary steps in those 
extraordinary times, many of the employers my constituents rely 
on would be forced to close their doors for good.
    Now it disappoints me to see that some of these very 
companies which requested taxpayer assistance have failed to 
change their pattern of irresponsible decisionmaking, which 
undoubtedly contributed to the current economic crisis. The 
Bush Administration and then-chairman of the New York Fed, 
Timothy Geithner, mismanaged the implementation of this 
program, and the Obama Administration, while assuring us they 
knew exactly what was going on and how the monies were being 
spent, have failed to bring about the necessary reforms and 
safeguards to protect the American taxpayer.
    Panel, we need to figure out our exit strategy, how 
taxpayers are going to be paid back, and when we can end this 
toxic relationship with AIG.
    Chairman Kanjorski. Thank you very much, Mr. Barrett.
    For 1 minute, the gentleman from Idaho, Mr. Minnick.
    Mr. Minnick. I opposed the TARP bill and I opposed the 
bailout of AIG. I'm a businessman who, when I bought companies, 
took due diligence seriously. We taxpayers shouldn't buy 
companies or socialize businesses. Having made the mistake with 
AIG, we should not now throw good money after bad. Instead, we 
should now withdraw taxpayer support and let AIG go bankrupt. 
Let a Federal bankruptcy judge void these ill-advised bonus 
contracts, sort out the losses and bring in new qualified 
management to properly manage AIG before you get one more 
nickel of taxpayer support. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Minnick.
    Next, Mr. Campbell of California for 1 minute.
    Mr. Campbell. Thank you, Mr. Chairman.
    There will be lots of discussion about how we got here, but 
we also need to spend some time on what we are going to do 
next. I have a lot of concerns about whether there will be any 
business left from which the taxpayers can recoup any money.
    A question I would like to know the answer to is that in 
September, AIG had $450 billion of exposure on credit default 
swaps. What is that number today? AIG's commercial property and 
casualty business was down 22 percent in the fourth quarter and 
there is evidence that it retained the remainder of its 
business by substantially reducing prices.
    What is happening to that property and casualty business? 
It would appear it is in some kind of a death spiral. Have 
there been some, even in the money market fund that AIG had, 
some puts and other riskier assets put into that which should 
not have been put into that and if the systemic risk is in the 
life insurance business, where does that stand right now?
    Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Campbell.
    And now, the last opening statement, the gentleman from 
Texas, Mr. Neugebauer, for 1 minute.
    Mr. Neugebauer. Well, thank you, Mr. Chairman.
    I was going to go ahead and say that I am outraged as well, 
but what I would like to be is enlightened. What we really need 
to know is what the plan is. The whole problem with the TARP 
plan from the very beginning is nobody has ever had a plan, 
other than to throw taxpayers' money at a problem that nobody 
is able to actually define. As the previous speaker said, what 
is the position in some of the CDS's today as opposed to what 
they were on the day that we took over, or I guess--I think we 
took over. I'm not sure what we did with AIG.
    What the American taxpayers want to know is what we are 
doing to mitigate their exposure, when are they going to get 
their money back, and what is defined. And what we need, this 
committee needs, if we are going to actually do oversight, is a 
plan that has measurable results. In other words, here is where 
we are today. Here is where we think we are going to be. Then 
we want you to come back in 30 days or 60 days or 90 days and 
show us whether or not you are going to make any progress.
    You couldn't borrow money anywhere in the world on the 
basis that we are throwing money at some of these entities 
without a plan. So I hope we will be enlightened today, as well 
as hopefully get a little bit less enraged and more engaged in 
getting our money back for the American taxpayers.
    Chairman Kanjorski. Thank you very much, Mr. Neugebauer.
    And now in response to requests in consultation with the 
ranking member, our witnesses today will take an oath. Will the 
witnesses please stand and raise their right hands and respond 
``I do'' after I read the oath.
    [witnesses sworn]
    Chairman Kanjorski. Thank you very much. You are now sworn 
in. Please be seated.
    I will now introduce the panel and first thank them for 
appearing today. We had to make changes to the panel because of 
the recent news. In light of that, I may say, because I heard 
some comments in the opening remarks, initially this 
subcommittee hearing was scheduled 6 weeks ago and at that 
time, there was no hullabaloo in the land about the bonuses. It 
was a standard process we were going through to find out what 
is happening with AIG. But Mr. Scott Garrett and I are so 
attuned to what may happen in the future, we anticipated this 
occurrence and therefore, we are here at the right moment 
asking. I am trying to be humorous, but I am not very humorous.
    In reality, the purpose of this hearing, really, is to find 
out what happened, how did AIG get here, what is the plan for 
AIG to perform, and what can we expect in the future, 
particularly toward when the taxpayers can expect to receive 
their funds back? And Mr. Castle specifically stated some 
disappointment that the Secretary of the Treasury and the 
Chairman of the Federal Reserve are not here today. They are 
scheduled to be here on the 24th of March. That will be the 
follow-up for that. I am sure there will be a lot of 
concentration on the bonuses.
    I would just caution my panel members on both sides of the 
aisle that bonuses are important, the bonuses are shocking, but 
the bonuses are not the only element here. The most important 
element is what the plan is for the future and are we going to 
be--
    The Chairman. Will the gentleman yield?
    Chairman Kanjorski. Yes.
    The Chairman. On the procedural issues, we could also note 
that the Secretary of the Treasury has also been scheduled to 
be here on the 26th to talk about the board of regulatory 
issue, the subject of our previous hearing. And I did want to 
note both of those hearings, just procedurally, will be full 
committee hearings, although the subcommittee has been doing an 
excellent job of handling this.
    But the protocol has been, for as long as I have been here, 
that cabinet officers will only testify at full committees, so 
the hearings with Mr. Geithner and Chairman Bernanke, not 
because there is any reason, other than that is the only way 
you can get them to come. This will continue to be a matter in 
which the subcommittee is taking the lead for us.
    Chairman Kanjorski. Thank you very much, Mr. Chairman. We 
will take that into consideration and understand that.
    Now our witnesses are asked to summarize their testimony in 
5 minutes and all of your written statements will be made a 
part of the record without objection. Hearing no objection, 
that is so ordered.
    First, we will hear from Mr. Scott Polakoff, Acting 
Director of the Office of Thrift Supervision.
    Mr. Polakoff.

  STATEMENT OF SCOTT M. POLAKOFF, ACTING DIRECTOR, OFFICE OF 
                    THRIFT SUPERVISION (OTS)

    Mr. Polakoff. Good morning, Chairman Kanjorski, Ranking 
Member Garrett, and members of the subcommittee. Thank you for 
inviting me here to testify about the supervision of AIG by the 
OTS.
    The scope of government intervention on behalf of AIG has 
created enormous public interest and acute attention by 
policymakers. I welcome the opportunity to present the facts 
available and to answer the important questions surrounding 
AIG.
    The OTS granted a Federal savings bank charter to AIG in 
1999 and the bank opened for business in 2000. The OTS is the 
primary Federal regulator for the $1 billion FDIC insured 
depository institution and the OTS was the consolidated 
regulator for the savings and loan holding company.
    In January 2007, the OTS was informed that its holding 
company supervision was deemed equivalent to that required by 
the coordinator under the European Union's financial 
conglomerate's directive. OTS continued in its role as 
consolidated supervisor until September 16, 2008, when by 
operation of law, AIG was no longer a savings and loan holding 
company.
    My written testimony goes into detail about OTS' oversight 
of AIG, including our annual examinations of the company, 
targeted reviews of its subsidiaries, including the AIG 
Financial Products operating business, our reports on the 
findings of those supervisory activities and follow-up 
communications with AIG's management and board of directors to 
address our concerns.
    In my statement today, I would like to highlight just a few 
points. The rapid decline of AIG stemmed from liquidity 
problems and two important business lines:
    Number one, credit default swaps. A credit default swap is 
a derivative instrument that provides insurance-like protection 
to investors against credit losses from the underlying 
obligations which were typically mortgage loans. Number two, 
securities lending, a business strategy implemented by a 
handful of AIG's State insurance subsidiaries.
    It is important to note that AIG stopped originating credit 
default swaps that were linked to subprime borrowers in 2005. 
By that time, however, the company already had $50 billion of 
such instruments on its books. AIG halted these activities 
while the housing market was still going strong, but the 
company's model forecasted trouble ahead.
    Another important point is that AIG's credit default swaps 
were protecting against credit losses on the highest rated, 
super senior, triple A plus rated tranche of the collateralized 
debt obligations. This segment of the securitization poses the 
least risk of credit loss. In fact, as of December 31, 2008, 
there have been no actual realized credit losses from the 
underlying CDO's.
    AIG's crisis resulted from the enormous sums of liquidity 
required to meet collateral calls triggered by one of the 
following three events: A rating agency downgrade of the 
company; a rating agency downgrade of the underlying CDO; or a 
reduction in the market value of the underlying CDO. AIG's 
security lending program, which began prior to 2000, lent 
securities from the State insurance companies to third parties 
who provided cash collateral in return.
    As a general theme, the cash collateral was invested in 
residential mortgage-backed securities. With the turmoil in the 
housing and mortgage markets over the past 2 years, these 
residential mortgage-backed securities experienced sharp 
declines in value. When the trades expired or were unwound, the 
cash collateral had to be returned to the counterparty.
    This created unprecedented liquidity pressure for the 
company. The cash requirements of the program significantly 
contributed to AIG's crisis. I think these are the keys to 
understanding how we got to where we are today.
    And as to where we go from here, I see two important 
lessons learned.
    Number one, the credit default swaps at the center of AIG's 
problems continue to be unregulated products. New regulations 
governing these complex derivative products are essential. The 
announcement by the President's Working Group on Financial 
Markets in November of last year to implement essential 
counterparty service for credit default swaps is a good 
beginning. And number two, the AIG story makes a compelling 
argument for establishing a systemic risk regulator with the 
authority to examine the resources to address temporary 
liquidity crises and the legal authority to perform 
receivership activities if a failure is unavoidable.
    Thank you, Mr. Chairman, for allowing me to testify. I look 
forward to answering questions.
    [The prepared statement of Mr. Polakoff can be found on 
page 210 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Polakoff.
    Now we will hear from the Honorable Joel Ario, Insurance 
Commissioner of the Commonwealth of Pennsylvania Insurance 
Department, on behalf of the National Association of Insurance 
Commissioners.
    Welcome, Mr. Ario.

 TESTIMONY OF THE HONORABLE JOEL ARIO, INSURANCE COMMISSIONER, 
 PENNSYLVANIA INSURANCE DEPARTMENT, ON BEHALF OF THE NATIONAL 
             ASSOCIATION OF INSURANCE COMMISSIONERS

    Mr. Ario. Thank you, Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee. I appreciate the 
opportunity to provide an insurance regulator's perspective on 
what has happened at AIG.
    Ben Bernanke, Chairman of the Federal Reserve, recently 
described AIG as, ``A hedge fund attached to a large and stable 
insurance company.'' He was right on both counts. The hedge 
fund is AIG Financial Products, which, according to Chairman 
Bernanke, made, ``Irresponsible bets and took huge losses.'' 
The large and stable insurance company is, of course, 71 State 
regulated insurance subsidiaries, including 11 companies in my 
State of Pennsylvania.
    The reason the Federal Government decided to rescue AIG was 
because of the systemic risk created by Financial Products. 
That risk materialized last September when it became apparent 
that Financial Products had bet twice the value of AIG on risky 
credit default swaps and failed to hedge its own bets. To make 
matters worse, the counterparties to those swaps included many 
of the world's leading financial institutions. It was to 
protect those institutions that the Federal Government acted.
    In Chairman Bernanke's words, ``We are not doing this to 
bail out AIG or their shareholders certainly. We are doing this 
to protect our financial system and to avoid a much more severe 
crises in our global economy. We know that the failure of major 
financial firms can be disastrous for the economy. We really 
had no choice.''
    To put it bluntly, AIG Financial Products, the hedge fund 
that failed to hedge its own bets, has become the poster child 
for systemic risk. Although the September crisis at Financial 
Products produced collateral damage within the AIG insurance 
companies, the fact is that these companies do perform well--
they are not in a death spiral--well enough that competitors 
accuse AIG of using its Federal assistance to unfair advantage 
in the marketplace.
    The allegations are most prominent in commercial insurance 
where the Nation's largest insurers routinely bid against each 
other on multi-million dollar accounts. AIG's competitors claim 
that AIG is deliberately underpricing in a desperate attempt to 
maintain premium value. AIG has fired back that its competitors 
are selectively underpricing to exploit a vulnerable company.
    Such disputes typically reflect insurers trying to protect 
profit margins in a soft market, but there is a point at which 
low pricing can threaten long-term stability. So we have 
carefully reviewed, we being State insurance regulators, 
carefully reviewed charges on both sides and to date, have not 
seen any clear evidence of underpricing on either side.
    What have we learned from the AIG ordeal? First, we have 
seen stable insurance companies that demonstrate the efficacy 
of State insurance regulation. Indeed, the Federal rescue of 
AIG would have been an even tougher call were it not for the 
well-capitalized insurance companies providing the possibility 
that the AIG loans will be paid back. That was true in 
September. It is true today.
    The insurance companies have the value they do because 
State regulation requires healthy reserves backed by 
conservative investments all dedicated to protecting 
policyholders and other claimants. This is not to say that 
regulation is perfect, to the chairman's introductory comment, 
which brings me to securities lending.
    Securities lending did not pose systemic risk and would 
have been resolved without any Federal assistance, but for the 
Financial Products debacle, which caused the run on the bank 
that took a net of $20 billion in Federal funds to fully 
resolve. It is more than $40 billion out, but $20 billion held 
by the Federal Government today. This was unfortunate and it is 
a problem for State regulation, but it does not compare to the 
$440 billion credit default swap mess that continues to pose 
systemic risk.
    The securities lending problem: solved today. Completely 
solved. My written testimony contains more details about 
securities lending, but let me conclude with a few thoughts on 
the most important lesson we can learn from the abuses at 
Financial Products: the need to identify and manage systemic 
risk.
    As AIG illustrates, insurance companies are more likely to 
be the recipients rather than the creators of systemic risk, 
but as AIG also illustrates, the systemic risk that is received 
can have significant repercussions. In this case, a manageable 
securities lending problem turned into a run on the bank back 
in September.
    State insurance regulators recognize that Federal action is 
needed to address systemic risk, but the solution should be a 
collaborative one that builds on the strength of State 
regulation (multiple eyes on any problem) by adding the eyes of 
other functional regulators in a transparent structure that 
holds all functional regulators accountable and does not 
compromise one company within the enterprise for the benefit of 
another. Such a structure would give us, as State regulators, 
the ability to do what we do best, protect the insurance buying 
public. Thank you.
    [The prepared statement of Mr. Ario can be found on page 
136 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Ario.
    And now our next witness will be Ms. Orice Williams, 
Director of Financial Markets and Community Investment at the 
Government Accountability Office.
    Ms. Williams.

TESTIMONY OF ORICE M. WILLIAMS, DIRECTOR, FINANCIAL MARKETS AND 
 COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY 
                          OFFICE (GAO)

    Ms. Williams. Mr. Chairman and members of the subcommittee, 
I appreciate the opportunity to participate in this morning's 
hearing on AIG and issues related to its Federal assistance. I 
will be providing an update on the status of our ongoing work 
on issues surrounding the Federal Reserve's and Treasury's 
assistance to AIG and potential competitive implications for 
commercial property/casualty markets where AIG insurance 
companies are major players.
    When you and Ranking Member Bachus asked GAO to initiate 
this work in January, we pulled together a multi-disciplinary 
team that includes staff knowledgeable about insurance and 
economics, including our Chief Actuary and Chief Economist. Our 
work is divided primarily into two areas:
    In the first area, we are exploring the goals of the 
assistance, progress in achieving these goals, and challenges 
AIG faces in repaying the Federal assistance as well as how the 
Federal Reserve and Treasury are monitoring AIG's restructuring 
efforts; however, it is important to note that GAO is 
prohibited by law from auditing the Federal Reserve's monetary 
policy activities, which includes the emergency authority the 
Federal Reserve is using to address the current financial 
crisis. Therefore, our review is based on publicly available 
information.
    Second, we are examining allegations that the assistance 
provided to AIG has afforded its property and casualty insurers 
an unfair advantage in certain markets and that they are 
pricing in a way that is not consistent with their risks.
    Now I will share a few of our preliminary findings. The 
Federal Reserve and Treasury officials told us that the goal of 
the continued assistance has been to avoid systemic risk from a 
rating downgrade or rapid failure of the company that would 
further destabilize financial markets. The Federal Reserve has 
been monitoring AIG's operations since September and Treasury 
is beginning to more actively monitor AIG's operations as its 
role has expanded.
    Although the ongoing Federal assistance has generally 
prevented further downgrades in AIG's credit rating, AIG has 
had mixed success in fulfilling its other restructuring plans. 
For example, while AIG has terminated its securities lending 
program, its efforts to sell certain business units has been 
more challenging in the current economic environment.
    GAO also faces ongoing challenges from the continued 
overall economic deterioration and tight credit markets. AIG's 
ability to repay its obligations to the Federal Government has 
also been impaired by its falling revenue and ability to sell 
its assets, as well as further declines in the value of its 
assets.
    Now I will briefly discuss our ongoing work on the 
potential impact of AIG's Federal assistance on the commercial 
property and casualty market. Specifically, we are reviewing 
potential effects on AIG's pricing practices. As you know, some 
of AIG's competitors have expressed concerns that Federal 
assistance to AIG has allowed AIG's commercial property and 
casualty insurance companies to offer coverage at rates that 
are inadequate for the risk involved.
    To date, we have spoken with numerous State insurance 
regulators, insurance brokers, and insurance buyers. The 
general consensus thus far is that while AIG may be pricing 
somewhat more aggressively in order to retain business in light 
of damage to the parent company's reputation, they have not 
seen indications that this pricing was inadequate or out of 
line with previous AIG pricing practices. However, we have 
found no evidence to date that Federal assistance has been 
provided directly to AIG's property/casualty insurers.
    To the extent that the property and casualty insurers would 
have been adversely affected by a credit downgrade or failure 
of the parent, AIG's insurance companies have likely received 
some indirect benefit.
    In closing, I would note that the extent to which the 
assistance provided by the government will achieve its goal of 
preventing systemic risk continues to unfold and will largely 
be influenced by AIG's success in meeting its ongoing 
challenges to try to restructure its operations and maintain 
goodwill. Our work is ongoing at this time. We have not drawn 
any final conclusions about whether or how the assistance has 
impacted the overall competitiveness of the commercial property 
and casualty market and will face a number of challenges in 
doing so.
    Mr. Chairman, this completes my oral statement. I would be 
pleased to answer any questions that you or members of the 
subcommittee may have at the appropriate time.
    [The prepared statement of Ms. Williams can be found on 
page 231 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Williams.
    And last, we will hear from Mr. Rodney Clark, managing 
director of insurance ratings at Standard & Poor's.
    Mr. Clark.

    TESTIMONY OF RODNEY CLARK, MANAGING DIRECTOR, INSURANCE 
       RATINGS, STANDARD & POOR'S RATINGS SERVICES (S&P)

    Mr. Clark. Thank you, Mr. Chairman, Ranking Member Garrett, 
and members of the subcommittee. Good morning. My name is 
Rodney Clark. I serve as a managing director in Standard & 
Poor's rating services business and from 2005 until very 
recently, I served as S&P's lead rating analyst covering AIG. I 
am pleased to appear before you today.
    Let me begin by speaking generally about our ratings 
process and the nature of our credit ratings. S&P's credit 
ratings are current opinions on the future credit risk of an 
entity or debt obligation. Our ratings do not speak to the 
market value of a security or the volatility of its price and 
they are not recommendations to buy, sell or hold a security. 
They are one tool for investors to use as they assess risk and 
differentiate credit quality of issuers and the debt that they 
issue.
    S&P analysts gather information about a particular issuer 
or debt issue, analyze the information according to our 
published criteria, form opinions and then present their 
findings to a committee of experienced analysts that votes on 
what ratings to assign. S&P publishes its ratings opinion in 
real time and for free on our Web site and we also generally 
publish a narrative that provides additional information about 
our opinion.
    This is the process by which S&P arrived at its ratings on 
AIG, which I will now discuss in more detail. Attached to my 
written submission is a table listing our global ratings 
history of AIG since 1990, as well as a more detailed 
description of our rationale for our rating changes. For many 
years, S&P had a triple A rating on AIG. Our opinion began to 
change in 2004 and since March 2005, we have lowered our 
ratings on AIG 4 times.
    In February of last year, S&P announced a negative outlook 
on the company's ratings related to the way AIG was determining 
the fair value of credit default swap contracts or CDS. AIG's 
CDS guaranteed an array of structured finance securities. 
Several months later, in May 2008, we lowered AIG's rating to 
double A minus following the company's announcement of further 
losses in their CDS portfolio and we maintained a negative 
outlook on AIG throughout the summer of 2008.
    In August, S&P announced that its view of the actual 
expected credit losses in the CDS area would likely amount to 
around $8 billion, significantly higher than the mark-to-market 
losses. AIG's financial condition continued to deteriorate 
sharply amid the substantial market turbulence in September 
2008 leading to a sudden drop in the market value of AIG's 
investments and its CDS portfolio.
    In light of these events, on September 12, 2008, S&P placed 
its ratings on AIG and its subsidiaries on credit watch with 
negative implications. On September 15, 2008, as AIG's 
condition continued to deteriorate, S&P lowered its rating 
further to A minus in light of the increase in CDS related 
losses and AIG's reduced flexibility in meeting its collateral 
needs. Since then, AIG has benefitted from government support.
    Our rating on AIG remains at A minus, but includes a six 
notch uplift for the government support. Thus, without 
government support, our rating on AIG today would be double B 
minus. S&P recently affirmed its A minus rating on AIG; 
however, we maintain a negative outlook on the company's rating 
going forward.
    I have also been asked to address the effect of AIG's 
troubles on creditworthiness of its insurance subsidiaries. We 
believe those subsidiaries are, to some extent, protected by 
insurance regulations from AIG's financial problems. 
Nevertheless, we believe there is increased reputational risk 
for the subsidiaries at this time, which may eventually affect 
their earnings. Moreover, they may have reduced access to 
capital in the event AIG's condition should worsen.
    I have also been asked to address whether S&P's ratings may 
have contributed to the decline of AIG. We believe that AIG's 
difficulties resulted from the convergence of many factors, 
including the unprecedented and substantial deterioration in 
the market value of AIG's CDS portfolio. While some have argued 
that S&P's downgrade was too slow, others have said that we 
acted too aggressively and that our downgrades contributed to 
AIG's decline.
    We would not refrain from taking any rating actions simply 
out of deference to a particular issuer or at the request of a 
market participant. Our ratings are not driven by market 
sentiment; rather, our role to act as an independent observer 
offering our views on creditworthiness.
    Finally, you have asked me to describe any involvement S&P 
may have had in connection with the structuring or 
restructuring of the government support packages to AIG. 
Although S&P has been informed by government officials about 
the actions that have been taken, we have had no participation 
in the structuring or restructuring of these packages, nor has 
S&P provided or been asked to provide any advice or 
consultation to the government in connection with its support 
of AIG. I think you for the opportunity to participate in this 
hearing and I would be happy to answer any questions you have.
    [The prepared statement of Mr. Clark can be found on page 
148 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Clark.
    To the whole panel, we thank you for coming today. We did 
not anticipate that this hearing would have as much attention 
as it does. It is just a standard old country type hearing up 
here and suddenly has gotten a life of its own for totally 
other purposes. But maybe we can use our time in questioning 
you to find out some important questions, other than bonuses.
    And that is first maybe directed to our Pennsylvania 
insurance commissioner because a good part of AIG's insurance 
is inspected by your department. And I know you are here for 
the National Insurance Commissioners, but could you give us an 
idea whether there is any real negative impact or risk to the 
insurance policyholders of AIG, specifically in Pennsylvania, 
but then as you may know, countrywide.
    Mr. Ario. As was just said by the gentleman from Standard 
and Poor's, there are some threats on the horizon in terms of 
reputational risk and in terms of access to capital, but today 
I can tell you that the 11 companies in Pennsylvania are 
strong. They continue to be roughly as strong today as they 
were in September.
    And so far, these threats have not materialized, and the 
insurance companies continue to be strong. Even if there were 
more threats, of course, the policyholders under these 
insurance companies would be fully protected, but today I think 
the franchise value is still there across the set of AIG 
companies, both in the property and casualty business and in 
the life business, and we continue to watch it carefully.
    Chairman Kanjorski. So as I understand that, trying to be 
fair, if I were a policyholder, I would not fear the fact that 
my policy will be honored, can be honored, and the funds are 
there protecting me. So it will be honored; is that correct?
    Mr. Ario. That is absolutely correct.
    Chairman Kanjorski. Very good.
    As to the thrift regulator, I guess I am just going to ask 
a simple question that I get asked every day when I am home 
talking to people. Most people are astounded that the problems 
of AIG and their involvement in the derivative markets were not 
picked up by the regulator and dealt with by the regulator. It 
seems that there was no whistleblower either. Can you give us 
some evidence of what happened and why the regulator did not 
pick that up?
    Mr. Polakoff. Yes, sir. I'll start with the notion that 
indeed the Office of Thrift Supervision reviewed the 
performance of the $80 billion in credit default swaps that are 
really at issue with the government bailout that occurred last 
year. Of that $80 billion in credit default swaps that are 
primarily supporting CDO's, the underlying CDO's, I want to 
restate what I said earlier, sir, which is that there has been 
no credit, realized credit losses, on those underlying CDO's.
    Credit default swaps were written on the triple A senior, 
super senior, tranche of the CDO's. The risk in that portfolio, 
especially that $80 billion, the risk is from collateral calls 
associated with either the rating downgrade of AIG, the 
company, the rating downgrade of the CDO's, or the market value 
deterioration in the CDO's.
    We have been strongly looking at the FP performance since 
2004. We had regular, what we call colleges, with all the 
international supervisors each year. In 2007 and 2008, we very 
aggressively discussed the risk within FP and the credit 
default swap portfolio. About $306 billion of the $430 billion 
of the credit swaps reside in a subsidiary in the U.K., but is 
actually a subsidiary of a French bank that is part of FP. So 
Commission Bancaire looks at that portion of the credit default 
swaps.
    But indeed, I do want to clarify, from our perspective, we 
reviewed and clearly understood and worked with FP with this 
risk. I also want to state that it is important to understand 
that this book of business, that the subprime credit default 
swap book of business stopped in 2005.
    Chairman Kanjorski. On that point, though, it seems to me 
that it was not our problem? We are not responsible for it so 
we would have to look somewhere else. So it is sort of a 
pointing game. The problem is, we are going to have to find 
somebody ultimately who is responsible for the whole thing, and 
what do you envision the change should be so that this problem 
will never happen again?
    Mr. Polakoff. Well, thank you, sir. Congressman, I want to 
go on record as saying OTS should have, in 2004, stopped this 
book of business with an understanding, with an anticipation, 
with an analysis that suggested that the real estate market 
might get as bad as it has gotten in the last 2 years. At the 
2004 assessment, we should have done it; we didn't do it. There 
are a lot of people walking around who failed to understand how 
bad the real estate market was going to get.
    I, in no way, want to suggest that there is a pointing game 
going on here or we are looking at others. We do believe that 
this kind of company deserves the oversight of what we will 
call a systemic risk regulator and that systemic risk regulator 
would have three parts to it: The ability to examine; the 
ability to provide liquidity if there is a liquidity crisis; 
and the ability to place an institution into receivership if 
that is a necessary outcome.
    Chairman Kanjorski. Thank you very much, Mr. Polakoff.
    And now my time has expired. My ranking member from New 
Jersey, Mr. Garrett.
    Mr. Garrett. Thank you. And I seek unanimous consent, just 
to clarify the record, as to my comments in July that actually 
besides covered bonds, it was also dealing with the framework 
of the unwinding process, the potential for future troubled 
institutions, such as this, and future activity of the Fed in 
the reserve, if no objection.
    Chairman Kanjorski. No objection. It is so ordered. Do you 
have a copy?
    Mr. Garrett. Sure.
    Thank you all. Just to run down the aisle, Mr. Clark, with 
regard to the comments regarding the six notch uptick with 
regard to the grading, is that due to the fact--simply to the 
amount of money that the Federal Government puts into this or 
is there an implicit now guarantee that we are there going 
forward?
    Mr. Clark. We are not considering, in our analysis, that 
there is an implicit guarantee going forward. We are reflecting 
the support that has been provided and the potential that there 
could be future support, which would include some of the things 
that AIG and the Fed have announced, but have not yet been put 
into place.
    Mr. Garrett. Because just recently, a few months--a short 
time ago, it was restructured from the Fed and the Treasury as 
to what their relationship was and I guess that was in light of 
the fact that had they not done that, then you would have 
gotten that six notch or some deviation.
    Mr. Clark. Right. And conditions wouldn't have been exactly 
the same at the time. So the answer might not have been exactly 
six notches, but it would have been in the range. But we have 
been saying for several months in our publications that we 
believe AIG's ratings would be non-investment grade had it not 
been for the support that had been provided.
    Mr. Garrett. I appreciate that.
    Ms. Williams, the last time you were here, whenever that 
was--a few weeks back--I got the impression--maybe I heard 
wrong from our exchange--that there was no one really 
responsible for or looking over the AIG and the holding company 
with regard to all this stuff going on here, black box/black 
hole, I think you referred it to, as far as the derivatives and 
what have you, but today, and also at the meeting previously, 
Mr. Polakoff, in reading his testimony, I get the idea that 
there was and that it was the OTS.
    And if you go into his whole testimony, he had a whole 
bunch of review back in March and what they said should be done 
and it comes back to them, AIG coming back with their 
recommendations. So if I understand it correctly, was there a 
regulator that looks over all the holding companies and the 
banks and the CDS out there?
    Ms. Williams. The OTS, in this situation, is the holding 
company regulator. They are responsible for regulating the 
holding company. And that is what I mentioned before, that 
there is a holding company regulator. The questions that we 
have about holding company regulation is the focus of that 
regulation; in this situation we have heard today, they were 
looking at AIG FP. There is a question of timing. And I think I 
may have indicated the timing was off in terms of when they 
actually started going ahead.
    Mr. Garrett. Bottom line, there was a regulator. Mr. 
Polakoff says that maybe they were just looking in the wrong--
had the wrong modeling, the wrong analysis. In retrospect, they 
can see what they should have done, but--
    Ms. Williams. Yes. There is a holding company regulator.
    Mr. Garrett. Very good. And just very quickly, on a side 
note, your comment that you are not able to audit the Fed with 
regard to the monetary policy, that is under current statute.
    Ms. Williams. Correct.
    Mr. Garrett. And perhaps, this is something--I know 
Chairman Frank has said at some point in time to look at the 
policy, and what have you, our control over that. I assume--do 
you want to make a comment whether that is something that 
Congress should look to do?
    Ms. Williams. This is an issue. GAO has said before that we 
will do what you instruct us to do and we--you know, if you 
want us to do it, we will definitely do it.
    Mr. Garrett. I appreciate that.
    Mr. Polakoff, $80 billion left out there; $50 billion of 
that is on the subprime situation, right?
    [no verbal response]
    Mr. Garrett. Okay. Going on Mr. Campbell's original 
question, what is the--how did you phrase that, Mr. Campbell? 
What is the total amount that is at risk, actually there, 
exposure for the taxpayer at this--or for actually AIG and 
potentially for the company and the taxpayer?
    Mr. Polakoff. Congressman, I may not be the best person to 
answer that question since post-September 15th--
    Mr. Garrett. That is fair enough.
    Mr. Polakoff. --we are no longer a savings and loan holding 
company regulator for this company. But I would submit to you, 
sir, that the $80 billion is down to $12 billion as a book of 
business of AIG FP.
    Mr. Garrett. One other question while you are here. Do you 
take a look to see on the other side on these CDS's whether 
these CDS's are actually hedged in this situation because we 
know that some of the folks out there who looked at AIG earlier 
than you folks and saw the problems said, ``We are going to 
hedge this business with AIG and protect ourselves.''
    So even though the fact we bailed out AIG and some of these 
parties were basically--got tax dollars through that, they were 
actually protected on the other side for their own hedging on 
the downgrade on this. Do you look at that? Do you have that 
information?
    Mr. Polakoff. We do not have that information. As to how a 
counterparty would be hedging, that relationship with AIG, no, 
sir.
    Mr. Garrett. Does anybody look at that?
    Mr. Polakoff. It is going to depend who the counterparty is 
and who the regulator is for that counterparty.
    Mr. Garrett. I understand. Thanks so very much.
    Chairman Kanjorski. Thank you very much, Mr. Garrett.
    And now the gentleman from Massachusetts, the chairman of 
the full committee, Mr. Frank.
    The Chairman. Thank you, Mr. Chairman.
    And let me say to the gentleman from New Jersey, I 
apologize. I was looking at the transcripts of our previous 
hearing and the transcript, the official transcript, is 
probably incorrect. Looking at the official transcript, it cuts 
off the questioning. I should have wondered because, according 
to this transcript, the gentleman used far less than 5 minutes 
and most of us find 5 minutes too constraining.
    So I will have to correct the transcript. It began with 
covered bonds and I will have to check and see why transcripts 
were not better done. So we did have the hearing on July 10th 
well before they got involved again. The gentleman did ask if 
they planned to do it again and I guess he got his answer. They 
may not have planned to do it again, but they did it again.
    Mr. Garrett. They didn't want to do it again. They said--
yes.
    The Chairman. This may be beyond the scope of what the GAO 
got involved in, but you know, Ms. Williams, that the rationale 
for the intervention by the Federal Reserve was to prevent 
systemic risk if there was a total collapse. Does the GAO have 
any opinion on whether or not that was a valid fear or was that 
beyond the scope of your mandate?
    Ms. Williams. It really is beyond the scope of our study. 
We were attempting to identify what the goal was.
    The Chairman. That's fine. There is no question, you know, 
it is correct. I would just note, and it is clear that there 
should have been some conditions, but I was re-reading the 
transcripts, probably to remind myself of what had happened. We 
should note that the Federal Reserve and the Secretary of the 
Treasury at that time, Secretary Paulson and Mr. Bernanke, were 
being criticized because they had not intervened to stop Lehman 
Brothers from falling apart and not paying off.
    So they were, to a certain extent, dammed, but they didn't 
dam when they didn't because there was a consensus forming--
well, first Bear Stearns, there was intervention for Bear 
Stearns and there was a lot of criticism. People said this is 
capitalism. You have to let people go belly-up.
    And then Lehman Brothers went belly up and it turned out 
bellies didn't look so good to people. So when the next one 
came up, which was AIG, they intervened. Now that doesn't mean 
they did it right or wrong, but we ought to give that context. 
And there was a significant consensus that letting Lehman 
Brothers fail with no intervention was a problem.
    But this is a question I want to ask our various witnesses 
and it is not exactly what they were asked about, but we do--in 
addition to doing everything we can to get the money back, an 
important part of our job is to minimize this kind of damage 
and, in particular, not to have either the Bush Administration, 
the Obama Administration, or any Administration forced with the 
choice of either you let Lehman Brothers go completely under 
and have a problem or you bail out AIG's counterparties and 
have a problem.
    We have, under the law, reasonable means for reacting when 
a bank is going bad. It is called ``resolve'' it. One of those 
antiseptic words. We can ``resolve'' banks. Wachovia went under 
during this period, Washington Mutual. Neither of those or 
other banks caused the kind of disruption, one way or the 
other, that we saw from Bear Stearns or Merrill Lynch being 
bought by Bank of America, etc.
    What Secretary Geithner has asked for, and recently the 
Speaker and Mr. Paulson were for this, and he has testified 
about it and Mr. Bernanke has, an argument is that I think, 
very strong that there should be a statutory framework so that 
regulators can step in and unwind an institution and not be 
faced with the O and nothing choice that they had with regard 
to, I think, people would find both the Lehman Brothers outcome 
and the AIG outcome somewhat unsatisfactory.
    I'm wondering again--it wasn't on your agenda, maybe, 
beyond the scope for some, but on the other hand, from OTS and 
others, do you have opinions as to whether or not we ought to 
be moving towards some statutory framework so that you can 
unwind these troubled institutions without the kind of choices 
we have had?
    Mr. Polakoff. Yes, sir. We do believe that there should be 
that statutory process. We do believe that if there is 
sufficient discussion and debate within Congress and a decision 
to move forward with a systemic regulator that the power should 
fall within the systemic regulator to examine, and if necessary 
for receivership activities. Yes, sir.
    The Chairman. Anyone else? Yes, Commissioner.
    Mr. Ario. Yes, within the insurance subsidiaries there's a 
clear process too for unwinding, just like there is with the 
banks.
    The Chairman. Right.
    Mr. Ario. Two things would happen with AIG in this kind of 
situation. One, most of the business would go to competitors, 
so there would be a smooth transition for policyholders; and, 
to the extent that didn't happen, there would be a guaranteed 
fund protection behind it. So we agree with OTS that there 
ought to be a systemic approach to this, and we would think.
    The Chairman. And let me just say one of the things with a 
guaranteed fund is it could come with limits so people are not 
rewarded with open-ended funds, but in the guaranteed funds 
there are usually limits, which is a guide to prudent 
investing.
    My time has expired, Mr. Chairman. If either one of you has 
a brief comment, but I think it's probably not a GAO issue.
    Ms. Williams. Well, actually I would just like to comment. 
The framework the GAO rolled out in January of this year for 
the financial regulatory system has an element that directly 
goes to that.
    The Chairman. Thank you.
    Ms. Williams. And that's a provision to make sure that the 
exposure to taxpayers is limited in any framework going 
forward. So this would fall into that category.
    The Chairman. I thank you. That's something this committee 
will have to focus on.
    Chairman Kanjorski. Thank you very much, Mr. Chairman.
    Now, the gentleman from Alabama, Mr. Bachus, for 5 minutes.
    Mr. Bachus. Thank you.
    Ms. Williams, Chairman Kanjorski and I, part of our request 
to you is to determine whether there had been any measurable 
progress in recouping the taxpayer dollars. Have you seen 
anything, any optimistic signs or positive signs; and, one of 
the things I'll ask you in that question or even choose to use 
this or not, but in the Fed's special purpose vehicle, ``Maiden 
Lane,'' I notice that those contracts and credit default swaps 
may be performing at least apparently at a higher level than 
when they were acquired. But would you comment on the broader 
question than maybe that detailed question?
    Ms. Williams. Our work in this area is going on, on an 
ongoing basis. In terms of the status, we looked at where they 
are and we noted the challenges. And at this point we see a 
number of challenges that AIG continues to face in terms of 
restructuring itself. So, I would say at this point we are kind 
of neutral until we continue to do some more work in terms of 
the outlook.
    Mr. Bachus. Okay. Thank you.
    And Mr. Polakoff you acknowledged, I believe, that you were 
somewhat aware of the worsening situation at the Financial 
Products Subsidiary, but you, I think, admit that OTS didn't 
foresee the extent of the risk to AIG. Is that correct?
    Mr. Polakoff. Yes, sir. We did not foresee the extent that 
the mortgage market would deteriorate and the impact on the 
liquidity of AIG FP.
    Mr. Bachus. Did you understand the complicated use of the 
credit default swaps? Did you end the exposure they were 
creating for the company, the amount of risk? Was there an 
appreciation of that?
    Mr. Polakoff. Yes, sir. Absolutely. We reviewed the models. 
We understood the models. We worked with the external auditors. 
We worked with senior management of the company. Again, the 
models were accurate in predicting that the actual realized 
credit loss on the underlying CDOs was minimal, and it remains 
minimal as of today. It was the liquidity aspect that the 
models failed and we failed to identify that aspect.
    Mr. Bachus. Did you lack qualified examiners, or is that an 
impossible task?
    Mr. Polakoff. No, it's quite possible. I'm very proud of 
the work our examiners did. Again, in 2004, we failed to 
predict how bad things would get in 2008.
    Mr. Bachus. Have you revised your examinations? Of course, 
a lot of that liquidity has been unwound now. So I guess it's 
accurate.
    Mr. Polakoff. Yes, sir. And this is not the only company 
that suffered liquidity crises. And from the Basel committee on 
down, all of the regulators have focused on the proper review 
of liquidity.
    Mr. Bachus. Thank you. Okay.
    Mr. ``Ario,'' is that how you pronounce it?
    Mr. Ario. That's correct.
    Mr. Bachus. There has been, you know, some call to create 
an optional Federal charter. But at least as I have seen it, I 
am not seeing much failure of State regulation of the insurance 
industry.
    Would you comment on what native reform, maybe the 
insurance reform ought to be and where that ought to come from?
    Is there a gap in the regulatory structure? Is there a 
failure of Federal regulation or is it a State regulation?
    Mr. Ario. Thank you for that question.
    I certainly agree with you that there hasn't been a failure 
of the State system here. In fact, we are the success story 
within this overall story and that the insurance companies 
continue to remain strong, stable, well-capitalized companies. 
And they are the most likely route that the taxpayer will get 
paid back here is the value in those insurance companies. There 
are on an ongoing basis many modernization initiatives that 
we're involved in. The world changes fast these days, and so 
we're updating our financial regulation, taking into account 
some of the issues on securities lending.
    I do agree with my colleague here, Mr. Polakoff, that it's 
the same thing on securities lending. It was liquidity issues 
that caused the problem, not losses in the underlying value. 
But we're looking at that issue. We're looking at modernizing 
our product approval and market conduct systems, our producer 
licensing systems, and so forth.
    But there is nothing in a systemic nature, I think, that we 
have to do other than be partners as part of a national 
systemic risk system that protects the functional regulators 
within an overall collaborative system.
    Mr. Bachus. Have you looked at the overall holding company 
at AIG in doing your assessments of the insurance company? Or, 
do you deal solely with the insurance operations?
    Mr. Ario. We deal primarily with the insurance companies. 
Certainly, when we have questions we kick them up to the 
holding company level, since securities lending was actually 
handled at the holding company level. When we have those kind 
of questions then about how is it being handled there, because 
it's using money from the life insurance companies, we 
generally get answers to those questions.
    But there is a well there where if we are pressed real hard 
on some sensitive topics, we don't have clear authority to go 
into the holding company level. And so I do think you need 
somebody that has clear authority at that holding company level 
as well.
    Mr. Bachus. Thank you.
    Chairman Kanjorski. Thank you very much.
    And now we will hear from the gentleman from New York, Mr. 
Ackerman, for 5 minutes.
    Mr. Ackerman. Thank you, Mr. Chairman.
    I think a lot of people listening to us, their eyes are 
starting to glaze over because they don't know what the heck 
we're talking about. And when they hear a term ``credit default 
swaps,'' it sounds very intimidating to begin with. Most of the 
American people don't know what that is, and I daresay that 
most Members of Congress didn't know what it was as long ago as 
a year ago, because it's a relatively new thing.
    I just want to make sure that I understand it. And I'll try 
to explain my understanding in what my mother would call by 
giving you a ``for instance.'' So there are two guys out on a 
life raft, and they're adrift at sea, and a storm blows up. And 
the raft is surrounded by sharks and the waves are 10 feet 
high. And the first guy says, ``I'm scared.'' So the second guy 
sells him the policy.
    That's a credit default swap. You're selling something with 
absolutely nothing to back you up. You have no money, possibly, 
in your pocket or your wallet, and, if everything goes right, 
you're collecting a premium. And if everything goes wrong, so 
what. It makes no sense. It's like snake oil salesmen selling 
you jars of snake oil, and they don't even have the oil in the 
jars.
    I mean there's a great company called, ``I Can't Believe 
It's Not Butter.'' You know, at least they have the decency to 
tell you it's not butter. I mean, this is insurance without 
being insurance, because if they called it insurance they would 
have to have money to pay you off. But they don't have the 
money to pay you off and they're calling it credit default 
swaps, because if they called it, ``I Can't Believe It's Not 
Insurance,'' maybe nobody would buy it.
    I mean, it's a funny joke I made up but this is exactly 
what's happening, and it's not funny, because all of us who are 
laughing are crying, and getting angry and getting enraged. How 
is this suddenly an industry? I mean these brilliant people 
figured this out. It's really very simple. Call yourself 
something else and sell something that you're saying isn't 
insurance that people think is, and the biggest companies, the 
most sophisticated investment minds on Wall Street and all over 
the world are buying this stuff thinking that they are ``almost 
insured,'' almost.
    And as long as they don't put in a claim, they're fine, but 
as soon as the tide goes out, there are a lot of people trying 
to cover their bare assets and they don't have the wherewithal 
to do it. How did we allow this to happen? I mean, some people 
think that we're the regulators and the Congress are the 
watchdogs. We're not that agency. We make the laws. We have 
oversight, and we rely on the regulators. We rely on the rating 
agencies and you at the table to sound the bells, whistles, and 
alarms and tell us hey, there's something going on out there 
that we can't regulate, that we can't observe, that we can't 
figure out, but it's going on.
    There are billions of dollars. AIG is the biggest, I 
suppose. How large is this? How many other people are involved 
in this? What is the risk to the American people? I mean, 
otherwise, you're playing, ``I can't believe we're not 
regulators,'' and we're pretending to be, ``I can't believe 
we're doing oversight.''
    Take a shot.
    Mr. Ario. I'll give you an answer from an insurance 
perspective as a downstream recipient of the risk that was 
created here. Financial Products is essentially on top of the 
pyramid. Financial Products is the one that everybody else 
looks at this stuff and says, ``We're not quite sure if this is 
going to perform or not. We had better hedge on it.''
    You buy the policy from AIG, and then people, as Mr. 
Garrett said, even people who bought policies from AIG hedge, 
in case AIG couldn't pay.
    Mr. Ackerman. They went to AIG because these guys rated AIG 
triple A, and so everybody assumes that their subsidiary is 
triple A, which you haven't rated. It's like if I have an 800 
credit score, are you going to lend my kid money because you 
think he has an 800 credit score?
    Mr. Polakoff. Congressman, if I could offer a couple of 
points for your consideration of the bailout that has occurred. 
And AIG recently did a press release breaking down the money--
$52 billion went for credit default swap-related issues, and 
$40 billion went for security lending issues. So there were 
multiple issues associated with AIG.
    There are many large financial institutions in the United 
States today that underwrite credit default swaps. The issue is 
not the product.
    Mr. Ackerman. They're underwriting the underwriters that 
are doing the underwriting?
    Mr. Polakoff. No. They're issuing, selling credit default 
swaps on various products. It's a well-known, well-respected 
product if done properly, if it were regulated.
    Mr. Ario. Well, I do agree with you, sir, that the product 
itself should be a regulated product.
    Mr. Ackerman. Well, bingo! That's the whole problem. Why 
don't we say that it has to be regulated? Otherwise, it can't 
be insurance.
    Mr. Ario. Well, we agree on that.
    Mr. Polakoff. Yes, the CFTC Commissioner a number of years 
ago came before Congress to ask that indeed credit default 
swaps become regulated; and, I think many members at this table 
would endorse that it should be a regulated product.
    Mr. Ackerman. The New York State Insurance Supervisor, Eric 
Dinallo, came before a different committee of Congress back in 
October and said that. I mean, where is the guy on television 
who does the bells and whistles and gongs? We need all of these 
things going off here.
    Otherwise, there's nobody getting our attention. The thing 
that we have to be doing, Mr. Chairman, I think, is taking a 
look at how we regulate a completely runaway financial giant 
that's going on so that when people buy--I think I'm buying 
insurance--are buying insurance, and not something else.
    I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Ackerman.
    Gentlemen, as you know, we have some votes. We have 
probably 8 minutes left, 7 minutes left, 7\1/2\ minutes left. 
Are you a fast talker, Mr. Price?
    Mr. Price. I think 5 minutes.
    Chairman Kanjorski. In 2\1/2\, you can do 5 minutes?
    We will recognize Mr. Price for his 5 minutes reduced to 
2\1/2\ minutes.
    Mr. Price. The first vote will go for a while, so I will 
appreciate them as chairman. I am pleased to hear the chairman 
of the committee announce that Mr. Geithner will be here before 
our committee within a couple of weeks. I think that there are 
a lot of questions that we would like to ask him today. I want 
to thank the panel for their perspective.
    Ms. Williams, one of the most pivotal roles that we can 
play is oversight, and so I think it comes as a surprise to 
some members of our committee that the GAO is prohibited by law 
from certain reviews of certain Federal financial activities.
    Would you elaborate on that? And, I know you responded to 
Mr. Garrett on that, but what is it specifically the GAO cannot 
do?
    Ms. Williams. This is an area that we actually have a 
prohibition, and it's quite unusual. It is in the Bank Audit 
Agency Act, and it articulates the limits of our authority in 
this area. And there are specific areas prohibited and I think 
there are four. One of the four articulated in the Act is we 
are prohibited from looking at the Federal Reserve's monetary 
policy activities.
    Mr. Price. You mentioned that you would be happy to do that 
if we gave you the authority to do so. Would it be helpful for 
you to be able to do that?
    Ms. Williams. In this current environment, I would say yes.
    Mr. Price. So you would be able to give us and the American 
people a better sense of what has happened and what is going on 
if you were able to look at that.
    Ms. Williams. We currently, in our conversations with the 
Fed, are limited to the information they provide publicly. We 
don't have the same prohibition, for example, with their 
supervisory and regulatory activities. We can actually go in 
and look at what they are doing.
    GAO does appreciate the fact that, you know, the reason the 
Fed has the protections that it has is to ensure its 
independence.
    Mr. Price. Sure.
    Ms. Williams. But I think we are in an extraordinary time, 
so when the Fed has evoked activities under their emergency 
powers, that's an area that perhaps would make sense for GAO to 
have more visibility.
    Mr. Price. Thank you.
    I want to address your report, and I just got it this 
morning, so I am trying to digest it all. But I didn't see any 
sense of an exit strategy that AIG has reported by GAO in your 
report. Is that an accurate assessment of what's going on over 
there?
    Ms. Williams. I mean, at this point, the plan is for 
restructuring. I think given the assistance that the government 
has provided so far and kind of the ongoing restructuring that 
has happened, there are real questions about what the exit 
strategy is. But our work in this area is ongoing.
    Mr. Price. But the American people can't look at it and say 
there's an exit strategy that's in place. Is that an accurate 
statement?
    Ms. Williams. Not that we have seen.
    Mr. Price. Okay. Thank you.
    Mr. Polakoff, you mentioned that OTS should have stopped a 
whole book of business back in 2004; and, I think you respond 
to a couple members saying OTS didn't appreciate how bad 
liquidity was going to get in 2008.
    Was there any change in the assessment between 2004 and 
2008?
    Mr. Polakoff. Yes, sir. What we didn't understand or 
appreciate significantly with our analysis was how bad the real 
estate market was going to get from 2004 to 2008 and the 
corresponding impact to liquidity on the CDS contracts.
    Mr. Price. And in 2006 or 2005?
    Mr. Polakoff. Oh, absolutely, as we progress through the 
years, and these were continuous examinations. As we progressed 
through the years, our concerns became greater. We communicated 
more with the board. We communicated more with management.
    Mr. Price. With the board of AIG?
    Mr. Polakoff. Yes, sir, but about FP. And we became more 
aggressive in the actions that we took as a regulator.
    Mr. Price. And were there any structural changes within AIG 
to address the concerns that you had?
    Mr. Polakoff. Yes, especially with regards to the modeling 
and the valuation of the credit default swaps.
    Mr. Price. Mr. Clark, were you aware of any of this going 
on as you were going through your ratings over the 2005, 2006, 
2007 period, the changes that AIG was making in response to 
OTS?
    Mr. Clark. We were generally aware of that. We were 
certainly aware of their decision to cease writing the new 
credit default swaps on that asset class when they did; and, 
therefore, the nature of the portfolio was relatively low-risk 
compared to if they had continued to protect against mortgages 
in 2006 and 2007 when the assets clearly were worse.
    Mr. Price. And the moneys that they have received at this 
point, have they been used to the best advantage of shoring up 
the company?
    Do you believe in terms of your rating your rating remains 
at an A-minus, negative?
    Mr. Clark. The moneys relating to those credit default 
swaps on the assets that covered subprime mortgages were used 
essentially to fund this ``Maiden Lane III'' vehicle.
    Mr. Price. Could they have been used more wisely?
    Mr. Clark. I won't comment as to whether they have been 
used wisely or not. I will say the way that they have been used 
limits further loss to AIG, and so contributes to stabilizing 
them.
    Mr. Price. I thank the Chair.
    Chairman Kanjorski. Thank you, Mr. Price.
    The committee will stand in recess.
    [recess]
    Chairman Kanjorski. The subcommittee will come to order.
    We have had some discussions. Two members of the panel are 
due to testify in the Senate around 1:00 and have delayed their 
testimony even up until this point. In order to accommodate 
them, and also to accommodate the rest of the subcommittee 
members, particularly with the second panel, Mr. Liddy, we have 
decided to go until 1:15, and then excuse this panel and bring 
in the second panel.
    So all members who wish to have their time, I think we have 
more than enough requests right now, but anyone else who has a 
request for time, please get it into the respective side so 
that we can put you down, and, to the best of my knowledge the 
last examiner was Mr. Price. And so we are now into California 
and Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman.
    Without objection, I would like to enter into the record an 
article by economist Dean Baker, explaining how even if it 
might have been a mistake to let Lehman go under, that 
certainly does not mean it is a mistake for AIG to go into 
bankruptcy or receivership.
    Mr. Sherman. Mr. Ario, do you have any bright member of 
your staff who understands credit default swaps?
    Mr. Ario. They understand it better than me, and I think 
they understand them pretty well.
    Mr. Sherman. Okay. In order to have somebody on your staff 
who understands credit default swaps, how many million dollars 
of retention bonus did your agency give him last year?
    Mr. Ario. As you might guess, the answer to that would be 
zero.
    Mr. Sherman. And one would expect that this individual 
would make what kind of general salary? Don't reveal anything 
all that.
    Mr. Ario. It may be into 6 figures, if that.
    Mr. Sherman. Okay. I'll ask our Acting Director of the 
Office of Thrift Supervision.
    Do you have anybody on your staff that understands credit 
default swaps? I mean, they may not have understood in 2004 
that the real estate market would tank in 2008. Anybody who 
understood that is a genius and a multi-millionaire right now. 
But in terms of just understanding how they work, do you have 
people on your staff who understand it?
    Mr. Polakoff. Yes, sir. We do.
    Mr. Sherman. Retention bonuses of over a million in order 
to keep them on staff?
    Mr. Polakoff. No retention bonuses, sir.
    Mr. Sherman. Salaries below $125,000 a year?
    Mr. Polakoff. I would say $125- to $150,000 for some of 
these specialists.
    Mr. Sherman. I don't know how it is that the private sector 
has to pay millions of dollars for that kind of expertise. And, 
I might add that the members of your staff, they haven't 
destroyed your agency or the international economy in any case, 
which is additional reason to think that they might be goodbye.
    I want to thank the panel for exposing one more fraud 
perpetrated on behalf of AIG, its counterparties, its general 
creditors, and of course its executives. And that fraud is this 
image that has been perpetrated, that the savings bank and its 
depositors, and the insurance company and its consumers would 
be destroyed if we put AIG into receivership.
    I think you gentlemen and lady have illustrated that these 
operating agencies, the savings bank, the insurance companies, 
have some representational relationship, some reputation tie. 
But, if anything, putting them into receivership would 
ameliorate a little bit of taint that they have had by being 
associated with their parent company. After all, if AIG was in 
receivership a month ago, we wouldn't have all these cameras 
here. And being associated with AIG as the savings bank and the 
insurance companies are wouldn't be near the problem that it is 
for them today.
    So let me just clarify Mr. Ario, if AIG, the parent 
company, were bankrupt and the bankruptcy judge or receiver 
were to spin-off the independent insurance companies, would 
they still be relatively health insurance companies, at least 
as to the 11 companies that your agency is familiar with?
    Mr. Ario. The general answer to that is yes. The longer out 
in time we go, the more the insurance companies get separated 
from the holding company issues, the more the answer is going 
to be yes.
    Back in September, though, I would say that a bankruptcy at 
that point, because of the way the ratings are tied together 
between the holding company and the insurance companies, the 
disentanglement and the potential for the problems at the 
insurance level were greater then. But your general point, the 
longer we go, the easier to separate.
    Mr. Sherman. Also, the longer we go we know the executives 
at AIG are greedy and now desperate, and they're trying to 
think of ways to squeeze money out of the savings bank and the 
insurance companies and bring it into the parent company in the 
Financial Products unit.
    You have done a very good job in preventing them from doing 
that, but every day that they are in control of those 
subsidiaries is a day that worries me.
    Mr. Polakoff, what about the savings bank? If it was a 
separate company unaffiliated with AIG, would it be relatively 
healthy?
    Mr. Polakoff. Yes, sir. In fact, if any holding company 
goes into bankruptcy, the underlying insured financial 
institution remains an open institution. I want to underscore 
the importance of the FDIC deposit insurance in that approach. 
So, yes sir.
    Mr. Sherman. I think this illustrates the fact that $170 
billion has gone not just to pay the bonuses, but it's going to 
take care of the counterparties. These are the richest entities 
in the world, the most powerful entities in the world. And they 
have insisted that the American taxpayer make sure that the AIG 
casino pays them off the full amount called for by their bet, 
notwithstanding they have broken the bank. And, it is said that 
AIG was too big to fail, that it was explained AIG is too 
interconnected to fail.
    I would put forward that AIG is too well-connected to fail 
and it is about time that they are put into receivership and 
the insurance companies and savings bank you regulate are no 
longer held hostage by and perhaps squeezed by a relatively 
malignant parent company. I yield back.
    Chairman Kanjorski. Thank you very much.
    Next, we will hear from the gentleman from Delaware, Mr. 
Castle.
    Mr. Castle. Thank you, Mr. Chairman. And let me just start 
with a question for Commissioner Ario. In your opinion, are the 
various entities that make up AIG's insurance portfolio of 
sufficient strength and in a position to be able to be sold to 
develop assets as part of the return of the loan from the 
United States?
    Mr. Ario. Yes, but for the deterioration of the economy 
generally. Relative to other insurers they continue to hold 
good value, but of course anybody who was in the market today 
trying to sell, and somebody has to raise the capital to buy, 
it's a problem for everybody. But if the markets recover so 
that there are actually opportunities to sell any insurance 
companies to anybody else, the AIG companies are going to be as 
good as anybody's.
    Mr. Castle. Yes, I wasn't trying to ask you to market them, 
but just from your point of view, from a regulatory legal point 
of view, they are sellable as assets?
    Mr. Ario. Yes.
    Mr. Castle. Thank you.
    I guess this question could go to Ms. Williams and Mr. 
Polakoff, but I am concerned about the management of AIG since 
the Federal Government has been involved. I think that was in 
October of 2008 under the previous Administration when the 
stock was assigned to the Federal Government as part of, I 
think, the first initial bailout, close to 80 percent of the 
stock of AIG.
    We have had a series of problems and transgressions since 
then, and I don't know if in your work in terms of dealing with 
them on a regulatory matter, looking into their circumstances 
of functioning, if you made a determination of how the 
management aspect of this is working, has the Federal 
Government in the form of the Federal Reserve or in the form of 
Treasury asserted itself in terms of board membership or 
anything of that nature; or, have they been present during 
these board meetings that have taken place in which these 
decisions have been made?
    I mean, I have been told that I think the Federal Reserve 
at least was present during some of the discussion of bonuses, 
for instance, and, I don't know what you know about that. And 
perhaps there's an answer you will have to get to us at a later 
time, but I am very interested in what that Federal Government 
role is concerned.
    We have a lot of money on the line. We have a lot of 
ownership at this point, and I would hope that our involvement 
is greater than what we have been hearing on the television and 
newspapers in the last few days as a matter of fact.
    Either one of you or both of you.
    Ms. Williams. As part of our ongoing oversight of the TARP 
program, one of the things we recommended in our very first 
report was for Treasury to make sure it created a process to 
oversee the agreements the agreements they have with 
institutions. And Treasury did have an agreement with AIG in 
November and they are still in the process of standing up that 
process to oversee the terms of their agreement. And in terms 
of the Fed, based on what they have disclosed to us, our 
understanding is that they are present at certain board 
meetings at least as a silent observer, if you will.
    Mr. Castle. Okay. I may come back to you.
    Mr. Polakoff, do you have anything to add?
    Mr. Polakoff. Congressman, once the United States 
Government took ownership of AIG, the company, back in 
September of 2008, we in essence ceased to be the regulator of 
the holding company. So I don't have that information.
    Mr. Castle. Gotcha.
    Ms. Williams, can you tell us anything about that Treasury 
plan in terms of what their involvement in the management would 
be in more detail?
    You have indicated there was a plan and you believe they 
executed it, but what did it consist of?
    Ms. Williams. No, actually. Let me clarify that. Our 
recommendation was for Treasury to develop a plan.
    Mr. Castle. Right.
    Ms. Williams. And in our second report that we issued in 
January, we found that they still hadn't developed that plan 
yet and it was still in process.
    Mr. Castle. Okay.
    Ms. Williams. And this is an area we continue to monitor 
the status of that recommendation.
    Mr. Castle. And you can't update us today as to whether or 
not they have done any thing since then. Is that correct?
    Ms. Williams. What we found when we spoke to them specific 
to AIG is they are continuing to stand up oversight of AIG as 
their role has increased in the assistance that's being 
provided to AIG, but they haven't done that yet.
    Mr. Castle. Okay.
    Mr. Clark, I am a little concerned in your testimony in 
terms of some of the credit ratings, etc. Was this done with a 
rearview mirror? It seems to me if you look at your chart of 
when downgrades were done, it sort of reflects things that have 
happened in the world of AIG.
    Do you feel that you and other agencies that do this are 
doing it in such a way that you are giving fair warning as 
opposed to looking at it after the fact? And I am asking that, 
maybe in general, but specifically as to AIG.
    Mr. Clark. It certainly is the case that we sought to give 
fair warning in our ratings announcements, and that includes 
back in February 2008, long before this rescue became necessary 
when we placed the ratings on negative outlook, a subsequent 
downgrade to the ratings in May. And, in fact, we indicated at 
that time that potential downgrades could occur after that if 
the company did not successfully raise capital.
    In June, they did successfully raise $20 billion of 
capital. After that fact, the events started to change very 
dramatically, particularly the first part of September, where 
in a very quick time the takeovers of Freddie Mac and Fannie 
Mae, the failure of Lehman, and just a massive loss of 
confidence in the markets that occurred over a very short 
period of time, and really greatly changed the assumptions that 
we had about the potential market value losses on those credit 
default swap securities.
    So the rating actions we made earlier in the year did 
reflect the facts as we knew them at that time and what we felt 
were appropriate assumptions for the future, but we didn't 
fully anticipate this extremely rapid, really unprecedented 
deterioration in the markets in early September, which affected 
the company's liquidity and collateral needs. And as soon as we 
were in a position to recognize that and see that it was going 
to have a lasting and important impact, we took the rating 
changes that we felt were appropriate.
    Mr. Castle. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. Thank you very much.
    Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman.
    Ladies and gentlemen, I think I heard most of you say that 
you didn't have oversight over CDS, but I didn't hear any 
disagreement with Mr. Ackerman's general description or the 
general belief that credit default swaps are all some sort of 
insurance. And I take that to be an accurate assessment of what 
they are. They're just insurance with nothing backing it up.
    If that's what they were, I would then argue that you did 
have the authority to oversee these. If we were a part of the 
holding company, it was your responsibility at the OTS to 
include any activity that might have impacted the holding 
company. If it was part of the insurance company, the State 
regulators had a responsibility to oversee some sort of 
insurance; and, certainly, the credit rating agencies had some 
responsibility to see that this game wasn't going to undermine 
investors' confidence.
    So I know nobody wants to take fault for it, and again, I 
don't think it's actually anybody's fault. It's everybody's 
fault. Credit default swaps were simply a way to get around any 
sort of regulation, any sort of oversight, and everybody here 
allowed it to happen. Everybody allowed it to happen. To say 
you didn't have any authority to me is simply an easy way out 
and a wrong way out.
    But I do want to know now. I mean, okay, it's done. We are 
where we are. I presume that everybody, you're here today, 
because you know a lot about AIG, and AIG to me is just one of 
the many problems, but it's the one that we're talking about 
today. I presume that even though the OTS isn't technically the 
regulator, I presume you are still keeping an eye on it, 
because in theory there will come a time when you will be the 
regulator again unless we change everything.
    So I don't think you probably just dropped the ball. I hope 
you have. And that being the case, I would like to know when do 
you think that the path that we are on now should, has a 
reasonable expectation, of leading AIG back to profitability at 
some point of stability; and, if so, when. And I'm not saying 
when, tomorrow, but within a year, 2 years, 10 years, 100 
years, never.
    Mr. Polakoff?
    Mr. Polakoff. Congressman, thank you.
    If I could just go back to one of your earlier points to 
clarify from my perspective while credit default swaps may be 
an unregulated product, they absolutely, positively fell within 
a company that OTS regulated and we indeed very much understood 
the risks of the profile of the credit default portfolio as we 
were looking at it.
    Mr. Capuano. Well, hopefully that cannot be true, because 
if you did, and then didn't do anything about it, that's even 
worse than not doing anything about it in the first place. If 
you understood the risk and took no action and said nothing 
about it, that's 10 times worse to me than simply saying not 
our bailiwick.
    Mr. Polakoff. Well, we did take action, and the risk in the 
portfolio was not a risk of credit loss because they have had 
no credit loss in the underlying CDOs. It was a liquidity risk.
    Mr. Capuano. I understand that, but a risk is a risk, and 
the truth is that may be important to you, but it is not 
important to the American public as to why we are putting 
billions of dollars in there. It doesn't matter.
    The risk, I think, was part of your responsibility to 
oversee, and the fact that you let them take so much risk, 
credit risk, liability risk, counterparty risk, I don't care 
what you call it or where you put it in a box, it's still too 
much risk for the American people. And you and your agency was 
one--not the only one. I'm not trying to single you out. You 
were one of the ones who allowed it to happen, but I would like 
to know when are we going to see some profitability at AIG.
    Mr. Polakoff. Congressman, I don't know when we are going 
to see the company returned to a profitable scenario. My 
understanding of everything that the government has done are 
the right actions to put it down the path to get where the 
American public wants it to be.
    Mr. Capuano. Are you reasonably satisfied--not the details, 
but in general--with the approach we have taken or has been 
taken is an acceptable approach?
    Mr. Polakoff. It seems very supportable and logical to me.
    Mr. Ario, on the States' side?
    Mr. Ario. Forward looking at credit default swaps, clearly, 
they should be regulated. I think you could get agreement 
across the panel on that. As to your question of when AIG will 
come out of this situation, basically, it depends on the 
markets.
    When this was done in September, there was enough value in 
the insurance subsidiaries to sell a number of them and pay 
back the Federal Government. Then, as we all know, it was 
October and the markets deteriorated across-the-board, and 
there just hasn't been an environment in which to sell.
    Mr. Capuano. So you would agree that the basic approach is 
in your group's estimation a reasonably correct approach?
    Mr. Ario. The question of whether the counterparties needed 
to be paid-off in order to stabilize the financial market, I 
think, that's a question for the Federal Reserve and Treasury. 
I don't have the expertise to answer that one. But the question 
of whether that money can be paid back, whether the insurance 
companies have the value in them to pay back, I think they do.
    Mr. Capuano. But it's insurance companies subject to State 
regulation, so therefore the State regulators in my estimation 
have to be on top of this issue. They must have an opinion as 
to whether this has been reasonably well-handled or not. I 
mean, it's a very simple question.
    Mr. Ario. From the insurance perspective, the answer is 
yes.
    Mr. Capuano. Ms. Williams, I am going to skip you, because 
I don't think that's your end of the world.
    Mr. Clark, the credit rating agencies must have an answer 
on this. You must now be absolutely certain, because I know 
that's what you get paid to do is to give us your opinion. When 
is AIG going to become profitable again?
    Mr. Clark. I would have to have quite the crystal ball to 
be absolutely certain on that. No. We are not certain when AIG 
is going to be profitable again. I can tell you from the 
company's financial reports in 2008 if it hadn't been for 
significant investment losses caused by the markets, the life 
insurance business would have been profitable.
    The property and casualty insurance excluding mortgage 
guarantee would have been profitable, excluding those 
investment losses. So there are still core profitable 
businesses that are a part of this group, but I agree with 
Commissioner Ario. Until the financial markets stabilize or 
even begin to show recovery, it will be difficult for AIG to 
show profitability.
    Mr. Capuano. And do the credit rating agencies believe in 
general that the general approach taken on this is reasonably 
good or horrendously bad?
    Mr. Clark. Which general approach? I'm sorry.
    Mr. Capuano. On AIG, what we have done so far, what has 
been done.
    Mr. Clark. The government's approach; we don't have a view 
on whether it was appropriate or not, only that it has to some 
degree stabilized the condition of the company.
    Chairman Kanjorski. Thank you very much, Mr. Clark.
    Thank you, Mr. Capuano.
    Our next questioner is Mr. Royce of California for 5 
minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I want to ask Ms. Williams of the Government Accountability 
Office a question. Yesterday, ``ABC News'' reported during late 
closed-door talks last month negotiators for the House, Senate, 
and White House stripped out a measure to the stimulus bill 
that could have restricted the AIG bonuses. And ``ABC News'' 
goes on to say, ``Last month the Senate unanimously approved an 
amendment to the stimulus bill aimed at restricting bonuses 
over $100,000 at any company receiving Federal bailout funds. 
The measure, which was drafted by Senator Olympia Snowe, 
Republican-Maine, and Senator Ron Wyden, Democrat-Oregon, 
applied these restrictions retroactively to bonuses received or 
promised in 2008 and onward. But, then, the provision was 
stripped-out during the closed-door conference negotiations 
involving the House and Senate leaders and the White House.''
    A measure by Senator Chris Dodd, Democrat-Connecticut, to 
limit executive compensation, replaced it. But Dodd's measure 
explicitly exempted bonuses agreed to prior to the passage of 
the stimulus bill. Here's the exact language, says ``ABC 
News,'' from Dodd's measure in the stimulus:
    ``The prohibition required under clause I shall not be 
construed to prohibit any bonus payment required to be paid 
pursuant to a written employment contract executed on or before 
February 11, 2009.''
    Now, I didn't vote for the stimulus for this particular 
bill, but the point is that some Democratic members, those who 
controlled the conference committee, were aware of the 
potential for taxpayer dollars to be used for bonuses and went 
out of their way to protect those bonuses by a reading of the 
provision in the conference report here that says exactly that. 
So I am going to ask the GAO, Ms. Williams, to comment. I don't 
know if inside the Government Accountability Office there has 
been discussion about the consequences of that language. But, 
if there has been, I would like to hear your commentary on it.
    Ms. Williams. Based on what we were doing specific to AIG, 
I am not in a position to provide a specific response to that 
issue. But I would be more than happy, if this is something we 
have looked at, to provide an agency response for the record.
    Mr. Royce. Well, as we pull up the language of the bill 
and, as I said, this isn't in the House version or the Senate 
version. This comes out of the conference committee report 
after Senator Olympia Snowe and Senator Ron Wyden attempted to 
put in on the Senate side. They added the language aimed at 
restricting bonuses over $100,000, those retroactive and 
prospective bonuses. And then to go through the provision 
again, this is the language that was put in behind the closed-
door conference committee. It says: ``The prohibition required 
under clause I shall not be construed to prohibit any bonus 
payment required to be paid pursuant to a written employment 
contract executed on or before February 11, 2009.''
    Now, that measure came back to the House and back to the 
Senate with that new provision in it. And my second question 
would be, why couldn't we pass legislation? And I believe the 
House Republicans prepared legislation to do this. Why can't we 
pass legislation that would remove that provision in the 
stimulus package? And, if we did, would that put us on firmer 
ground as we tried to knock-out these bonuses on AIG.
    Ms. Williams. Once again, this is really outside of the 
scope of what we are specifically looking at in terms of AIG.
    Mr. Royce. But you are looking at the bonus issue, and I am 
looking at the law that attempts to prescribe us or attempts to 
prevent us from knocking down those bonuses--attempts to 
prevent regulators and other authorities from halting the 
payment of those bonuses. And I am just saying, why don't we go 
back and reverse what was done in that closed-door session? 
And, if we did that, clarify the law, maybe go back to Senator 
Olympia Snowe's original language before it was taken out in 
the conference committee, I would think that would put us on 
firmer ground then to prevent these bonuses from being paid.
    Chairman Kanjorski. The gentleman from Massachusetts, Mr. 
Lynch.
    Mr. Lynch, because of the limitation of time until 1:15, do 
you have an objection if we allow 2 minutes, because we are 
intending to try and get in many members as possible.
    Mr. Lynch. I am happy to cooperate, Mr. Chairman, sure.
    Chairman Kanjorski. The gentleman is recognized.
    Mr. Lynch. Thank you, Mr. Chairman, and Ranking Member 
Garrett.
    I am tempted to follow up on the gentleman from 
California's point. I do know that in terms of contract, we 
have heard objections that we can't go back and interfere with 
a pre-existing contract.
    However, I know that Congress, in our raw power, has the 
ability to do just that. We do it all the time in bankruptcy 
where Congress has provided a forum where we just basically 
tear up every contract in a bankruptcy. And I know that Article 
1, Section 10 of the Constitution prevents States from doing 
that, but Congress has that power.
    But I understand, Ms. Williams, you are saying it is 
outside the scope of your authority, and I am not going to 
badger on that. But I'm mystified why my autoworkers were 
badgered and badgered publicly on these financial shows because 
they are making $40 an hour and you don't hear one word about 
the--it is just a sense of entitlement by the folks of these 
companies that are losing billions of dollars--billions of 
dollars--in taxpayer money, and yet they still feel the sense 
of entitlement that they are due these bonuses. It just blows 
my mind.
    Let me ask you: AIG originally received $85 billion back in 
September of 2008--actually, it was September of 2007, I 
believe, when we originally gave them $85 billion and we took 
an 80 percent share of AIG. Then following that, there was $70 
billion in cash given to them by the Fed, $40 billion in loans 
from the Fed, $34 billion in--from this sheet, it looks like 
the Capital Purchase Program, we took some equities and 
securities back from AIG. And then finally there was $52.5 
billion in TARP, which I want to note that I voted against, but 
they got it anyway.
    Going all the way back to the beginning of this, we have 
received zero in terms of information on AIG. We got a lot this 
week. We got nothing on counterparties, who they were, where 
the money went, what kind of compensation deals going on out 
there, if there were bonuses being paid, whether the money was 
going to foreign banks. So going back to the original $85 
billion that they got, we had 6 months of silence basically.
    And you folks are supposed to be out there helping us get 
information back here because we have a whole bunch of people 
lined up who want another bailout, which--forget it. As far as 
I am concerned, forget it. We got so little cooperation from 
these people and we have such abuse here, don't even think 
about coming up here looking for a bailout. That is a disgrace.
    But why did we have to wait for 6 months, until this week, 
until finally we got a little bit of information? Chairman 
Frank is still waiting for information on some of these 
counterparties, they haven't told us the identities of all 
these people. We are going to try to get it from Mr. Liddy when 
he comes up here in a little bit.
    But where is the bottleneck? What is the problem with 
getting information about where the taxpayers' money is going? 
Can you help me with this?
    Mr. Polakoff. Congressman, I would only offer that from an 
OTS perspective, we are not involved in that role and we are 
not involved with the communication requests from Members of 
Congress.
    Mr. Lynch. I am not going to let you off the hook that 
easily. You know, you looked at these CDOs. I know that, by 
virtue of an Act of Congress back in 2000, CDOs are not 
regulated, but you did look at the condition of this company on 
the holding company end. What about information on what these 
instruments were valued at? I know you are saying we had no 
credit losses on the super senior tranch, but you have a 
mezzanine tranch and an equity tranch that were just 
deteriorating, and that has an impact on the margin for those 
senior tranches. I mean what about the information on that 
stuff that we would be looking for?
    Mr. Polakoff. Any information, Congressman, that you have 
been looking for hasn't come to the OTS in a request. To the 
extent we have information that is not part of the examination 
process that we can share with you, we would do so in a timely 
manner.
    Chairman Kanjorski. Thank you very much, Mr. Lynch. And 
now, Mr. Hensarling of Texas.
    Mr. Hensarling. Thank you Mr. Chairman, and as I said in my 
opening remarks, as outrageous as this bonus scandal is, the 
greater outrage continues to be the almost $180 billion of 
taxpayer exposure for bailouts with no end in sight, taxpayer 
money used to help make counterparties whole, including foreign 
entities.
    Mr. Chairman, there was an excellent editorial in the Wall 
Street Journal yesterday entitled, ``The Real AIG Outrage'' 
that is on point. I would ask unanimous consent that it be 
entered into the record. Mr. Chairman?
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Hensarling. Thank you, Mr. Chairman.
    In addition to serving on this committee, I also have the 
opportunity to serve on the Congressional Oversight Panel for 
the TARP program, and with my time on that panel, I have 
concluded that when I look at the causes at the economic 
turmoil we have, certainly there are the crooked, there are the 
greedy, there are the foolish, but there are also smart people, 
good people, well-meaning people who simply made mistakes. And 
with the hindsight of 20/20 vision, it is able to bring these 
mistakes to the fore.
    So, Mr. Polakoff, I don't frankly know enough about you or 
completely studied OTS's actions, so I am not here to vilify 
you, but I am here to understand the limits of your power, your 
authority, and what actions were taken.
    In an earlier answer to one of the questions, I believe I 
heard you say that OTS in 2004 should have stopped the book of 
business that I think you were alluding to, the CDS, and the 
AIG securities lending commitments. Did I understand you 
correctly?
    Mr. Polakoff. Yes, sir.
    Mr. Hensarling. So if you said you should have stopped it 
in 2004, that implies you could have stopped it in 2004. Is 
that correct?
    Mr. Polakoff. Yes, sir.
    Mr. Hensarling. So there were not limits on your power. 
Perhaps there were limits on your knowledge or insight, but 
there was not limits on your power to stop what you cite, as I 
believe--I'm reading from your testimony--``AIG's liquidity was 
the result of two IGs business lines.'' So you did have the 
power to stop those business lines, is that correct?
    Mr. Polakoff. Yes, sir.
    Mr. Hensarling. I read on your Web site that, ``OTS has 
supervisory and enforcement authority over the entire corporate 
structure. The scope of this authority includes the savings 
association, its holding company, and other affiliates and 
subsidiaries of the savings association.'' I continue to quote, 
``These supervisory tools allow OTS to obtain a complete 
picture of the interrelationships and risk throughout the 
savings and loan holding company enterprise regardless of its 
size and complexity.''
    Again, it appears, if this is correct, it was not a lack of 
supervisory authority that caused you not to take action with 
respect to these two lines, is that correct?
    Mr. Polakoff. Yes, sir.
    Mr. Hensarling. And I think I also heard you say in your 
testimony that you did have sufficient manpower and expertise, 
is that correct?
    Mr. Polakoff. Yes sir.
    Mr. Hensarling. So again, in retrospect, it wasn't the lack 
of authority, it wasn't the lack of resources, it wasn't the 
lack of expertise, you just flat out made a mistake. Is that a 
correct assessment?
    Mr. Polakoff. In 2004, we failed to assess how bad the 
mortgage economy, the real estate economy would become in 2008, 
yes, sir.
    Mr. Hensarling. I see my time has expired. Thank you.
    Chairman Kanjorski. Thank you very much Mr. Hensarling. Now 
the gentleman from North Carolina, Mr. Miller, for 2 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Until just the last few days, I have assumed that we had 
really smart, really aggressive, mean lawyers looking at every 
possible legal theory upon which we could sue directors or 
officers or employees who caused all of this.
    So I was surprised to hear that we were actually worried 
about them suing us, that we were getting legal advice, that we 
had to pay these contracts, these bonuses, no questions asked. 
They were based upon the contracts. Contracts are sacred. We 
could end up, under Connecticut law, having to pay double 
damages if we paused to ask any questions.
    Mr. Frank has already mentioned the failure of performance, 
the negligence, the incompetence as an issue, but that argument 
also assumes that this was an arms length transaction involving 
a solvent corporation, a corporation that had been continuously 
solvent at the time that it made the contracts and at the time 
that it paid the bonuses.
    And there is a great deal of evidence that AIG is not 
solvent, has not been solvent for a long time, much longer than 
a year, and that at least their top executives knew that. They 
were cooking their books.
    The Oversight and Government Reform Committee last fall had 
a hearing, and in lieu of deposition, Joseph W. St. Dennis 
provided written answers. He was the vice president of 
accounting policy at AIG Financial Products from June 2006 
until October 2007. His duties were documenting the accounting 
for proposed transactions, etc.
    And his statement is that he resigned because he was 
consistently excluded from valuing the assets, from performing 
his job, by Mr. Cassano, that Mr. Cassano didn't want him to be 
part of him valuing their super senior credit default swap 
portfolio, and he believed because he would bring transparency 
to it as the accounting rules required.
    Have we looked at the liability, if in fact they were 
insolvent, they knew they were insolvent, and they were cooking 
their books? Ms. Williams?
    Ms. Williams. GAO has not looked at that issue.
    Mr. Miller of North Carolina. Is anybody else familiar? Do 
you know if we are looking at any liability by any officer, 
director, or employee of AIG Financial Products, the AIG 
parent?
    Mr. Polakoff. At this point, OTS is not, Congressman.
    Mr. Miller of North Carolina. My 2 minutes has expired.
    Chairman Kanjorski. Thank you, Mr. Miller. The gentleman 
from Georgia, Mr. Scott, for 2 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Polakoff, I want to ask you some direct questions and I 
want you to give me some direct answers because I want to speed 
up to get to Mr. Liddy. When were you aware that AIG was going 
into the business of credit default swaps?
    Mr. Polakoff. Sir, I would say 2004 or earlier.
    Mr. Scott. At that time, did you know that that was an 
unregulated market?
    Mr. Polakoff. Yes.
    Mr. Scott. Were you concerned about that?
    Mr. Polakoff. Our focus was on the modeling and on the risk 
associated with the product, sir.
    Mr. Scott. When were you aware of the contracts for the 
bonuses?
    Mr. Polakoff. I was not aware of those contracts, sir.
    Mr. Scott. Not aware of the contracts? The contracts began, 
as we are aware now, on March 15th of last year.
    Are you aware that on March 15th, that particular unit, the 
Financial Products division, was losing buckets of money, by 
the trainloads that accumulated in $40.5 billion of losses at 
the very time that they were preparing these contracts? Were 
you aware of that?
    Mr. Polakoff. I was aware of the financial condition of FP, 
yes sir.
    Mr. Scott. I mean, wouldn't that raise a major concern, 
that here is a division, a company that is awarding a division 
with $450 million in contracts for a unit of 467 people at a 
time when that very unit was bleeding money to the company at 
the tune of $40.5 billion.
    I mean, it seems to me that somebody was saying, how can we 
even think of bonuses to be given to a division and rated at 
$450 million at the very time that division is losing buckets 
of money. And that 5 months later, here we come, they are 
asking, and out of the Federal Reserve rescue fund we give them 
$85 billion? It seems to me that somebody was asleep at the 
switch.
    This is a profound issue that borders on fraud and 
criminality with the timeline. And I am anxious to put these 
lines of questioning to Mr. Liddy, but you, as the oversight 
agency over AIG, should have known all of this.
    We didn't know. We were rushed into a panicking situation 
by then-Secretary Paulson to save this AIG or the whole world 
economy is coming down.
    Mr. Polakoff. Congressman--
    Chairman Kanjorski. Mr. Scott, I am going to interpose 
here. Allow the answer. We have to move this along. We have 
several members waiting.
    Yes, respond.
    Mr. Polakoff. The timeline that you offered revealed that 
these contracts were initiated when this company was an 
operating--still well-rated company before any government 
funds. And we would have looked at the financial condition of 
the company as still a well-rated company with no taxpayer 
dollars in looking at those payments and the intent of those 
payments to keep employees at FP to unwind the transactions 
that originated in 2005 or earlier.
    Chairman Kanjorski. Okay, the gentlelady from New York, 
Mrs. Maloney, for 2 minutes.
    Mrs. Maloney. Thank you. I would like to ask insurance 
commissioner Joel Ario, have you seen this document, produced 
by AIG, on systemic risk of AIG? Did you ever see this 
document?
    Mr. Ario. Yes, I have, ma'am.
    Mrs. Maloney. This document really talks about the dire 
consequences if AIG were allowed to fail, and I am wondering if 
a similar document was ever reviewed by the executives of AIG 
when they decided to go into derivatives and other highly risky 
products that have brought down the company. Do you think they 
ever looked at anything that assessed that risk? I would like 
to put this in the record, please.
    Mr. Ario. Not to my knowledge.
    Mrs. Maloney. I would like to ask you a question. How are 
the insurance businesses of AIG segregated from the AIG 
Financial Products?
    Mr. Ario. Within insurance regulation, there is the strong 
principle that the assets that are there for the benefit of 
policyholders are walled off from all other creditors of the 
company, including the holding company upstream. So we believe 
that the assets of the insurance companies are there for the 
policyholders and they are protected against all other 
creditors, including the holding company upstream.
    Mrs. Maloney. So in other words, the risk of default in the 
life insurance business of AIG is separate from the cross-
linked risk of being associated with and dragged down by AIG 
Financial Products, is that correct?
    Mr. Ario. It is a slightly different question. If there are 
problems at the holding company level, particularly in terms of 
the rating of the companies, that can create rating issues for 
the downstream insurance companies, and that is a particularly 
important issue in the property and casualty side. If we are 
going below the A minus level that we are at now into the Bs, 
it would have very negative impacts on the insurance company. 
So there is that linkage.
    Mrs. Maloney. But the linkage is only with the rating 
companies. In other words, they are walled off, they are 
separate. So what would happen if AIG Financial Products was 
allowed to fail? Would that have an impact on the insurance 
properties and the insurance assets of AIG?
    Mr. Ario. Not directly on the assets. That is more a 
question for how the rating agencies would look at that issue 
for the insurance companies.
    Mrs. Maloney. The rating agencies do not have a lot of 
credibility at this point, so I would rather ask the insurance 
commissioner. It is my question. So if Financial Products was 
walled off and allowed to fail, the insurance portion would be 
safe and sound, and going forward, is that correct?
    Mr. Ario. Yes, the assets would be there and would be 
protected.
    Mrs. Maloney. Thank you.
    Chairman Kanjorski. The gentleman from Florida, Mr. Klein.
    Mr. Klein. Thank you, Mr. Chairman. I would like to direct 
my questions to Mr. Clark.
    Mr. Clark, there have been a lot of questions about the 
role that the rating agencies have played, not just in AIG, but 
in the entire meltdown, and who pays the fees where there are 
conflicts of interest, the systems that are being used? I have 
heard the comments that say that--I think in your statement 
today you said it is just one factor, which of course it is. 
There are the sophisticated buyers of instruments who look at a 
rating agency valuation one way and there is the general public 
who also, to some degree, looks at the rating agencies and sees 
a triple A rate or an A minus, or any number of things.
    And it seems to me that there is a failure here--and I am 
not just picking on Standard & Poor's or you. But the system 
that really depends on transparency, making intelligent 
investment decisions at the highest level and the average 
investor who is buying a bond, needs to know that the 
information is real and it is objective in terms of making that 
decision. In my opinion--I am not a professional, but as 
someone who has done some securities work in the past--the 
system is not working properly with the role of the rating 
agencies in their current form.
    And I would like to just gauge from you whether you think 
mistakes were made, and how are you changing your models as you 
move forward in your valuation techniques to help, if you are 
going to continue to do what you are doing, and the role that 
you have in our system to make sure that we really do get 
information that is objective and useful for investors to make 
their decisions.
    Mr. Clark. The first part of your question, were mistakes 
made, I think hindsight being 20/20, we might have formed 
different judgments than we did if we knew then what we know 
now about how the financial markets would perform in the late 
summer, because that really is the biggest thing that changed 
in our analysis of AIG over this period.
    We believe based on the models that we used, the 
assumptions we were making, the information we had, that our 
ratings were correct and appropriate until the beginning of 
September until the huge decline in those market values and the 
effect that would have on the collateral that the company would 
have to post really changed those conclusions very rapidly with 
the extreme rapidity of the movement in those markets.
    Mr. Klein. Wouldn't you agree, though, that the projection 
of the market has some value in terms of where things are 
going, the value of an investment vehicle?
    Mr. Clark. The market values are important. They are an 
important guideline, but what we could not have understood at 
that time, what many people in the market did not know at that 
time, was how quickly the value of mortgage-related securities 
and other structured securities would decline over the late 
summer into September. It was something unprecedented in terms 
of the rapidity of the decline.
    Chairman Kanjorski. Mr. Perlmutter, for 1 minute.
    Mr. Perlmutter. Thank you all for testifying today. Just a 
statement.
    Mr. Ario, I appreciate the fact you say there are good 
parts to AIG that still either have been profitable or are 
solid. What we had was a rogue or a subsidiary that made 
outrageous profits and it created outrageous losses that took 
this company down and has cost the United States a lot of 
money. So hopefully those solid parts of the company will 
ultimately pay us back $160 billion, which is where I want to 
see this thing go.
    But I would ask all of you, just taking a look at this 
retention plan, it almost contemplates the losses that that 
subsidiary suffered. They are almost pointing to everybody, 
``We are going to lose money, but you guys are still going to 
get a bonus.''
    And so I would look at that closely. I think Mr. Miller was 
on to something. When a company is insolvent, there is a 
concept called fraud against creditors, that you can't just be 
making bonuses to people if you are out of money. So I don't 
know why we paid these bonuses, especially to that division, 
when they talk about realized losses in this thing. They are 
already contemplating their own demise.
    That is just a statement. Can somebody tell me what 
guaranteed investment agreements are as we are repaid as part 
of the TARP money?
    Mr. Ario. That is going to be where a government agency is 
issued a bond, they have a certain amount of money, say $100 
million to build a bridge or something, and they don't need all 
the money right now, so they go out and get a contract with a 
company like AIG to guarantee the payment of the money back 
when they need it. That is what a guaranteed investment 
contract would be.
    Mr. Perlmutter. Thank you, because a substantial amount of 
the money from the TARP went back to States, as I can see it 
from this. Thank you.
    Chairman Kanjorski. Thank you very much. We will have 1 
minute for the gentleman from Indiana, Mr. Donnelly.
    Mr. Donnelly. Thank you very much.
    Mr. Polakoff, I have a question. For naked credit default 
swaps, how are those anything other than gambling? There is 
nothing really there. Back home in Indiana, if a fellow goes 
and places a bet on a Bears game, he can go to jail. On Wall 
Street, he is considered a master of the universe. How does 
this work and why is it allowed?
    And then the last question, and it may be the most 
important, why should we be paying for just a gambling casino, 
just bets, there is no real product there? And you know what, 
the casino is closed, you go home.
    Mr. Polakoff. Congressman, I agree with you from the 
perspective that these products need to be regulated and there 
are certain parts of these products, whether it is a naked 
credit default swap or in some cases whether it is naked short 
selling, which is an entirely different vehicle--
    Mr. Donnelly. Well, there is nothing even there, is there, 
other than a bet? And if it is a bet, how come you go to jail 
for betting on a Bears game and not for one of these?
    Mr. Polakoff. Naked credit default swaps are not the 
subject of the AIG FP though, sir.
    Mr. Donnelly. Well, if you are a waitress or a truck driver 
or a hardworking person, why should you pay the other side of a 
bad bet?
    Thank you, Mr. Chairman.
    Chairman Kanjorski. The gentlelady from California for 2 
minutes.
    Ms. Speier. Thank you, Mr. Chairman.
    I think that it is very important for us today to realize 
that Congress has a lot of finger pointing to do at itself. 
When the Commodities and Futures Trading Commission Chairman 
said, ``Credit default swaps should be regulated,'' came up 
here, testified to that fact, she lost her job, and 
subsequently, credit default swaps were unregulated 
specifically by legislation that passed the Congress.
    We had the Glass-Steagall Act that was on the books for 
over 60 years, it worked, and then the financial services 
industry wanted the Gramm-Leach-Bliley Act, which allowed for 
this financial supermarket to happen, and what did Congress do? 
It passed it. So I believe that part of the responsibility 
falls with us.
    One last question to Mr. Clark. You rated AIG at an A or A 
minus through most of 2008, is that not correct?
    Mr. Clark. We lowered the rating on AIG to A minus on 
September 15, 2008, and it--
    Ms. Speier. So before that, it was a double A?
    Mr. Clark. Before that it was double A until May, and then 
it was double A minus from--
    Ms. Speier. Well, growing up, an A means good. A double A 
means really good. So through all of 2008, it was a double A 
until September 15 when we already knew in March of 2008 that 
it had lost $12 billion.
    So I believe that you need to go back to the drawing board 
and come up with different ways of rating these agencies.
    Chairman Kanjorski. Thank you very much, Ms. Speier. Mr. 
Foster, did you want to exercise your minute to 2 minutes?
    Mr. Foster. One minute.
    Chairman Kanjorski. One minute? Very good. That is it then.
    Mr. Foster. I have been struck by the complexity of AIG 
from a corporate point of view, and I was wondering if you 
could give me an impression of what fraction of these 
difficulties could have been avoided if AIG was simply simpler 
or a series of independent companies accomplishing the same 
thing. You know, if they were a bunch of independent insurance 
companies, and if the thing called the holding company 
basically didn't exist, and that you had a credit default swap 
trading house that was regulated so that the regulator only had 
to look at that.
    Mr. Ario. AIG started as an insurance company, and in my 
view, if they had stuck to that, they would still be the number 
one insurance company in the world on the property and casualty 
side.
    Mr. Polakoff. Congressman, I think your question goes well 
beyond AIG to whether we need a systemic regulator, because 
what you described is not limited to an AIG structure. When you 
get to be a trillion dollar company, when you operate 
internationally, it is a very complex unit.
    And I think your point, as I understand it, sir, is if it 
is going to be complex and arrogated like an AIG is or other 
companies are, there really needs to be someone from the top 
down who has all the powers necessary as a systemic regulator.
    Mr. Foster. No, my point was more should we allow this 
level of complexity?
    Ms. Williams, did you have any comments on this?
    [no response]
    Mr. Foster. Thank you. I yield back.
    Chairman Kanjorski. I thank you very much, Mr. Foster. That 
completes the examinations.
    I want to thank this panel for appearing.
    Mr. Clark, you have an opportunity to correct the record. 
You had some problem that--
    Mr. Clark. Yes, Mr. Chairman, thank you, if I could.
    In my remarks, I believe I may have made one statement in 
error with regard to the credit default swaps. S&P announced in 
August that AIG's actual credit losses in these areas would 
amount to around $8 billion with significantly higher mark-to-
market losses. I may have said that incorrectly earlier, so I 
would ask that to be submitted to the record.
    Chairman Kanjorski. Put that in the record.
    Thank you all very much for appearing, and now this panel 
will be excused and we will have the seating of the second 
panel.
    [pause]
    Chairman Kanjorski. Will the Capitol Police restore order, 
and particularly the signs of demonstration are to remain down 
or be removed from the room. I am a very patient person, but do 
not try my patience.
    Now the Pink Ladies back there, respond properly or please 
exit the room.
    Signs down!
    And in consultation with the ranking member, our witness 
today will take an oath. Will the witness please stand and 
raise his right hand, and I will ask the witness to respond ``I 
do'' after I read the oath.
    [witness sworn]
    Chairman Kanjorski. Thank you very much, Mr. Liddy, if you 
will kindly be seated.
    Mr. Liddy, you and I are not strangers to one another. We 
have had the occasion to visit personally some 2 or 3 months 
ago in my office for what I thought was a great conversation. 
And then subsequently, maybe 4 to 6 weeks ago, a telephone 
conversation that was not as great, as I recall. And I want to 
just have the record reflect that.
    So that the public knows and the record reflects, Mr. Liddy 
is not a person who is being paid anything for the CEO position 
he occupies at AIG. He has been pressed into Federal service by 
officers and public officials of the United States Government, 
and he responded to their call.
    He is a former CEO of one of our largest insurance 
companies, now presently retired before he took on this 
command.
    I wanted to make that clear, Mr. Liddy, because I am sure 
that you and your family have had a great deal of abuse, 
particularly in these last few days. We do not intend to harass 
you here in this committee, nor should we.
    On the other hand, I think it is only fair that we set the 
record straight. When we discovered that there were potential 
bonus payments about 2 months ago, we talked with each other 
and I urged you to do everything within your power to see if 
you could suppress the payment of those bonus payments, or deny 
them in their entirety.
    At that time, it was my understanding and the understanding 
of my staff, that both AIG people and my staff on the committee 
would cooperate, would have a transfer of information and some 
documents to indicate whether or not there was any assistance 
we could lend in interpreting what positions AIG could take in 
regard to these bonuses.
    I think specifically, to make it simple, we wanted to see 
whether or not we could vitiate that contract. And when I say 
``we,'' Members of Congress and for the benefit of this 
committee.
    The disappointment and why you are here under these 
circumstances, Mr. Liddy, is that I warned you at that time 
that if these bonuses were paid and no mitigation was made to 
the general public of the United States or to this Congress, 
the action by AIG in doing that would jeopardize the second 
rescue plan that is anticipated and potentially needed to save 
the American economy.
    As of Saturday last, we had received no communication 
regarding the documents, papers, and faxes that we had expected 
from AIG prior to payment. The only thing we received was a 
letter indicating that payment was made and that it was done on 
the basis of an attorney's or attorneys' positions, that a 
contract was involved, and apparently they advised that no way 
around the contract could be found.
    Not to get argumentative about it, but I do want to render 
this opinion. In my prior life, I was an attorney, and I dealt 
with your prior insurance company where you were CEO. And I 
will not mention the company, because it is of no concern to 
anyone else. But I am sure everybody knows what a large company 
that was.
    In cases that I had with your company, there were clear 
cases of the need for recovery or payment. And yet defenses 
were rendered and time was taken, and very often those cases 
had to go to trial. And that practice exists all over the 
United States.
    So this is not a thing of first impression, that sometimes 
insurance companies delay payment or take a position they will 
not pay until they were sued.
    In this case, there is an opinion in the land, and in this 
committee, reflected today that this was a rush to payment, 
that there were other alternatives at hand.
    One of the last alternatives would have been a denial of 
the right to pay on the contract. And a simple word to these 
folks: Sue us.
    Now that is not a bad remedy, in my estimation, and I hope 
you will address it in your statement today. I have read your 
prepared statement. Insofar as if you had taken that position, 
these bonus recipients would have been in the same position as 
the taxpayers of the United States. They would have had to sue 
and wait until the resolve of whether AIG succeeds or not, or 
go the distance of the suit, which would be 2 or 3 years.
    The worst that could have happened would be a penalty 
feature under the laws of the State involved. But, if in the 
meantime, an election were made to take AIG into bankruptcy or 
some other relief, those funds would not have been paid.
    Now I indicated to you I thought that you were missing the 
gravity of this situation in terms of what the American people 
were responding to: They had enough. This was an unreasonable 
action on the part of AIG to pay these funds.
    So in your testimony today, I hope you address some of 
these ideas. And with no further assertion on my part, and 
looking forward to the question, Mr. Liddy, if you summarize 
your testimony, we will allow you some leeway because of your 
involvement in the situation, so provide it all, and you may 
proceed.
    Mr. Bachus. Mr. Chairman, I don't know how long Mr. Liddy's 
statement is, but I would because of the gravity of this 
matter, even if it's 10 minutes, I would--
    Chairman Kanjorski. Absolutely. I will be very lenient. Mr. 
Liddy can take all the time he wishes to respond to the 
committee, I hope. But I am going to be heavy on the gavel, 
because there is a lot of criticism at the lower levels of the 
committee that we have not gotten down to, and I assume there 
is nobody at this hearing today who is not going to want their 
5 minutes with Mr. Liddy. So I am going to hold everybody to 
their 5 minutes, and probably be annoying by slapping the 
gavel.
    Mr. Liddy, proceed.

  STATEMENT OF EDWARD M. LIDDY, CHAIRMAN AND CHIEF EXECUTIVE 
          OFFICER, AMERICAN INTERNATIONAL GROUP (AIG)

    Mr. Liddy. Thank you, Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee. I appreciate the 
opportunity to appear before you as the representatives of the 
largest shareholder we have, the American people.
    My name is Edward Liddy. Six months ago, I came out of 
retirement to help my country. At the government's request, I 
have had the duty and the extraordinary challenge of serving as 
Chairman and Chief Executive Officer of American International 
Group or AIG.
    I speak to you today on behalf of the 116,000 AIG employees 
around the world, who are remarkably united around one simple 
belief. When you owe someone money, you pay that money back.
    I'm sure we all share that belief. I believe that you and I 
also share a common agenda today to clean up the mess at AIG 
and in the process, help get the American economy moving again.
    Let me speak directly to the situation at AIG that has 
sparked the Nation's outrage over the past several days. No one 
knows better than I that AIG has been the recipient of generous 
amounts of government aid. We are acutely aware, not only that 
we must be good stewards of the public funds we have received, 
but that the patience of America's taxpayers is indeed wearing 
thin.
    Where that patience is especially thin is on the question 
of compensation. I am personally mindful both of the 
environment in which we are operating, and the President's call 
for a more restrained compensation system.
    At the same time, we are essentially operating AIG on 
behalf of the American taxpayer, so that we can maximize the 
amount we pay back to the government as quickly as possible.
    We weigh every decision we make with one priority in mind: 
Will this action help our ability to pay monies back to the 
government or hurt it?
    Although we have wound down more than $1 trillion, roughly 
a third from its peak, in the portfolio of AIG Financial 
Products, the unit that is at the root of our financial 
problems, that portfolio remains very large, $1.6 trillion. And 
it continues to contain substantial risk.
    The financial downside for taxpayers is potentially very 
large, and it's very real, and that's why we're winding down 
that business as quickly as possible.
    To prevent undue risk exposure in the meantime, AIG has 
made a set of retention payments to employees, based upon a 
compensation system that prior management put in place at the 
end of 2007 and the beginning of 2008.
    Payments were made to employees in the Financial Products 
Unit that caused many of AIG's problems. And Americans are 
asking quite simply, ``Why pay these people anything at all?''
    Here is why: I'm trying desperately to prevent an 
uncontrolled collapse of that business. This is the only way to 
improve AIG's ability to pay taxpayers back quickly and 
completely, and the only way to avoid a systemic shock to the 
economy that the U.S. Government help was meant to relieve.
    Make no mistake, had I been CEO at the time, I would never 
have approved the retention contracts that were put in place 
over a year ago. It was distasteful to have to make these 
payments, but we concluded that the risk to the company and 
therefore the financial system and the economy were 
unacceptably high, and if not paid, we ran the risk that we 
would have happen what everyone has worked so hard thus far not 
to have happen.
    That said, we have heard the American people loudly and 
clearly these past few days. The payment of large bonuses to 
people in the very unit that caused so much of AIG's financial 
trouble does not sit well with the American taxpayer in any 
way, shape, or form. And for a good reason.
    Accordingly, this morning, I have asked the employees of 
AIG Financial Products to step up and do the right thing. 
Specifically, I have asked those who received retention 
payments in excess of $100,000 or more to return at least half 
of those payments. Some have already stepped forward and 
offered to give up 100 percent of their payments.
    The action we are taking today is a result of discussions 
with numerous parties, many of you, including Attorney General 
Cuomo of New York.
    We will work to ensure the highest level of employee 
participation in this effort in the days ahead, and will keep 
the Congress and the American people informed of our progress.
    Now obviously we are meeting today at a high point of 
public anger. And I share that anger. As a businessman of some 
37 years, I have seen the good side of capitalism. But over the 
last few months, in reviewing how AIG has been run in prior 
years, I have also seen evidence of its bad side.
    Mistakes were made at AIG on a scale few could have ever 
imagined possible. The most critical of those was the creation 
of a credit default swap portfolio, which eventually became 
subject to massive collateral calls, that created a liquidity 
crisis for AIG.
    I agreed to take the reins at AIG last September after the 
company had turned to the U.S. Government for financial 
support.
    On behalf of my colleagues, I want to thank the Federal 
Reserve and the U.S. Treasury and the American taxpayer for 
making the extraordinarily tough call to provide that support. 
It has meant that together we have been able to preserve jobs 
and businesses, and most importantly protect policyholders who 
rely on a promise of insurance to secure their wellbeing.
    We are moving urgently on a business plan designed to 
maximize the value of our core businesses, so that in turn we 
can maximize the amount that we repay to the American taxpayer.
    We at AIG want to believe that we are all in this together. 
I have led AIG for 6 months, and I want to assure you that the 
people there today are working as hard as we can to solve this 
problem for the benefit of America's taxpayer. And quite 
frankly, we need your help.
    We need the support of the Congress to do this, and if we 
do it together, I'm confident we can achieve two hugely 
important things: First, repayment of AIG's debt to the 
government to the maximum extent possible; and second, and 
perhaps equally important, a solution to AIG's condition that 
is a giant stepping stone to the economic recovery we all 
desire.
    With that, Mr. Chairman, I would request that my remarks 
and several additional comments be included in the hearing 
record and I'm happy to respond to your questions or those of 
the members.
    [The prepared statement of Mr. Liddy can be found on page 
157 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Liddy. I guess 
my first question is, you have just announced that some of your 
employees who received those bonuses after Saturday of this 
week have agreed to return them. Why could that not have been 
negotiated for the last 2 months? And why couldn't that 
information have been made available to this committee, to the 
Secretary of the Treasury, and to the Chairman of the Federal 
Reserve?
    Mr. Liddy. I think there are two parts to that question, 
sir. Let me see if I can address them in turn. We have been 
working on this issue of what to do with these retention 
payments. We have made the information publicly available in 
our various 10-K filings and 8-Ks and 10-Qs.
    The decision we made, I made, was as much one of risk 
assessment as it was blindly following legal advice. The risk 
assessment was: We have made great progress in winding down 
this business, but there is still $1.6 trillion of stuff in 
that portfolio. There is risk that it could blow up. And if it 
were to explode, it can cause irreparable damage to that 
progress that we have already made.
    Chairman Kanjorski. Necessitating, Mr. Liddy, a further 
investment of the American taxpayers in AIG with equity, if we 
are to keep you solvent?
    Mr. Liddy. Would you repeat that, sir?
    Chairman Kanjorski. The risk is, if those assets 
deteriorate or blow up, you would either go into total--
    Mr. Liddy. Yes--
    Chairman Kanjorski. --destruction, or have to come back to 
the United States Government and this Congress for additional 
funds.
    Mr. Liddy. Yes. I think that's exactly correct, sir.
    Chairman Kanjorski. Right.
    Mr. Liddy. So the judgment that we made in cooperation with 
the Federal Reserve--we treat the Federal Reserve as our very 
important partner in this--the decision we made was that we 
could preserve that unit and continue to wind it down in a very 
orderly fashion and not expose the taxpayer and the company to 
the risks that heretofore they had been exposed to.
    I know $165 million is a very large number; it's a very 
large number. In the context of $1.6 trillion and the money 
that has already been invested in us, we thought that was a 
good trade.
    Chairman Kanjorski. Am I to understand that you are saying 
that Chairman Bernanke or his designated person at the Federal 
Reserve was informed that you were going to make these payments 
and acquiesced in that decision?
    Mr. Liddy. Yes. Everything we do, we do in partnership with 
the Federal Reserve. The Federal Reserve is at our board 
meetings, at our compensation committee meetings, at our 
various meetings on strategy. And they have the ability to 
weigh in either yea or nay on anything that we decide.
    Chairman Kanjorski. Why was this committee not informed, as 
you had previously indicated that you would put a plan together 
and you would immediately after that plan was submitted to 
Treasury and to the Federal Reserve make us aware of what that 
plan was? Why did you hold us, in the absence of that 
information, and make the payments on a Saturday night?
    Mr. Liddy. Sir, there was no intent to deceive or hide 
anything. These payments were due to be paid on March 15th. We 
have been discussing this issue at large with the staff of many 
of the members who are represented here today, and with the 
Federal Reserve since--
    Chairman Kanjorski. You publicly did not discuss this with 
my staff?
    Mr. Liddy. I don't remember, sir, whether we discussed all 
of the particulars of this with your staff or not. I would just 
like to make the point that there's no attempt to do anything 
under the stealth of darkness or under cover. We wanted to do 
what was right in these contracts. The contracts called for a 
payment on March 15th.
    And we have done that. We have been talking about this 
within the board and with our representatives of the Federal 
Reserve literally for 3 months.
    Chairman Kanjorski. And with the Secretary of the Treasury?
    Mr. Liddy. No. The way our relationship generally works is 
we review things with the Federal Reserve, and the Federal 
Reserve--as they think is appropriate--discusses it with the 
Secretary of the Treasury or with representatives of Treasury.
    I have asked if the Federal Reserve would like us to have a 
separate line of communication with Treasury or not, and I have 
asked Treasury. I think they're trying to get as efficient a 
process as possible.
    Chairman Kanjorski. Are you aware of the fact that probably 
the funds available, the TARP funds, will run out shortly, and 
the likelihood of additional funds will have to be secured by 
action and authority of Congress?
    Mr. Liddy. I am.
    Chairman Kanjorski. And do you realize that the actions 
that you take at AIG and took in this precise case not only 
impact AIG and the potentials of that reality occurring that 
you described, but it may have jeopardized our ability to get a 
majority of this Congress to support further largess to provide 
funds to prevent a recession, depression, or meltdown.
    Are you aware that is the process of your decision and how 
important it was?
    Mr. Liddy. I am sir, although I think there's also a 
question of another element. And that is if something happens 
to AIG, and it goes bankrupt or goes belly-up and puts at risk 
all the money that has already been put into it, that also can 
have dire consequences.
    So it's an issue of: Can we stabilize the AIG FP situation, 
run it down so nothing untoward happens there and reach the 
promise of paying back the taxpayer?
    Chairman Kanjorski. Well, not to argue that point further, 
but you are going to serve further. Are we to assume that you 
are going to continue this process of decisionmaking and 
disclosure of talking only to the Federal Reserve and not 
informing the Congress or the American people or the Executive 
Branch of this government?
    Mr. Liddy. I will do it in any way that you and the Federal 
Reserve ask AIG to do it. Heretofore, what we have assumed is 
that our discussions with the Federal Reserve were being 
properly communicated to others. It appears that we need to 
improve upon that process. We will do everything we can to do 
that.
    Chairman Kanjorski. My time has expired. Mr. Garrett?
    Mr. Garrett. Thank you.
    First, I appreciate your service and recognize the fact 
that you have to step up to this situation. The chairman didn't 
make mention of the fact; I guess it's in the press as far as 
apparently physical threats or what have you, to yourself or to 
your family, which of course are condemnable, and no one should 
be going through that.
    Secondly, along this line, we realize how difficult it is 
to get people to fill spots like this, and also we recognize 
right now the Treasury Secretary has had his dilemma in filling 
spots as well. It may be because the government is engaged in 
an activity that it has never engaged in before, basically 
crossing the line between public and private, and the conflicts 
then are inherent there that we have to have a public 
discussion of what otherwise would be private activity.
    So that is something Congress needs to consider, going 
forward.
    Much of the discussion will be on the bonuses. I'll just 
raise one question with regard to that, and it goes along the 
line as far as who knew what when, and what have you. I 
appreciate your comment with regard to the discussions that you 
have had with the Fed on this.
    I would presume that even though the Treasury was not 
sitting in at those meetings, the information should still be 
hopefully flowing back from the Fed to the Treasury. You 
probably don't have any personal knowledge of that.
    Mr. Liddy. I don't. I'm pretty sure that it did, but I 
would be hard-pressed to prove it to you.
    Mr. Garrett. Yes. And the reason is this, because there are 
stories in the papers today and yesterday saying that the White 
House has now instructed the Treasury to try to engage in some 
clawback provisions in past legislation to engage in trying to 
get some or all of this money back.
    And I'm reading that, and I'm wondering, is the White House 
basically then second-guessing what the Treasury Secretary must 
have known--or at least I will assume that your Treasury 
Secretary must have known--for a period of time: (a) through 
these discussions with the Fed; and (b) just by the fact that 
the Treasury Secretary is from Wall Street and we sort of know 
that this type of employment contract and contingency contract 
is not unique to top-level management.
    I presume you would agree.
    Mr. Liddy. I'm sorry, Mr. Garrett. The Treasury Secretary 
is--
    Mr. Garrett. Well, the Treasury Secretary obviously comes 
from a financial background. He comes from having been involved 
with the AIG situation in the past Administrations as well.
    Mr. Liddy. I understand.
    Mr. Garrett. And whether you had that conversation with him 
or not, some of this is sort of obvious on the face that these 
types of employment contracts would have been there.
    So it's just puzzling to me that the White House now seems 
to be second-guessing the decision that the Treasury Secretary 
made, if he allowed this to go forward.
    Mr. Liddy. Yes, I don't have a comment on that. I talked to 
the Treasury Secretary last week, and he indicated to me that 
the first he had heard of this whole situation was about a week 
before that. So I don't know where the--
    Mr. Garrett. Okay--
    Mr. Liddy. --rubber meets the road, so to speak.
    Mr. Garrett. A final question is on the bigger picture, and 
that is: How do we get the taxpayer off the hook, going 
forward? Is there basically in a word an exit strategy here for 
the government to get out from under this?
    Mr. Liddy. There is.
    Mr. Garrett. Is that exit strategy basically in part to 
sell off some of the assets, and if that is the case, do you 
see--I know you haven't been able to do it now, because of the 
global economic climate--is there anything that you would see 
in the near future, that any of this exit strategy is really 
going to engage itself?
    Mr. Liddy. The exit strategy, I think, is a solid one. It 
has been in place for a while now. And it is: Sell whatever 
assets we can, use that money to pay back the Federal Reserve 
and the TARP money. To the extent we can't sell an asset, we're 
going to ring-fence it, put it in a separate trust, and 
actually give that asset to the Federal Reserve as satisfaction 
of the debt.
    And when that asset can be taken public or it can be sold, 
then the Federal Reserve would decide to sell it.
    Mr. Garrett. Okay.
    Mr. Liddy. So there is an exit strategy. I think it will 
work. But it's very market-dependent.
    Mr. Garrett. And the final question here is this: The 
number you gave was $1.6 trillion?
    Mr. Liddy. $1.6 trillion. The testimony on an earlier panel 
was about the derivative aspect, and you originally said it was 
360 or 370 on the foreign derivatives overseas, and around 80 
or 90 billion here, adds up to 400-something. So why is that 
number different than what you see as being outstanding?
    Mr. Liddy. I believe the prior testimony, which I was 
watching, had more to do with credit default swaps.
    Mr. Garrett. Right.
    Mr. Liddy. But in addition to that, there are all kinds of 
derivative contracts. There are currency contracts, interest 
rate contracts, oil contracts, a whole series of contracts.
    So there are three measures. Let me see if I can clarify 
that for you. There's a measure of how many dollars of notional 
exposure is it? At the beginning of 2008, that was $2.7 
trillion, it's now $1.6 trillion. We have made great progress 
winding it down.
    With respect to the credit default swaps that have caused 
us all the difficulty, that number started out at about $80 
billion, it's now about $10 billion.
    Mr. Garrett. Right.
    Mr. Liddy. And then there's another category called 
regulatory capital trades. And that started out at about $360 
billion, it's now down to $230 billion, and we will get it down 
to considerably less than that by the end of the first quarter 
in 2010.
    So there are different metrics designed to measure 
different things.
    Mr. Garrett. I appreciate your answers. Thank you.
    Chairman Kanjorski. Pink Ladies, I think you have tried my 
patience. Now the signs are either going to be removed from the 
room, or you are going to be removed from the room, before I 
recognize another speaker.
    Do you wish to remain in the room? And those of you who are 
in pink with the signs, are you going to surrender those signs 
so that they can be held for you later on, or do you want to be 
removed from the room?
    Voice in Audience. We won't--
    Chairman Kanjorski. Officers, take the signs. If I see any 
more signs on camera, you are going to be physically removed 
from this room.
    The Chair will now recognize the chairman of the full 
committee, Mr. Frank of Massachusetts.
    The Chairman. I thank you, Mr. Chairman. Given your method 
of dealing with this, I assume it's a good thing no one was 
wearing a tee-shirt with a slogan.
    [laughter]
    Let me begin by repeating what Mr. Geithner has said and 
others. Mr. Liddy is in no way responsible for these bonuses 
having been agreed to. He, as a public service, agreed to come 
in, and inherited a situation.
    I disagree with some of the ways in which he has handled 
it, but there ought to be a clear distinction between people 
who had a responsibility for creating this situation and those 
given the responsibility for handling it, who may differ with 
us.
    And frankly, on some of those signs talking about jail with 
regard to imbecility, they were entirely inappropriate and not, 
it seems to me, seemly for people who believe in civil 
liberties and fairness to incorrectly suggest that there was 
any criminality on the part of this witness.
    Now having said that, I do want to say, as I have said 
several times, that I think the time has come to make some 
changes, and indeed I think the time has come for the Federal 
Government to assert greater ownership rights.
    That is in part motivated by what I would think was a 
stronger legal position. If we sued against these bonuses as 
the owner, charging that there had not been adequate 
performance to justify the bonuses, as opposed to as a 
regulator, I think many, myself included, would have more 
comfort with the Federal Government as a party in interest as 
the actual owner, saying, ``We are exercising ownership rights 
not to have paid out bonuses,'' when there was a poor 
performance, than for the Federal Government to interfere with 
an existing third-party contract.
    I also have said that I thought there should be some people 
removed, and I was not talking about Mr. Liddy, and I may not 
have been as clear about that.
    I am very critical of the people who put these contracts in 
place. As I read earlier from the contract, there is a pool of 
money to be distributed, and then it says: But losses are to be 
subtracted from that, but the losses that could be subtracted 
toward a cap by $65 million.
    Let me just ask you, Mr. Liddy, is it possible under the 
way these contracts were written, that you inherited, that the 
company as a whole could have lost money but there still would 
have been a bonus pool to distribute to the employees?
    Mr. Liddy. Congressman, I think the contracts here that you 
were reading from have to do with performance bonuses. No 
performance bonuses at FP, zero. It's a different issue than 
the retention bonuses, where we basically said to people, ``You 
have a job, that job's going to go away, after you wind down 
the book of business that you manage. If you'll stay--
    The Chairman. So are you saying that the only bonuses that 
were paid recently were the retention bonuses?
    Mr. Liddy. Yes.
    The Chairman. There were no other bonuses paid?
    Mr. Liddy. Not at AIG FP. No, I don't believe so.
    The Chairman. All right. And as to the retention bonuses, 
we are told some people who got retention bonuses have since 
left. Is that correct?
    Mr. Liddy. Yes, sir. The arrangement--
    The Chairman. Did they give back their retention bonuses?
    Mr. Liddy. No. The arrangement is if you stay, wind down 
your particular business, do a good job of it, and we are 
comfortable with the job you have done, you will get that 
retention bonus. So--
    The Chairman. So--the people who got a retention bonus and 
then they left, what would be the average period of time after 
which people got a retention bonus that they left? I don't 
expect you to know that off the top of your head. I would ask 
you to submit to us.
    Mr. Liddy. Okay.
    The Chairman. One other issue before I get to--well, two 
others. You are optimistic in here about paying down the 
Federal Reserve debt. You don't mention the debt to the 
Treasury. Is that next after the Federal Reserve debt?
    Mr. Liddy. Yes. It's really important for us, sir, to pay 
the debt down first so the rating agencies remain--
    The Chairman. As opposed to the TARP, which is considered a 
different category? Is that the--
    Mr. Liddy. Yes. Although, could I clarify? I think there's 
some confusion. Right now, the Federal Government has invested 
two major tranches of money in AIG. One is $40 billion of TARP 
and the other is just under $38 billion of a loan from the 
Federal Reserve. That's it. It's $78 billion.
    There's another $30 billion of TARP, which is available to 
us if we have to draw--
    The Chairman. And you are talking about paying off the 
Federal Reserve debt, the $38 billion?
    Mr. Liddy. The order in which we would do things is, first, 
the Federal Reserve debt, and then the TARP dollars.
    The Chairman. Next question before I ask you my final one: 
I'm running of time. I would be interested in your submitting 
in writing, given your experience, whether we should be dealing 
with this question of an orderly resolution procedure. You were 
put in place where there wasn't any.
    The Secretary of the Treasury previously and currently has 
said: ``We need an orderly way to wind down a troubled non-
bank.''
    But let me ask you this now; you have said some people are 
giving the bonuses back. I'm now asking you to send us the 
names of those who received bonuses, who have not given them 
back. Can you do that?
    Mr. Liddy. Sir, I will if I can be absolutely assured that 
they will remain confidential.
    The Chairman. Well, I won't give you that assurance, sir. 
And so if that's the condition, it would be my intention to ask 
this committee to subpoena them. This is a situation where 
there is a lot of public activity.
    I ask you to submit the names of the people who have 
received the bonuses, noting that they paid them back, or not, 
and I would accept them under a confidentiality personally. In 
fact, you have submitted some confidential information, and I 
frankly threw it away after reading it, because I was afraid I 
would inadvertently breach the confidentiality.
    But I do ask that you submit those names with restriction, 
and if you feel unable to do that, then I will ask the 
committee to subpoena them.
    Mr. Liddy. Congressman, if you'll let me explain. I very 
much want to comply with your request. I would hope it doesn't 
take a subpoena. If it does, then we will obviously comply with 
the law.
    I'm just really concerned about the safety of our people. 
So let me just read two things to you: ``All the executives and 
their families should be executed with piano wire around their 
necks. My greatest hope.'' ``If the government can't do this 
properly, we the people will take it in our hands and see that 
justice is done. I'm looking for all the CEOs' names, kids, 
where they live, etc.''
    You have a legitimate request--
    The Chairman. Well--
    Mr. Liddy. But I won't affect the wellbeing of our 
employees.
    The Chairman. Could I get an additional minute by unanimous 
consent? Because this is a subject to be addressed?
    [Off microphone discussion]
    The Chairman. I understand that. Many of us get these kind 
of threats. Clearly, those threats are despicable, people who 
engage in this kind of threat.
    And I would say to my colleagues, the rhetoric can get 
overheated, so we ought to be very careful. That's why I want 
to be very clear, Mr. Liddy, that I disagree with the way you 
have handled this, but I understand that you inherited it. I 
disagree with the people who wrote those contracts, but it did 
not appear to me to be criminal.
    I will be willing to be guided to some extent by what the 
security officials may say, but this is an important public 
subject, and my guess is that there are probably threats aimed 
without too much specificity about people who work there.
    So I am going to keep that request on the table. I will 
consult with the law enforcement people, including the Federal 
law enforcement people, and if they tell us they think there is 
a serious threat, we will have to take that into consideration.
    But I do want to keep that request on the table, and it is 
subject to our being persuaded, if I ask for a subpoena there 
would be a committee mark-up, it's not a unilateral decision, 
and yes it's legitimate to take into account.
    I have to say that if we gave in to these kind of threats, 
we would never get information made public about a lot of 
things, and I would certainly ask that the State and local and 
Federal law enforcement officials give full cooperation, and I 
would urge that any threat that anybody even comes close to 
carrying out or even threats which themselves can, by law, be 
prosecuted.
    At this point, I am not persuaded, but it is--I will ask 
before we act that we get information from the security people 
and that will be before the committee when we vote.
    Thank you, Mr. Chairman.
    Mr. Liddy. Thank you, sir. We will wait to have more 
discussion with you.
    Chairman Kanjorski. Thank you very much, Mr. Frank.
    The gentleman from Alabama, Mr. Bachus?
    Mr. Bachus. Thank you. Mr. Liddy, mark-to-market, I think, 
is good in concept, but insurance and banking CEOs are telling 
me that it is not working well in a distressed market. I would 
like your comments on modifications others have proposed, and 
general modifications, and how it might help AIG to increase 
the likelihood of the taxpayers being fully reimbursed.
    Mr. Liddy. Yes, sir. I think mark-to-market is a good 
concept, run amok. On balance, knowing what something is worth 
every day is a good thing, but it presumes that there's a 
market. It presumes that there's a willing buyer and a willing 
seller.
    When liquidity completely dries up, there's not a willing 
buyer, so you have to keep marking the value of the assets down 
to an unwilling buyer level.
    In insurance companies, we have a long liability. We will 
insure your life. And we will match it with a long dated asset. 
Those long dated assets, like commercial mortgage-backed 
securities and residential mortgage-backed securities, because 
they're long-dated, they are not liquid right now, and they 
have been buffeted in value, unlike anything most of us have 
ever seen.
    So as a result of that, AIG and many other insurance 
companies have had to write the value of those assets down, and 
it has caused great stress on the liquidity.
    So I'm a believer in mark-to-market, but I think it's not a 
one-size-fits-all, and I think it's not a one-size-fits-all 
with respect to all the various assets to which it applies.
    I think it is important that some adjustment be made. To be 
honest with you, much of the damage is already done, but that's 
not an argument for not closing the door. We should still close 
the door, and perhaps be more prudent about how we apply it, 
starting with this quarter, the first quarter of 2009, going 
forward.
    Mr. Bachus. And maybe be critical to get that guidance out 
before those first quarter reports.
    Mr. Liddy. Yes. I know this topic has been discussed 
before, and it made sense to me to not do anything in 2008. You 
can't do it in the fourth quarter of the year.
    But to start afresh with the new quarter of 2009, to the 
extent it's possible, that makes sense to me.
    Mr. Bachus. Thank you.
    You said that you have unwound all but about $10,000 worth 
of credit default swaps. That's very good news. That's $70 
billion. What about the balance sheet rental? When you were 
talking about regulatory capital, was that the same thing or a 
different thing?
    Mr. Liddy. No. That is the balance sheet rental. The 
regulatory capital trades are really of a substantially 
different nature. They don't require--for the most part, they 
don't require the collateral postings that the credit default 
swaps did. It's pay-as-you go. If a company actually doesn't 
get a payment, then you have to make them whole.
    What has happened--and a couple of the individuals on the 
previous panel did a great job I think of explaining that--with 
the AIG credit default swaps, what we did was we insured the 
value. So when the value went down, we had to post collateral.
    In most cases, what you are doing is you are insuring the 
payment. So the regulatory capital works in an entirely 
different way.
    Mr. Bachus. Sure. What--on the balance sheet rental, have 
you had progress in that regard?
    Mr. Liddy. Yes. That number was at its height. I'm going to 
give you boxcar numbers. I don't remember precisely, it was 
$350- or $370 billion. It is now down to $230 billion.
    And because of some things that are happening in the 
regulatory environment in Europe, that will be reduced by 95 
percent by the end of the first quarter next year.
    Mr. Bachus. All right. You know, I have had some problems, 
we use that figure $170 billion, bail-out money that the 
taxpayers are owed?
    Mr. Liddy. Yes.
    Mr. Bachus. Now I'm aware of the Federal loan, which is 
$37.8 billion. The $40 billion TARP, now that's $77-, $78 
billion. Is that what is actually owed? Or is it $170 billion?
    Mr. Liddy. No, it's $78 billion that is actually owed. If 
you would let me break down the pieces. $40 billion of TARP 
money, you're 100 percent correct. $37.8 billion at the end of 
2008, it might have gone up a ``skooch.'' So it's in the range 
of $80 billion is what we actually owe.
    Mr. Bachus. Right.
    Mr. Liddy. Now the Federal Reserve invested in some of our 
distressed assets, they bought into financing vehicles that 
have RMBSs in them.
    Mr. Bachus. Those are the Maiden Lane?
    Mr. Liddy. Yes, Maiden Lane II and III. They were able to 
acquire those assets at a discount at 40 or 50 or 60 cents on 
the dollar. They are currently performing. There have been no 
credit losses on them. And the Fed is a patient investor. They 
and the American public will do very well on that investment.
    So I believe what frequently happens is people take the $40 
billion and we can have as much as $60 billion in the Federal 
Reserve. We have only tapped into, let's call it $40 billion. 
But analysts, writers will take $40- plus $60- plus the $50 
billion of assets that the Federal Reserve has invested in, and 
a few other things, and they get to that $170 billion number.
    It's an important distinction, because for us to pay off 
what we owe the Federal Government, it's roughly an $80 billion 
target right now, and we can do that. But we need some help 
from the markets to be able to do it.
    Mr. Bachus. Thank you. And let me say this, Mr. Chairman, 
as I close. It's my understanding most of those assets, like 
you say, they were 45 cents, 50 cents on the dollar. Now in the 
markets generally, they're trading about 90 cents on the 
dollar. Is that--
    Mr. Liddy. No, that is too high, sir. That's too high. They 
are down--it depends upon the specific asset, but they are 
probably anywhere from 30 to 75 cents; it depends upon the 
asset.
    But the really important thing is: They are current pay. 
You know, for every dollar that's owed on those, 96 or 97 or 98 
cents is being paid.
    Mr. Bachus. That's performing? So they're performing?
    Mr. Liddy. Yes, they're performing.
    Mr. Bachus. And you know, when you talk about $1.6 trillion 
under management, and you're having to have people to manage 
that, I would say to the committee, we're talking about--this 
is a big number--but a million and six hundred thousand 
million.
    Mr. Liddy. Right.
    Mr. Bachus. That's a pretty big figure.
    Mr. Liddy. And sir, that really is the risk trade-off that 
we made. I don't want that book to blow up and cause to come 
undone all that we have achieved, all that you all have 
achieved thus far.
    You know, do other reasonable people see it in an entirely 
different way? Yes. Is the American public mad as a hornet 
about it? Yes. Would I have liked not to have made those 
payments? Yes.
    But I don't want that business to erupt on us and cause the 
difficulties we have tried so hard to avoid.
    Mr. Bachus. I think that is the definition of the risk, if 
those aren't properly managed, is a million six hundred 
thousand million. So we ought to all keep that in mind when we 
talk about you having the skill to manage those.
    Mr. Ackerman. [presiding] Mr. Liddy, you have basically 
been parachuted into the helm of a ship that has already hit 
the rocks. And you get no pay, you get a buck a year, you have 
no stock options is my understanding. You have no financial 
upside, no matter how good a job you might do.
    And on behalf of a lot of people, I want to thank you for 
rising to the occasion to take on the task of setting this 
thing straight to the best of your ability.
    Mr. Liddy. Thank you, sir.
    Mr. Ackerman. You're going to hit some bumps in the road. 
But you have no right and neither do the good people who work 
for your company to be subjected to the kinds of things that 
you have been subjected to and the threats to yourself or your 
family by anybody.
    And I just want to apologize on behalf of the millions and 
millions of decent Americans who understand really what is 
going on, but are nonetheless frustrated.
    We are here to help you over those bumps in the road, 
because you're not going to make perfect decisions all the 
time, and you have just hit one of those bumps in the road.
    So I want to try to help you. So maybe you can--
    Mr. Liddy. Thank you. I need all the help I can get.
    Mr. Ackerman. All right. This old school teacher is going 
to give you a little bit of advice: Pay the $165 million back. 
That bonus money that has been given out, circumstances 
understood very clearly. You have a legal question here. But 
you have received or have access to $197.3 billion of U.S. 
taxpayer money. $165 million adds up to this old math teacher 
as less than one-tenth of 1 percent. That's not worth the 
aggravation, the angst, that you have suffered and that this 
country is going through.
    Give that back. Cut your losses in financial terms. It just 
isn't worth it. Do you think you could consider doing that? And 
then pursue the legal options if you wish, of litigation 
against the people who do not want to give it back or haven't 
given it back?
    Mr. Liddy. Sir, that is what I have attempted to set in 
motion this morning; I have asked the folks at AIG FP to, in 
fact, return that money, give it back, at least 50 percent of 
it, and for the leadership group, 100 percent of it.
    The issue I have, I never got a chance a moment ago to 
fully explain the legal side of it. And I'm not one who hides 
behind the legal aspect of this.
    What we can't do is have a group of individuals or have an 
event which causes AIG FP to get into a situation of cross-
default. If it does that, it will be bankruptcy and it won't be 
a very good picture.
    Mr. Ackerman. Take it out of your profits down the road. 
Eat it now. It's a lot sweeter now than it's going to be later. 
Because you have legislation coming down the pike that they're 
going to call it, ``I can't believe it's not waterboarding.''
    Mr. Liddy. What I would like to do, sir, is see how much 
leadership comes from the AIG FP people in terms of returning 
those bonuses. My fear is the damage is done, that we will get 
the bulk of that money back. They will return it, but they will 
return it with their resignations.
    And we do in fact run the risk of that business being much 
more difficult to wind down than we ever anticipated. That is 
not a concession to defeat. We will do everything we can to 
make sure that business gets wound down professionally, 
quickly, and efficiently.
    Mr. Ackerman. You're talking about the business of credit 
default swaps?
    Mr. Liddy. No. I'm really talking about the $1.6 trillion. 
We're pretty much done with credit default swaps.
    Mr. Ackerman. Is credit default swaps a bad idea?
    Mr. Liddy. No, a credit default swap is I think a very 
legitimate product. It just needs much more visibility and you 
can't use the language--
    Mr. Ackerman. Can I edit one of your words, ``visibility?''
    Mr. Liddy. Yes.
    Mr. Ackerman. And say ``transparency.'' The reason this 
country is great and our system works better than any other, is 
because of transparency, and our capital markets work great, 
better than any others, because of transparency.
    And the fact that Mr. Madoff said, ``I can't tell you the 
secrets of my business, because they're secret, that's why I'm 
successful,'' that is what has everybody all screwed up, 
because nobody knew what he was doing and he's just too big to 
fail.
    The credit default industry is Madoff Lodge. People are 
buying into what they don't understand, they can't see through, 
it is completely unregulated by any agency that we know of or 
have been told today by the regulators; has no finances to back 
it up, and can't pay off on a bad debt, on a bad bet.
    It's people sitting around, shooting craps without a 
wallet. And I don't think that's a good financial investment, 
do you?
    Mr. Liddy. Well, I wholeheartedly accept your edit. 
Transparency is a better word. With transparency and the right 
contract, a credit default swap can serve a purpose. That is 
not what we had. We did not have transparency, and we did not 
have a good contract.
    Mr. Ackerman. My time has expired. Mr. Price? No? In that 
case, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman. And thank you, Mr. 
Liddy for being here today. I am very interested in the events 
that have occurred about the time that you came to AIG, and in 
terms of the Federal Government role in all of this, going back 
to the first tranche, which I understand was issued by the 
Federal Bank of New York, as a matter of fact, which I think 
Mr. Geithner was heading at that time.
    Can you tell us--and it was at that point that the Federal 
Government became the owner of 89-point-some percent of AIG 
stock, and so we became a majority stockholder at that time. 
Can you tell us what the Federal Government participation has 
been since that time in terms of meetings that have occurred 
either with the Fed of New York or the greater Federal Reserve 
here in Washington and the Treasury Department?
    Mr. Liddy. I can. Our interaction is primarily with the 
Federal Reserve Bank of New York. They have observer or 
overseer powers over us. They have assigned an excellent cadre 
of people to understanding our business. That cadre of people 
have brought in experts from Morgan Stanley, and from Ernst & 
Young to supplement them since the Federal Reserve primarily is 
a regulator of banks, not of insurance companies.
    As I said earlier, I very much view the relationship as a 
partnership. We do not do a single thing of strategic import 
without making certain that we have talked to the Federal 
Reserve about it and we have given them an opportunity to weigh 
in on it.
    The Federal Reserve attempts--
    Mr. Castle. I don't mean to interrupt you, but you said in 
your testimony, ``working with our partners in the Federal 
Reserve and the U.S. Treasury.'' You have only been talking 
about the Federal Reserve so far.
    Mr. Liddy. Well, no, really I'm just talking about the 
Federal Reserve. As I have talked to the Federal Reserve, and I 
have talked to the U.S. Treasury, they have encouraged us to 
primarily deal with one regulator or one overseer, and that has 
been the Federal Reserve, and that is exactly what we have 
done.
    Mr. Castle. And the Federal Reserve has been a participant 
at your board meetings. I'm not sure they have a vote, but they 
have been a participant at your board meetings and in other 
significant meetings in terms of reviewing policy since that 
time in October?
    Mr. Liddy. Yes. Absolutely yes. And it goes well beyond 
that. It goes to participation in all the things that lead up 
to board meetings or committee meetings.
    Mr. Castle. And it has been a variety of people? Either 
outsiders they have brought in, or people from the Federal 
Reserve who participated in these meetings. Is that correct?
    Mr. Liddy. Yes, sir.
    Mr. Castle. And you indicated that you assumed that they 
had shared that information earlier in testimony today. You 
assumed they had shared that information with Treasury and with 
Congress, for all that matters. Is that correct?
    Mr. Liddy. Yes. As I mentioned--
    Mr. Castle. I'm correct and have been correct in saying 
that was an assumption you made?:
    Mr. Liddy. Yes. I had a conversation with Treasury 
Secretary Geithner about a week ago, and he indicated to me 
that he had only become aware of the situation about a week 
prior to that, and we have tried to keep the staffs of various 
Members of Congress apprised of all of the situation and to be 
very responsive to whatever queries you may have. I think we 
have done a good job of that. Very good--you'll be the judge of 
that.
    Mr. Castle. If Treasury Secretary Geithner was the head of 
the New York Federal Reserve and his people were participating 
in the meetings that you had thereafter, would he not have 
known from them? Or was even a participant in the meetings at 
least until he became Secretary of the Treasury?
    Mr. Liddy. I don't know. You really have to ask the Federal 
Reserve that as to how much was there in the chain of command 
that would have gone all the way up to Mr. Geithner. I don't 
know the answer to that.
    Mr. Castle. Did he participate in any of the meetings when 
he was still at the Federal Reserve in New York?
    Mr. Liddy. In several yes, although once he was nominated 
as a potential Secretary of the U.S. Treasury, he recused 
himself from any of those situations.
    Mr. Castle. Now you indicated that the Federal Reserve 
could say yea or nay at these various meetings, and I assume 
these are probably board meetings or some subset of the board 
executive committee meetings or whatever.
    Mr. Liddy. Correct.
    Mr. Castle. Did they actually have the right to say yea or 
nay on decisions such as bonuses, or whatever? Or did you just 
assume that they were there and they could have said something 
if they wanted to. How do you interpret their powers?
    Mr. Liddy. I generally ask them, I ask them if they're okay 
or if they have a comment on it, which is my way of making 
certain that if there's a different point of view that should 
be heard or should be voiced, that there's an opportunity for 
it to be heard.
    Mr. Castle. And they did not say nay as far as these 
bonuses were concerned?
    Mr. Liddy. No. There was great angst over the payment of 
these bonuses, believe me, on all of our parts, including the 
Federal Reserve's. And the judgment, as I said--I'm sorry to be 
repetitive--the judgment we made was the risk was too great 
that we would lose all the progress we made if we didn't pay 
these bonuses.
    Mr. Castle. I request, Mr. Chairman, as I close here--and 
would it be possible to ask if Mr. Liddy or those working with 
him could submit a list and the chronology of the meetings that 
occurred at which the Fed was available there and who was there 
and the basic outline of what was discussed at that meeting?
    Mr. Ackerman. Would you submit that in writing?
    Mr. Castle. Could you submit that in writing? I'm not 
asking you to do it now.
    Mr. Liddy. We don't have it available to us right now. I--
    Mr. Castle. No, would you submit it in writing? Could you 
go back and after several days be able to submit something of 
that nature, looking at your minutes or whatever?
    Mr. Liddy. Yes.
    Mr. Ackerman. Thank you.
    Mr. Castle. Yes, from your board minutes or whatever other 
writing you might have. Thank you.
    Mr. Ackerman. The answer was yes.
    Before moving to Mr. Sherman, if the committee would 
indulge a quick clarification? If you could give us a yes or 
no? During the exchange with Chairman Frank, requesting a list 
of those people who have accepted the bonuses or to whom 
bonuses were given, you also referenced the fact that you were 
going to cooperate with Attorney General Cuomo in New York.
    He has indeed already subpoenaed those names. Does that 
mean you will be cooperating with that subpoena?
    Mr. Liddy. We have not provided those names to the Attorney 
General.
    Mr. Ackerman. The question was: Will you cooperate with the 
Attorney General's subpoena?
    Mr. Liddy. I'll talk to my general counsel about it, and we 
will do the right thing.
    Mr. Ackerman. Does the right thing include complying with 
legal requests from attorneys general?
    Mr. Liddy. We always comply, we do everything we are 
required to do and more with respect to obeying the law.
    Mr. Ackerman. So that will be a yes? You will supply the 
names subpoenaed?
    Mr. Liddy. I'm sorry to be so evasive. I just want to 
protect our employees--
    Mr. Ackerman. No, it's easy. You don't have to be evasive. 
It's really yes or no.
    Mr. Liddy. I just want to protect our employees. So if 
someone can just assure me that what is not going to happen is 
a list of names, addresses, dollars, and pictures are released 
and therefore they are even more at risk than they are right 
now.
    Mr. Ackerman. You are not giving it to a bunch of 
Congressmen, now. You're giving it to an attorney general of a 
big State--
    Mr. Liddy. No. Believe me, I understand that, and it would 
our intent to comply with the subpoena.
    Mr. Ackerman. Thank you. Mr. Sherman?
    Mr. Sherman. Thank you. Mr. Liddy, you missed the first 
panel. We learned in the first panel that the insurance 
companies and savings banks will be just fine and that U.S. 
consumers would be just fine if the parent company went into 
receivership. We heard that from the regulators of those 
entities.
    They said that there would be a slight reputational risk if 
the parent company went into receivership, but it would be 
maybe a thousandth of the bad press that they have gotten over 
the last week, because you didn't go into receivership.
    The second thing they told us is that they had on their 
staffs experts in credit default swaps, who were making between 
$100- and $150,000 per year with no retention bonuses at all.
    But of course none of those individuals, although they have 
the expertise, none of them have the experience in bringing 
down an entire company or a world economy.
    Now I support Chairman Frank's plan to launch a shareholder 
derivative suit or similar action against the overpaid 
executives.
    But I don't want to go home and tell my constituents, ``We 
may have some chance of getting some of the money back.'' The 
American people are skeptical.
    And so as a tax attorney, I can assure my constituents that 
if we pass the tax bill, we're sure to get virtually all of the 
excess compensation back for the American taxpayers.
    Now if the Federal Reserve Board knew about the particulars 
of these bonuses and didn't tell us, then they should be called 
to account. Because that calls into question not only their 
competence, but their dedication to democracy. Because they may 
have deliberately prevented the American people from weighing 
in on the decision as to whether AIG should have been put into 
receivership.
    Mr. Liddy, can I count on you to provide the members of 
this committee with every document that you gave the Fed, 
excluding those documents that have the names or other 
identifying information of your employees?
    Mr. Liddy. I would like the opportunity to talk to my 
general counsel about that and make sure that, in fact, is the 
right thing to do.
    Mr. Sherman. Well, if you're going to keep your 
shareholders informed, you have to keep the members of this 
committee informed, and not just give it to a Fed that seems to 
have let us down.
    I would ask you provide for the record a chart, focused on 
future bonuses and future high compensation, which we could 
stop if we pushed you into receivership. At least we can stop 
future payments.
    And in that chart, show us how many employees are getting 
more than $100,000 a month in salary and how many stand, under 
current compensation plans, to get over $500,000, $1 million, 
or $2 million during 2009 in bonuses?
    Can you furnish that for the record?
    Mr. Liddy. I believe we can.
    Mr. Sherman. Thank you.
    Now are the employees of the company able to consult at AIG 
expense criminal defense lawyers, especially the high-paid 
$500-an-hour or $1,000-an-hour criminal defense attorneys? Is 
that allowed under your policies?
    Mr. Liddy. Only if there's an assertion of criminal 
wrongdoing.
    Mr. Sherman. I think anybody listening to this committee 
would say that there is an assertion of criminal wrongdoing, at 
least being made by the America people.
    You have an obligation to keep your shareholders informed. 
The shareholders are the 300 million American people. You can't 
just tell one or two shareholders. You have to tell all the 
shareholders.
    You knew a month ago that if we put this company into 
receivership, we not only would save the $30 billion that was 
provided to the company, or the risk that was taken by the 
Federal taxpayer, in providing an additional $30 billion credit 
line, but that we would invalidate these bonus contracts.
    You seem to have informed one or two people of that. You 
did not inform all of the shareholders.
    The other issue is the contracts themselves seemed to have 
been entered into in contemplation of huge losses, and whether 
there was a criminal conspiracy to conceal these losses from 
the shareholders that AIG had about a year ago, and enter into 
these contracts, both of issues raise issues of whether there 
is criminal liability.
    Under those circumstances, will AIG spend the money to 
provide criminal defense counsel to its employees and officers?
    Mr. Liddy. I really need to look at the facts, sir. And in 
much more detail than what you just indicated.
    Mr. Sherman. I would ask that you would provide for the 
record what your policies are, because as of, you know--the 
Miranda rights don't entitle you to a $1,000-an-hour criminal 
defense attorneys, they entitle you only to what is called, the 
rights that Miranda was given.
    I believe my time has expired.
    Mr. Ackerman. The gentleman from illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Mr. Liddy, when did you first know about the retention 
contracts?
    Mr. Liddy. In October or November of 2008.
    Mr. Manzullo. Did you attempt to change any of those 
contracts as you did when you were at Allstate?
    Mr. Liddy. I asked that a complete analysis be done of 
whether there were ways to effectively alter those contracts. 
Could we change them? Did we have to honor them? I did do that.
    Mr. Manzullo. And so you came to the conclusion that even 
though the taxpayers owned 80 percent of the company, and the 
company couldn't pay any bonuses at all unless the taxpayers 
had put up the money, that the contracts could not be altered. 
Is that what you were told?
    Mr. Liddy. It was what I was told, sir, but I really 
started from a different place. As I mentioned earlier, I 
started from the basic issue of risk analysis.
    Mr. Manzullo. No, I understand that.
    The top 7 people at the organization received more than $4 
million in retention bonuses, and the top individual got $6.4 
million, and 73 employees got a total of $1 million each. Were 
these being considered to be key players, key figures in the 
corporation?
    Mr. Liddy. Not within the corporation, but within the unit 
known as AIG FP, so just to be clear, the top people in the 
corporation are getting no bonuses.
    Mr. Manzullo. But that's the group that went sour, isn't 
it, the Financial Services Division?
    Mr. Liddy. Yes. And they would be some of the top people in 
AIG--
    Mr. Manzullo. When Mr. Kashkari, who is the head of TARP, 
testified before this committee on December 10th, he said that 
the top people who were involved in AIG going sour had been 
removed. Would he have been mistaken when he said that?
    Mr. Liddy. I think he was really referring--I haven't seen 
the testimony--I think he was referring to the corporate level, 
the holding company, versus AIG FP.
    But with--
    Mr. Manzullo. He said, ``We have removed those people.''
    Mr. Liddy. I understand that Mr. Cassano is gone.
    Mr. Manzullo. But I had asked him that question, because I 
was questioning a $3 million bonus, which turned out to be $4 
million, and his statement was that the key people who had made 
AIG go sour had been removed, and that this was evidently 
somebody else.
    And my question too is that these people who got the $4 
million and the $6.4 million, those are the people who were in 
charge of the Financial Services Division at the time that 
division collapsed? Isn't that correct?
    Mr. Liddy. Not entirely, sir. The architects and builders 
of the AIG FP strategy, they are gone, primarily Mr. Cassano 
and a few other names. And we are not paying them anything, 
despite what the contracts say and everything else, we are not 
paying them--
    Mr. Manzullo. So you could not pay contracts? Go ahead.
    Mr. Liddy. Not when we have our people who are more 
executers and traders, derivatives--
    Mr. Manzullo. Would you say an executor would get $6.4 
million in bonus and 7 get more than $4 million? These are not 
perfunctory people, these are first-class people making first-
class decisions that determined the destiny of the Financial 
Services Division.
    Isn't that correct?
    Mr. Liddy. Yes--
    Mr. Manzullo. So they have to bear responsibility, do they 
not?
    Mr. Liddy. They are very talented people who are--
    Mr. Manzullo. I understand that, but they have to bear the 
responsibility, do they not, Mr. Liddy, that they were there at 
the time that these financial investments went south and they 
have to bear responsibility that they perhaps were at fault 
also in addition to the gentleman that you removed, who is on 
the holding company? Isn't that correct?
    Mr. Liddy. Yes. Although sir, most of the people who were 
directly responsible for the credit default swaps at AIG FP, 
those people are gone.
    Mr. Manzullo. Well, then, who are these people? I mean did 
the credit swaps come out of the Financial Services Division?
    Mr. Liddy. They did, but think of it as boxes. You had 
credit default swaps, you had regulatory capital, you have 
other derivatives trades. Many of these people are working the 
other derivative trades at $1.6 billion. The regulatory capital 
book, we have that under control, and the credit default swap 
book, that's pretty much gone.
    These are people who for the most part worked in the 
derivatives, the currency hedges--
    Mr. Manzullo. Okay. I understand that. But my question is 
the fact that your testimony is inconsistent with that of Mr. 
Kashkari, because he led the American people to believe--and 
perhaps he was correct--that the people who are responsible for 
the mess at AIG had been removed from their areas of 
responsibility and all new people had been put into that 
position.
    That is why the Americans are really upset over people who 
are at fault getting these types of outrageous bonuses.
    Mr. Liddy. Sir, I think we are in agreement. The people who 
were primarily responsible for the credit default swaps that 
had brought us to our knees, they are gone. The people who were 
responsible for regulatory capital trades that had some 
exposure, they are gone.
    But the people who still operate a $1.6 trillion trading 
book of business, we aren't losing the kinds of dollars on that 
we have lost on credit default swaps, they are still there.
    Mr. Manzullo. Those are the ones--
    Mr. Liddy. They are the ones who are winding that book of 
business down.
    Mr. Manzullo. And they got the retention bonuses?
    Mr. Liddy. Yes, they did.
    Mr. Manzullo. Even though seven of them left after they got 
the retention bonuses?
    Mr. Liddy. Well, again, they did exactly what we asked them 
to do. They had a book of business of several--
    Mr. Manzullo. But they got paid on March 15th and this is 
March 18th. So they didn't retain very long, did they?
    Mr. Liddy. No. Remember, these went into effect on January 
1, 2008, so those people may have taken until October to 
November of 2008 to get rid of that book of business in a way 
that we felt comfortable with--
    Mr. Manzullo. Okay--
    Mr. Liddy. If they did that and then their job was 
eliminated, they earned their retention bonuses.
    Mr. Manzullo. Thank you. My time is up. Thank you.
    [Off microphone discussion]
    Mr. Ackerman. Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Liddy, I'm just 
curious. First of all, thank you for working for a dollar a 
year. Apparently Diogenes found his one good man and you're it.
    I think you're about to get some more thanks.
    I'm just curious. When you were doing these bonuses, did 
you expect that it would touch a nerve with the American 
people, as it has?
    Mr. Liddy. Absolutely.
    Mr. Capuano. All right. So you knew this was coming?
    Mr. Liddy. Yes.
    Mr. Capuano. All right.
    Mr. Liddy. But perhaps not as severe as it is, but 
absolutely.
    Mr. Capuano. Fair enough.
    I understand that these people who got these bonuses--and I 
want to be clear--I'm not against bonuses per se. What I'm 
against is bonuses to people who helped cause the problem and 
particularly bonuses that come out of taxpayer's dollars, etc., 
etc.
    I'm not against bonuses. We're not talking about anybody 
who got a $1,000 bonus, we're talking about people who got 
hundreds of thousands of millions of dollars.
    And do you believe honestly in your heart, with all of the 
unemployment that has gone on in the financial services sector 
right now, right this very minute, do you really believe that 
these are the only people who are capable of doing this job?
    Mr. Liddy. No, I don't.
    Mr. Capuano. So that there are people out there who would 
have taken this job, who maybe wouldn't have gotten this far. 
So you could have fired these people to replace them with 
equally capable, professional people that are currently 
unemployed on Wall Street right this minute?
    Mr. Liddy. If you'll let me explain. Each of these 
contracts is a complicated contract unto itself. It's not you 
have seen one, you have seen them all. They're really all 
unique.
    And they need to be properly hedged and balanced at the end 
of each day, because there's so much volatility in the--
    Mr. Capuano. Yes--
    Mr. Liddy. If they're not, you get burned.
    Mr. Capuano. Let me ask a question. In your former life 
with Allstate--I'm a policyholder of lots of insurance, that's 
basically a legal contract between me and my insurer, so when 
you were at Allstate, every person that you sold an insurance 
policy to had a basic contract with Allstate. Would you agree 
with that?
    Mr. Liddy. Yes.
    Mr. Capuano. Did you honor every single one of those 
contracts as those clients saw them as they should have been on 
it, as they think? Every single one of them. You just paid it 
out when somebody asked.
    Mr. Liddy. No, we--
    Mr. Capuano. You had a difference of opinion on a legal 
contract. You went to court, based on judgment.
    Mr. Liddy. Yes.
    Mr. Capuano. And let the courts decide. I'm a lawyer. I'm 
all for courts making decisions on legal matters, not 
necessarily lawyers for private companies. Our job, your job, 
is to make decisions on the basis of what you think is best but 
at the same time, in this case, you have an obligation to the 
general public.
    I can't imagine why you couldn't have followed the same 
policy here. Simply--
    Let me ask you one more question I asked the previous 
panel. Do you believe that the current course that AIG is on, 
that this course will lead to stability and profitability of 
AIG within a reasonable period of time?
    Mr. Liddy. I do.
    Mr. Capuano. Do you have any idea how long it will take? A 
year, 2 years, 5, 10, or 100 years?
    Mr. Liddy. You know, the plan is about a 2- to 3-year 
period of time--
    Mr. Capuano. A 2- to 3-year period.
    Mr. Liddy. But it's very dependent upon what happens to 
market conditions around the globe.
    Mr. Capuano. I respect that.
    Mr. Liddy. Very dependent.
    Mr. Capuano. As we all are dependent on that.
    So did you consider at all--you didn't consider replacing 
these people because you thought the contracts were too 
complicated. I respect that.
    Did you consider at all saying, ``Look, we're not going to 
do this. We read it differently, we think the circumstances 
have changed, we think these contracts are null and void 
because the circumstances have changed. If you disagree with 
us, we will see you in court,`` knowing, or at least believing 
that within 2 to 3 years, AIG will either be back to 
profitability or bankrupt and gone. Either way, by the time 
those lawsuits were settled, these people would be then in a 
court that either was a private company with no taxpayer 
dollars left, or a company that went bankrupt, with a 
bankruptcy judge to decide who got what money. Did that cross 
your mind at all?
    Mr. Liddy. It crossed our minds; it got very serious 
consideration.
    Mr. Capuano. Serious consideration. Why didn't you do it?
    Mr. Liddy. Back to the risk assessment. Had we done that, 
more than likely those people would have walked out the door 
tomorrow or whenever, and we would have had this $1.6 trillion 
book of business which needs to be managed every day with no 
one to manage it.
    To the extent something happens in one of those trades, and 
it triggers a cross default, we get into a spiral that undoes 
all of what the government has--
    Mr. Capuano. So do you have any plans for the people who 
haven't left yet? Do you have any plans for firing them now? 
Because they have proven to me that they don't have the best 
interest of their employer, mainly the American taxpayer, at 
heart.
    Since that's the case, I understand you don't want to be 
without them. You don't have to tell me names, but is there 
anybody you are going to fire next week or next month or 3 
months from now and replace them quietly in a thoughtful 
manner?
    Mr. Liddy. No. Let me tell you what we have tried to do. 
Each person has a book of business. There are 22 or 24 separate 
books of business. Their job, either individually or in tandem, 
is to wind that book of business down.
    It could happen by the end of April, it could happen by the 
end of December.
    What we have also done is we have brought in some 
additional people to understand those books of business--it's 
hard to get all the right expertise at the right time--to 
understand those books of business as backstops or insurance.
    Mr. Capuano. Mr. Liddy, I think you have made a series of 
judgments that I obviously disagree with, that you could have 
made other decisions and let the chips fall where they may.
    It amazes me that these are the only people. Apparently you 
are the only good person left on Wall Street to do this because 
you know the American people need it, and I appreciate your 
effort, and I don't mean to berate you on a personal basis. I 
really do appreciate what you have done.
    Nonetheless, it would be nice if we had a couple more 
people working for AIG at top-level salaries who felt the same 
way or anywhere near the same way.
    And for those who don't, the truth is, as one taxpayer, I 
don't want them working for me. I would just as soon you get 
rid of them and take the risk with that.
    Mr. Liddy. You know, sir, there is a cadre of people 
working at AIG very hard for the American taxpayer, trying to 
do everything we can to repay every single dollar.
    You would be proud of them.
    Mr. Capuano. Not right now, I'm not.
    Mr. Liddy. Okay.
    Mr. Ackerman. The gentlelady from Illinois, Ms. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    If the taxpayers hadn't loaned AIG any money, would the 
executives who received the bonuses have received them?
    Mr. Liddy. Probably not. But if you'll let me explain, I 
think it's a matter of what would have happened. I think the 
company would have spiraled into bankruptcy, and in bankruptcy, 
a bankruptcy court judge makes the decision of: ``Are you 
important, or are you important, and what do we have to do in 
order to keep you?''
    So if they were determined by a bankruptcy judge to be 
important, they may have gotten a payment. But the basic 
contracts would have been voided.
    Mrs. Biggert. But because the money came from the Treasury 
and from the Fed, they were able to get the bonuses?
    Mr. Liddy. There was no bankruptcy.
    Mrs. Biggert. Okay.
    In my opening statement, I was concerned whether the 
taxpayers who own 80 percent of the company got to vote on 
these bonuses. Was there any notification or anything that--the 
reason I'm asking that is because as part of the bailout, the 
New York Fed appointed 3 trustees to represent the government's 
nearly 80 percent ownership interest in the company. Did you 
ever see or hear from these trustees? Were they at the board 
meetings? Were they there?
    Mr. Liddy. You know, I have met with the trustees on a 
number of occasions. They were just appointed approximately the 
middle of February or so. I don't remember the exact date.
    Again, we have reviewed these with the Federal Reserve, and 
the Federal Reserve is the repository gatekeeper, if you will, 
of the relationship with AIG.
    Mrs. Biggert. So they were appointed after the decision--
well no, the decision was in March.
    Mr. Liddy. No. Before.
    Mrs. Biggert. So did they notify anybody? Or did you talk 
to them about the bonuses?
    Mr. Liddy. I do not know if they were reviewed or not.
    Mrs. Biggert. Okay. Who are the trustees?
    Mr. Liddy. There are three trustees. To be honest with 
you--Doug Fuge. I can get you that list, if you will--
    Mrs. Biggert. I would appreciate it.
    Mr. Liddy. Bill Considine. I can get you that list.
    Mrs. Biggert. All right.
    So did you or your staff make the Treasury aware of the 
bonuses, other than talking to the trustees, or--
    Mr. Liddy. I'm sorry, did we make the Treasury--
    Mrs. Biggert. Yes. Did you make the Treasury aware?
    Mr. Liddy. No, as I said earlier, we began discussing this 
at our board meeting starting in the middle of November, a full 
disclosure with the Federal Reserve. And I don't know, I'm not 
privy to what happens from the Federal Reserve up into the 
Treasury.
    Mrs. Biggert. Okay. You know, my constituents and the 
American taxpayers are really upset with this. As you well 
know, as we all know.
    And they don't want to see one more dime go to AIG. Can you 
give me three good reasons why you should have received that 
money, and why, if you are going to need it in the future, that 
the taxpayers should give you support?
    Mr. Liddy. I think the payment of the bonus, the thought 
process was that it would prevent a very disorderly event 
within the Financial Products business, which could have 
brought down the whole corporation.
    And then the roughly $80 billion that the taxpayers have 
already invested in AIG would have been for naught.
    So we did not think that the $165 million relative to 
putting at risk the $80 billion that has already been 
invested--we thought it was wiser to err on the side of caution 
and see if we could do everything we could to keep those 
individuals in place at AIG FP.
    Mrs. Biggert. And do you think that it would happen that 
the company would need more money?
    Mr. Liddy. I believe we are adequately capitalized, 
particularly with the ability to draw down on the additional 
$30 billion of TARP.
    It goes back to my answer to somebody's question over here. 
It is very much a function of what happens with the capital 
markets around the globe, if investment values, if asset values 
continue to go down, it will be a problem for everybody in the 
life insurance industry.
    Mrs. Biggert. All right. Thank you.
    Mr. Ackerman. Thank you very much, Ms. Biggert.
    And now, Mr. Baca of California?
    Mr. Baca. Thank you very much, Mr. Chairman, and thank you 
very much, Mr. Liddy, for being here and trying to find a 
solution to a major problem that the American people are 
outraged in reference to what happened to these particular 
bonuses.
    I want to start out by asking a couple of the questions. 
You indicated you started in September, but I believe in part 
of your testimony you indicated that it was during the last 
Administration they came up with these contracts that were in 
place, is that correct?
    Mr. Liddy. When you say last Administration, do you mean my 
predecessors?
    Mr. Baca. Yes.
    Mr. Liddy. Yes.
    Mr. Baca. And that was before President Obama took office, 
is that correct?
    Mr. Liddy. Yes. That goes back to the end of 2007, 
beginning of 2008.
    Mr. Baca. So it was basically under this last 
Administration. And part of the problem that we have and people 
are so much upset with this, retention bonuses that were given 
out right now--isn't retention, doesn't that mean that you 
stay, and a bonus means that you're getting paid for something 
you performed that is positive and is turning our economy 
around and our crisis around?
    Mr. Liddy. Yes. In this case it meant you stayed and you 
made progress on a specific assignment to wind down a portion 
of your responsibility within AIG FP.
    Mr. Baca. And some of these retention bonuses individuals 
you indicated in your testimony, that some of them have left, 
is that correct?
    Mr. Liddy. Yes. If they completed their work and their 
responsibility was wound down to our satisfaction, they would 
have left probably closer to the end of the year, and they have 
would have waited until March 15th, but they would eligible for 
the retention arrangement.
    Mr. Baca. You know, it is appalling to me that we are 
giving out these bonuses, and to the American people and the 
taxpayer--we have teachers right now across the Nation who are 
receiving pink slips, especially in the State of California. 
They are doing excellent jobs, and yet they are not getting 
bonuses. I wish we would have given those teachers bonuses, 
because they're getting the pink slips, and yet, these 
individuals out here, when you look at the crisis that we're 
in, they haven't gotten us out of the crisis, they received the 
bonuses. Isn't that a shame?
    Mr. Liddy. I have teachers in my family, sir. I know that 
pain.
    Mr. Baca. And you indicated during your testimony that you 
asked a lot of these AIG executives who received these bonuses 
to return the money. What has been the result of that survey 
that you conducted earlier?
    Mr. Liddy. I just asked them this morning. And in response 
to the public outrage, in response to the suggestions of many 
folks that I met with yesterday, just listening to the 
President of the United States say, we need to do something, we 
have attempted to amend this situation, and we have asked the 
people at AIG FP to demonstrate their leadership and give it 
back.
    Mr. Baca. Isn't there any remorse or feeling by these 
people who are getting these bonuses, when people are losing 
their jobs, losing their homes, the economy is where it's at 
right now? I mean, what has been there expression and their 
feelings? We are talking about human beings who have lost their 
jobs, have lost their homes. And yet we're giving out the $165 
million that was given.
    And I'm glad that the last question was asked, you know, 
``Was it done because of the bailout?'' Because it was this 
last Administration that asked us to vote for this bailout that 
a lot of us didn't want to, did they know in fact that we were 
going to have a crisis and that they were going to gain from 
this?
    Mr. Liddy. You know--
    Mr. Baca. It could have been, yes.
    Mr. Liddy. Yes, that's a hard one to answer, sir. I 
understand the intent of the question. The people at FP, it is 
easy to paint with one brush and capture everybody. In fact, 
there are a lot of really good people up there. They are basic 
Americans, they want to do a good job for us.
    The trades that were done that brought us to our knees, 
that was a very small number of people--
    Mr. Baca. Somebody asked us to do a bailout, we gave them 
the bailout. They knew it, they took it, they ran, they took 
the American people's money.
    Mr. Liddy. No, but I was really trying to be sensitive to 
and respond to your point. You know, don't these people have a 
conscience, which is basically what you asked me.
    You bet they do. What we asked them to do was to stay, do a 
specific amount of work, and if you do that, at the end of that 
period of time and you have done that work, we will give you a 
retention bonus. That is what those payments were.
    So they did the work, they reduced the risk from that $2.7 
trillion down to $1.6 trillion, and the American taxpayer is 
better off because we have less risk.
    But we have to keep shrinking this business quickly so it 
doesn't get away from us.
    Mr. Baca. And I hope that in part of the comment, that we 
hope that from now on, that we modify those kind of contracts, 
and we never ever have these kind of contracts if the American 
people will have to pay for something that someone else has 
created, something that they didn't do, that we now are paying 
for that.
    Mr. Liddy. Duly noted.
    Mr. Baca. Thank you very much. I yield back the balance of 
my time.
    Mr. Ackerman. Thank you very much, Mr. Baca.
    Mr. Hensarling from Texas.
    Mr Hensarling. Thank you, Mr. Chairman. Mr. Liddy, I have 
disagreed with certain things that you have said, and I have 
disagreed with some of your conclusions. But I do want to add 
my voice to others who state that you are one of the good guys. 
You were asked to come into this position, take on a very, very 
tough job, and clearly you are doing this out of a feeling of 
service to your country, and I thank you for that.
    On page 4 of your testimony, you talk about Federal 
regulators making the decision not to allow AIG to fail. With 
all due respect, Mr. Liddy, AIG has failed. Any company 
requiring $170 billion-plus of taxpayer viability exposure has 
failed. It has failed in my mind, and it certainly has failed 
in the public opinion's mind.
    I mean AIG, notwithstanding the fact--I know you have many 
good men and women, I know that you have profitable divisions. 
But it appears to many of us it is now a conduit for 
counterparty transfers of taxpayer money.
    My first question is: Did I hear you correctly? And please, 
I had to step out of the room on occasion. You speak of a plan 
in your testimony, a business plan designed to maximize the 
value of the core of businesses, so that we can maximize the 
amount to repay the American taxpayer.
    Is it your belief that this plan will make the American 
taxpayer whole?
    Mr. Liddy. It is, sir, with the caveat, if you will, that 
the markets have to behave. In order to sell assets, there have 
to be buyers who have equity or cash or capital in order to be 
able to buy them.
    Since October, that has proven not to be the case. We have 
set in motion a plan that despite that fact, we think we can 
still pay back the Federal Government.
    Mr Hensarling. Mr. Liddy, I spent about 12 years in the 
private sector before coming to Congress, and I know we have 
talked about the bonuses ad nauseam. But when I was in the 
private sector, two things had to happen to qualify for a 
bonus. You had to perform exceedingly well and the company had 
to perform exceedingly well.
    Clearly, you are bullish on the future of AIG. I'm curious 
whether the recipients of these bonuses share your enthusiasm. 
And if so, let me offer a suggestion to you, sir. What AIG does 
with their money is their business. What they do with taxpayer 
money is our business. If these people who receive the bonuses 
share your bullish thoughts on AIG, why don't you do double or 
nothing on these bonuses? Let's let the taxpayer be made whole, 
and if the taxpayer is made whole on his debt, if the taxpayer 
makes a decent return on his equity position, and AIG is indeed 
returned to profitability, Mr. Liddy, why don't you just double 
those bonuses. Instead if these people have skin in the game 
and if they believe they can work it out of trouble, then we 
don't have to worry about these other options.
    Mr. Liddy. Interesting idea.
    I would say it's probably not in the taxpayer's best 
interest to go there. I have much confidence that we can in 
fact rescue AIG. It's not a failed company; it is a failing 
company unless we do something about it. And we in fact have a 
plan to do something about it.
    It basically is a disaggregation of AIG.
    Mr Hensarling. Well, Mr. Liddy--
    Mr. Liddy. And the sale of those businesses to pay back--
    Mr Hensarling. Here's the challenge for many of us here. 
And that is--and I voted against TARP once, I voted against it 
twice, I'll vote against it 3 or 4 times, if necessary. So I 
didn't support the underlying legislation.
    But if the taxpayer is being asked to yet again prop up 
this company, you know, where is the skin in the game for the 
individuals who were supposed to turn this around? How can I 
look taxpayers in the eye in the Fifth District of Texas and 
say, ``Yes, invest your fifth tranche of hard-earned money into 
this company,'' notwithstanding the fact that the people who 
receive the bonuses don't ultimately have enough confidence 
that you're going to get paid back?
    How do we do that? How do we have any confidence? And in 
addition, I know you talk about failure, but failure isn't 
necessarily chaos. I mean, that is why they have chapter 11, 
that is why they have reorganization, that is why they have 
receivership.
    Mr. Liddy. I think you find--I did listen to the previous 
panel--I think you would find that AIG is regulated by 430 
regulators around the globe, and if the company failed, those 
good insurance companies would be grabbed by whatever 
regulators could possibly get their hands on them, to make sure 
that they were protected.
    I don't know that the world has ever seen anything like 
that. My risk assessment is that winding down the AIG FP 
business as quickly as possible is essential because it's the 
biggest exposure that we have. If we are successful in doing 
that, when we are successful in doing that, then we can in fact 
sell all the good insurance businesses, take those proceeds, 
and pay back the Federal Government. That is what we are 
desperately trying to do.
    Chairman Kanjorski. The gentleman from Massachusetts, Mr. 
Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. Thank you for 
testifying, Mr. Liddy. I appreciate your being here. I want to 
get right to the employee retention plan. Do you have a copy of 
this in front of you?
    Mr. Liddy. I do not.
    Mr. Lynch. Can some of the staff drop off a copy here to--
can you hold my time till we get this down there? Mr. Liddy, 
I'm going to explain a couple of sections here. One has already 
been mentioned by Chairman Frank, and that was the--at page 10 
of this compensation agreement, it holds that the bonus pool 
that's available for employees will be basically capped at 
$67.5 million and that regardless of what happens with the 
company, and investments, the bonuses will be given out. So it 
basically anticipates losses on the part of the company but 
protects the employee's bonuses from that dire circumstance. Do 
you think that's consistent with your fiduciary responsibility 
to your shareholders and to people who rely on your performance 
for their own benefit?
    Mr. Liddy. Congressman, you'll have to forgive me. I just 
am not familiar with that contract. I believe that contract is 
the annual performance bonus arrangement.
    Mr. Lynch. Right. It is.
    Mr. Liddy. No performance bonuses were paid in AIG FP, I 
don't believe, for 2007.
    Mr. Lynch. I'm sorry. This is for retention. These are 
retention bonuses. And while you're looking at it, the 
paragraph above that, Section 306, subparagraph A, this really 
gets me.
    Mr. Liddy. I'm sorry, sir. What page are you on?
    Mr. Lynch. Page 10 of the agreement. It says, ``The 
effect''--the subheading is, ``The effect of mark-to-market 
losses on the bonus pool.'' This is again a protection for the 
bonus pool for the employees.
    It says: ``The bonus pool of any compensation year 
beginning with 2008 compensation year will not be effected by 
the incurrence of any mark-to-market losses or gains or 
impairment changes arising from the CDO portfolio.'' This is 
the credit default swaps. This is the underlying--these are the 
underlying assets.
    So what you have done here is basically you have reserved 
the bonus pool for the employees, and not only have you done 
that in this agreement, but you have basically protected 
yourself, immunized yourself from the stupidest decisions made 
by AIG, which earlier in the testimony has been admitted to 
that it was the credit default swaps that were really--you 
know, by the Financial Products Division--that really brought 
this company down to where it is right now.
    And what you have done here in this agreement is basically 
you have immunized your own bonuses from that stupid decision. 
In other words, the bonus pool will not be affected by the CDOs 
and the credit default swaps that you were all worried about. 
And this agreement was written in 2007. This is similar--this 
is like the captain and the crew of the ship reserving the 
lifeboats saying, ``To hell with the passengers. We're going to 
take the lifeboats for ourselves.'' That is what happened here.
    This is a violation of fiduciary duty. When you cordon 
yourself off and protect yourself, as the managers of this 
company and as the people running the ship, and you say, well, 
we're going down, so we're going to make an agreement where 
we're not affected by the bad decisions we make. We're going to 
pass that all on to the investor and the shareholder.
    That amounts to malfeasance. Not just nonfeasance, but 
that's a complete violation of trust in the people who invested 
in your company. This should not have happened, and I honestly 
believe this is reversible. This is so outrageous that you 
would say we're not going to be victims of our own stupid 
decisions. We're not going to take the heat for this on the 
CDOs and the credit default swaps. That is simply unbelievable. 
It's arrogance. And I think it's probably illegal. And I agree 
with Chairman Frank that we should probably try to challenge 
this as shareholders on behalf of the American people as well.
    Do you have anything to say for yourself?
    Mr. Liddy. Yes, sir, I do.
    Mr. Lynch. Please.
    Mr. Liddy. You have generously used the word ``you'' in 
that construct. As I mentioned, these contracts were all put 
together before I was at AIG. I would not have done these 
contracts this way, and this whole arrangement would have 
looked, if it existed, would have looked a whole lot different. 
So I really do--I take offense, sir, at the use of the word--
    Mr. Lynch. Well, offense was intended. So you take it 
rightfully, sir.
    Mr. Liddy. No. I take it--
    Mr. Lynch. What I see happened to the American people here 
and what is happening to 200 billion innocent taxpayers. I have 
people in my district who don't have a 401(k). They're out 
there working every day for, you know, a fixed wage. And yet 
they and their sons and daughters and grandchildren and great 
grandchildren are going to have to pay the freight here. They 
don't have anything to do with Wall Street. They're lucky if 
they can live from day to day. A lot of them are out of work 
right now. Think about those people, how they feel in having to 
pick up the tab for this.
    Mr. Liddy. I understand everything you have said, sir. I 
do. It's just important for me that you appreciate these were 
put in place before I was there.
    Mr. Lynch. But the decision to allocate these was made in 
December, sir.
    Mr. Liddy. No. No. That decision--the decision to put this 
plan in place goes back to 2007.
    Mr. Lynch. No, no, no. The actual payment of the bonuses.
    Mr. Liddy. Okay. There were no payments then. If you'll 
just give me a chance to explain. The arrangement you're 
reading from continues to be--it's an omnibus plan that covers 
retention payments and an annual performance plan.
    Mr. Lynch. It says here retention bonuses.
    Mr. Liddy. Right. And if you--I think if you read through 
it, I would be glad to spend time with you offline and make 
sure that I understand your point of view, and maybe I can help 
you understand--
    Mr. Lynch. Well, look. I understand if there's ambiguity, 
we can talk about it. But this says, in large letters, 
``Employee Retention Plan.''
    Mr. Liddy. Right.
    Mr. Lynch. Look, I am a contract attorney. You might want 
to try that with somebody else, but this is the plain language 
within the four corners of this contract that we're talking 
about here, sir.
    Mr. Liddy. Right. And it applies to the payment of annual 
performance bonuses, not to the pay of the retention plan 
itself. So there were no performance bonuses. You're absolutely 
correct. The clauses that are on here should not be in here. I 
would not have put them in there. We did not pay anything in 
accordance with those clauses.
    Mr. Lynch. Okay. My time has expired, Mr. Chairman. I yield 
back.
    Chairman Kanjorski. Thank you. We will now hear from Mr. 
Campbell of California.
    Mr. Campbell. Thank you, Mr. Chairman, and thank you, Mr. 
Liddy, for your rather thankless service. I would like to focus 
on the future of this company which is now nationalized. You 
talked about reducing the exposure in the Financial Products 
Division from $2.7 trillion to $1.6 trillion. And I understand 
what you have said about it depends very much, the future, on 
what the markets are like.
    If markets were as they are today, in other words, they 
don't get any better, they don't get any worse, and you run 
down that $1.6 trillion, what kind of loss would AIG expect out 
of the Financial Products Division once you have wound it all 
out?
    Mr. Liddy. Mr. Campbell, if I could, my comment about 
markets getting worse has more to do with selling assets. It's 
selling our really good life insurance company in Asia or what 
have you. The rundown of the book of business can happen in an 
orderly way. On some trades we make money, on some trades we 
lose money. The goal would be not to lose any money on that 
business so we don't have to put more money into it from the 
Federal Reserve. That's entirely possible in almost any market 
condition as long as there's someone there monitoring the book 
of business. If there's no one there, you have a problem.
    Mr. Campbell. I understand. So do you think it's likely 
that could be run down without any further loss?
    Mr. Liddy. No. I think it will probably cost, I don't know, 
maybe a couple of billion dollars, which is a large number, but 
that's anticipated in the borrowings that we already have from 
the Federal Reserve.
    Mr. Campbell. Okay. Let me talk about--you talked about the 
good businesses, and I wanted to discuss just how good perhaps 
they are. My understanding--correct me if I'm wrong on this--is 
that the commercial property and casualty business was down 22 
percent, I believe, in the fourth quarter. There is that 
anecdotal evidence out there that there is a lot of price 
cutting on the part of AIG, and so therefore the profitability 
of that business--that the business may be shrinking, and it's 
both in volume and in margins. And obviously, a business that 
has shrinking volume and margins has problems for the future. 
Is that what's going on in the--
    Mr. Liddy. No. I don't believe it is. And I think as I 
listened to the individual from the GAO, I think what she said 
was as of her testimony today, they had seen--and Joel Ario 
said the same thing--they had seen no evidence of irresponsible 
price cutting on the part of AIG.
    I will tell you what is happening. What AIG does is we 
write really big risks for oil rigs and large apartment 
buildings and new hotels and tunnels and things of that nature. 
That has all ground to a halt. So there is no new business that 
you can write insurance on. So to the extent you lose an 
account, there's not fertile ground that you can apply to 
replace that account. That is happening in spades.
    The point you make is a good one. Over time, people just 
get AIG fatigue. A buyer of insurance just doesn't want to deal 
with, ``Is AIG bankrupt? Are they solvent? Are they going to be 
around? Why did they pay those bonuses?'' You just get AIG 
fatigue. And if I can't turn this situation around, we run the 
risk that the business does atrophy. We're trying very hard not 
to do that.
    We have a plan. We're going to sell a minority interest in 
that business, maybe take it public, maybe get it out entirely 
from underneath the AIG umbrella. We brand it and give it a 
chance so we can realize some value and pay it back to the 
Federal Government.
    Mr. Campbell. Will that business be profitable in the first 
quarter of 2009?
    Mr. Liddy. I just haven't seen the numbers. I'm sorry. I 
just don't remember what they are.
    Mr. Campbell. Was it profitable in the last quarter of 
2008?
    Mr. Liddy. If you exclude investment losses, I believe it 
was, yes. It was profitable and generated cash.
    Mr. Campbell. Talk about the life insurance subsidiary for 
a second. I know that in your--I believe it was the company's 
evaluation of systemic risk, that is where you believe there is 
a great deal of systemic risk, but there is a lot of 
counterparty liabilities to other life insurance companies. Is 
that true?
    Mr. Liddy. It is in both. You know, we insure, on the 
property casualty side, we insure 94 percent of the Fortune 500 
companies. So the systemic risk idea is very real in both the 
property casualty and the life side.
    Mr. Campbell. Okay. But in the property casualty, I mean, 
they could replace that insurance with another carrier.
    Mr. Liddy. If there is enough capacity.
    Mr. Campbell. Right.
    Mr. Liddy. It is a really good point, and if you would just 
give a minute. You know, we are so large. We have more capital 
than any other insurance company in the United States in the 
property casualty area. If that business went away, I'm not so 
sure that it could all be immediately replaced. And because the 
market is so treacherously low right now, companies that wanted 
to replace it couldn't go out and raise the capital to be able 
to do it.
    Mr. Campbell. Okay. Because I'm running low on time, what 
is the status then of the life insurance--that is a separate 
division from property casualty, correct?
    Mr. Liddy. It is. Multiple life divisions.
    Mr. Campbell. Correct. And is that business profitable? Is 
it shrinking in margins and business, or what is its status?
    Mr. Liddy. It is profitable. Pieces of it are stable. If 
you sell variable annuities or fixed annuities right now, 
nobody in the industry is selling those. Industry sales are 
down maybe 40 to 50 percent on balance. So we are down the same 
as the industry is. But the persistency has more or less 
stabilized since September. That business is profitable. That's 
part of what we want to either take public or give to the 
Federal Reserve to satisfy our debt.
    Mr. Campbell. Why can't we sell that? That is my final 
question.
    Mr. Liddy. No buyers. The people who would buy that 
business don't have any money, and their stocks are down 70 
percent since October 1st. So they can't use equity to buy it. 
They can't go out to the capital markets and raise cash to buy 
it. There is no way. We could sell it for a fraction of what it 
is worth. That is not a good idea; it would not enable us to 
pay back the money that we owe to the government.
    Mr. Campbell. Thank you, Mr. Chairman.
    Chairman Kanjorski. The gentleman from North Carolina, Mr. 
Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Mr. 
Liddy, I am sympathetic to your concerns about the safety of 
your employees, but the lack of transparency at AIG has been a 
great frustration to me personally, to the Congress, and to the 
American people. Neel Kashkari sat right there on December 
10th, and I asked him whether we were ever going to find out 
who the counterparties were, and if not, why not, and he said 
he did not understand my question.
    You said that you first learned of these performance--
rather these retention benefits--in October or November, and 
you talked to lawyers, and they said there is no way out of 
this, you have to pay it. You would have to pay twice this 
under Connecticut law if you don't pay it, no questions asked. 
Did your lawyers assume that AIG, the Financial Products Unit, 
was solvent at the time of the contract, that this was an arm's 
length transaction with a solvent corporation? Or did they ask 
you if it was possible that this was a sweetheart deal to loot 
an insolvent company by insiders to leave the company without 
sufficient--or leave the company with even less to pay its 
honest debts?
    Mr. Liddy. As I mentioned, I was not there. I simply do not 
know the answer to that question.
    Mr. Miller of North Carolina. You were there. This was in 
October/November of last year.
    Mr. Liddy. Yes. Let me explain. The work that I asked to be 
done in October/November of last year was, are these valid 
contracts? Are we required to pay them? Can we break these 
contracts?
    Mr. Miller of North Carolina. And that is what I am asking.
    Mr. Liddy. What will happen if we do?
    Mr. Miller of North Carolina. There is an important factual 
question here: Was AIG solvent? Were these arm's length 
transactions or were these sweetheart contracts?
    Mr. Liddy. Yes. I'm not a lawyer, sir, but I would say at 
the end of 2007, 2008, when they were entered into, AIG was 
solvent. It was before the very substantial credit crunch of 
the third and fourth quarter.
    Mr. Miller of North Carolina. Have you seen the written 
questions and written answers from Joseph W. St. Dennis 
provided in October of last year to the Government Reform and 
Oversight Committee as part of their investigation of AIG? He 
was the vice president of accounting policy at AIG Financial 
Products from June 2006 to October 1, 2007. He said that he 
left, he resigned because on multiple instances, beginning in 
the late summer of 2007, ``Mr. Cassano took actions that I 
believe were intended to prevent me from performing the job 
duties for which I was hired.''
    He gave several instances, one of which was evaluation of 
credit default swap portfolio, and said that Mr. Cassano pretty 
clearly admitted that he had intentionally cut or excluded Mr. 
St. Dennis from those discussions. Have you reviewed this?
    Mr. Liddy. I have not.
    Mr. Miller of North Carolina. Are you familiar with it?
    Mr. Liddy. I am familiar with it, yes.
    Mr. Miller of North Carolina. Okay. Have you looked at 
whether Mr. Cassano or anyone else has any liability to your 
corporation for--on any basis?
    Mr. Liddy. You know, as I said, I'm not a lawyer, but there 
was no evidence of wrongdoing in any of this.
    Mr. Miller of North Carolina. This isn't evidence of 
wrongdoing?
    Mr. Liddy. No, sir. I--
    Mr. Miller of North Carolina. Isn't this evidence of 
cooking the books?
    Mr. Liddy. I have not read it, so I can't comment on it.
    Mr. Miller of North Carolina. You said in your testimony, 
and I agree with this, that when you owe somebody money, you 
pay that money back. The United States Government and the 
American people don't owe anyone for the debts of AIG. It is 
not our debt. Do you agree with that?
    Mr. Liddy. I'm not sure I understand, Mr. Miller. AIG owes 
the government--
    Mr. Miller of North Carolina. Right.
    Mr. Liddy. --the American people $80 billion--
    Mr. Miller of North Carolina. Yes. But what you owe your 
counterparties, that is not a debt of the United States 
Government.
    Mr. Liddy. No, it is a debt of AIG.
    Mr. Miller of North Carolina. Okay. There has been a study 
by economists on what works and what doesn't when a nation's 
banking system collapses, its financial system collapses, and 
one of the characteristics is transparency. The second is 
maintaining market discipline. And that means that shareholders 
bear the loss, but it also means that unsecured creditors bear 
the loss. Anyone who is in a position to determine the ability 
of the corporation they are doing business with to pay their 
debts should bear the loss, not presumably taxpayers. Are we 
maintaining market discipline by continuing to give money to 
AIG to pay unsecured creditors, to pay the counterparties to 
your credit default swaps?
    Mr. Liddy. Well, that whole process is over. We are not 
doing any of that any longer. We have walled off those 
liabilities, if you will. But to your basic point, we owe those 
people that money. I mean, it's just a fact of life. AIG owes 
those counterparties that money. If you don't pay them, the 
result--
    Mr. Miller of North Carolina. You did. We didn't.
    Mr. Liddy. Right. But the result of not paying them is an 
event of default and it forces the company into bankruptcy.
    Mr. Miller of North Carolina. Okay. Are you going to 
examine ever whether there is any liability by any officer, 
director, or employee of the Financial Products Unit?
    Mr. Liddy. Yes. There are ongoing investigations by the 
Justice Department and the SEC and the FBI and a regulatory 
agency in the U.K. We are cooperating fully with those 
investigations.
    Mr. Miller of North Carolina. I'm talking about civil 
liability to the corporation, for breach of fiduciary duty or 
whatever else. Are you examining whether you can sue them? You 
seem to be terrified they might sue you. Are you going to sue 
them?
    Mr. Liddy. No. We did examine that. And, again, the 
judgment was on a risk basis: if we don't have those people, we 
increase the risk that something happens at AIG FP, and we undo 
everything we have done to get to this point.
    Chairman Kanjorski. Okay, gentlemen. We have eight votes on 
the Floor. It will be approximately 1 hour. We would appreciate 
your indulgence, Mr. Liddy. We have arrangements for where you 
are to stay, and we will take a recess for 1 hour.
    [recess]
    Mr. Scott. [presiding] The subcommittee will come to order.
    We will now hear from Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Liddy, I have a conversation I want to have with you 
and it has to do with the issue of any discussions which AIG 
might have had with members of the Senate over the provision 
that was put in the Senate bill in order to guarantee the 
payment of the bonuses.
    The explicit provision that went in in conference said: 
``The prohibition required under this clause shall not be 
construed to prohibit any bonus payment required to be paid 
pursuant to a written employment contract executed on or before 
February 11, 2009.'' But the wider discussion I was interested 
in was whether AIG had contacted any members of the United 
States Senate about this particular problem of the bonuses. 
And, so, I would just like your response to that.
    Mr. Liddy. I believe the answer is no, at least not to my 
knowledge. We have a strict prohibition against lobbying. We 
will respond if called, but we do not make outbound calls, if 
you will. So as far as I know that is not anything we had any 
engagement in whatsoever.
    Mr. Royce. Let me ask this, then. Could you check and see 
if there are any e-mails or any written communication around 
this issue that would have attempted to bring this to the 
attention of members of the United States Senate, or the House 
for that matter. But I understand the provision went on in the 
Senate.
    Mr. Liddy. I will answer. At your request, we will check. I 
feel quite certain the answer is no.
    Mr. Royce. And then let me ask you about discussions that 
you may have had with members of the Administration and get 
into a little more detail in terms of who had those discussions 
and the basic thrust of them.
    Mr. Liddy. The only discussion I would have had with 
members of the Administration would have been with Secretary 
Geithner. The first of those conversations would have been 
about a week ago. I'm sorry not to be more precise. I don't 
have the exact date. And there probably would have been two of 
those: one on a Tuesday and one on a Friday; or one on a 
Wednesday and one on a Friday; something like that. And the 
purpose of the discussions was for Secretary Geithner to hear 
from me--my view of the bonuses and what we were going to do.
    As I indicated earlier, he indicated to me that he had 
become aware of those only maybe a week or 10 days beforehand, 
and we shared a healthy exchange on this is going to be rough 
for the American public. He understood the risk issues, I 
believe, understood the legal issues, asked for me to make some 
changes to them, which we did. I sent him a note, which was 
vetted with his staff beforehand, and that has pretty much been 
the extent of it.
    Mr. Royce. I understand.
    Mr. Liddy. When you said Administration, I didn't include 
in any of that the Federal Reserve.
    Mr. Royce. Sure. Well, let me ask this question then. Would 
there be any talking points or e-mails or communication from 
the company that you could provide this committee as to the 
nature of that conversation? We would appreciate it if that 
could be supplied to the chairman and ranking member.
    Mr. Liddy. We can do that, and that basically would be the 
letter which I sent to Secretary Geithner, and I think has an 
attachment to it in his public record.
    Mr. Royce. The issue to us is of course the fact that 
Senator Snowe was concerned about this very provision, and so 
when the stimulus bill came before the Senate, she attached to 
that an amendment aimed at restricting bonuses over $100,000 to 
any company that received Federal bailout money. And that 
measure drafted by Olympia Snowe in the Senate and by Ron Wyden 
applied these restrictions retroactively to those bonuses 
received or promised in 2008 and onward. And, of course, the 
issue was at some point that provision was stripped out during 
the closed-door conference negotiation involving the House and 
Senate leaders and involving the White House.
    And a measure reportedly originally reported by ``ABC 
News,'' that it was Senator Chris Dodd who put that provision 
in it, but at any rate, a provision that the Democratic 
leadership on both the House and Senate side were aware of 
replaced the provision voted out of the Senate by 100 members 
of the Senate. And so, instead, we had a final bill come back 
to the House with a new provision in it, a provision that 
explicitly exempted bonuses agreed to prior to the passage of 
the stimulus bill.
    So, you know, for us on the House side, you can see the 
surprise. Republicans all voted against that bill, but in that 
bill, then, we find a provision that nobody voted on in the 
Senate or House on the Floor, but instead is put in during a 
closed conference and expressly prohibits us from attempting to 
prevent the use of taxpayer money for bailouts of firms for 
payment of bonuses to firms which the taxpayers have themselves 
bailed out, and, so, hence our concern over the line of 
communication.
    So, if there's any company communication or lobbyist 
retained by the company that did have any communication on 
this, the request from this committee is for that to be 
produced.
    And, again, thank you very much, Mr. Chairman.
    Mr. Liddy. I understand your point. I have no involvement 
and no perspective on it, but we will comply with your request.
    Mr. Royce. Thank you.
    Chairman Kanjorski. The gentleman from Georgia, Mr. Scott.
    Mr. Scott. Thank you very much. Mr. Liddy, over here. How 
are you? Welcome.
    First of all, I want to say you're in a tough spot. We 
understand that and I share your concern that whatever we do, 
it is very important for us to understand that the American 
taxpayers now have $173 billion invested at AIG. We have 
another $30 billion on its way.
    That's over $200 billion. And if we are going to get a 
return on that and get our money paid back and be able to 
restructure this company, it is going to take talented, hard-
working, good people at AIG to do this. So we are aware of this 
and we are all very sensitive to it.
    But, Mr. Liddy, we are in effect at war. Our economy is 
almost in the tank. We get a ray of hope with the stock market 
here and there. We had a new Administration coming in. We had 
hopes soaring, but this happened. And what we have here with 
the action with AIG and these bonuses is sort of like a stone 
in America's shoe, a stone that makes it difficult for us to 
walk this journey, let alone run it where we have to go.
    And the American people are demanding that we get this 
stone out of this shoe, so we need to hurry up and get this 
bonus issue off the table. And so I applaud you in coming 
forward in your initial statement of saying what you're doing 
for that, but getting half of the money back is not the answer. 
The answer is getting all this money back, because there is 
strong evidence as you have seen from the testimony here that 
we are coming at that money, because the American people want 
us to come at it.
    We should not have to fight this through the courts. We 
should not have to harangue the Tax Code in such a way. There's 
also thoughts of fraudulent and criminal activity. We don't 
need to go down that road, so I hope that you will amend your 
efforts to demand, as to now see the person who is now in 
charge to say on my watch I don't need this hanging over us.
    We have too much to do to be sidetracked by this, and with 
the Senate offering bills along that line, with the House 
coming forward with efforts, and you heard the chairman of the 
committee and the different concerns. The American people need 
this. We need to win this round and get this money back.
    I want to ask you a couple of points along this line. The 
first point I want to ask you is would you do that, first of 
all. Would you amend and ask for all of this money to come 
back?
    Mr. Liddy. If you let me think about that, sir, it is one 
of many, many requests that I have had: Are there different 
ways to do that. I hear your request.
    Mr. Scott. Okay. Now, the other point is, I asked the 
thrift person, and I want to ask you. And I know you came on 
the scene in September, but many of us believe that this was a 
fraudulent effort here.
    What do you think when they put forward the effort 1 year 
ago exactly this month to give $450 million in bonuses to this 
Financial Products division, which has only 367 people in it, 
to deal with this area when they were bleeding money at the 
time?
    And 4 or 5 months later, they had bled enough money to the 
tune of $40.5 billion, this very unit that drove AIG into the 
arms of the taxpayers. Somewhere down the line, it seems to me 
the question should be asked: Where were they thinking they 
were going to get this money? And was there any thought too, 
since there's such a close proximity here and they're bleeding 
money that somebody down the line might have thought down the 
road if we do this, the government will come to our rescue. 
And, thereby, that's where we could get our bonuses from, from 
the taxpayers.
    Had that thought occurred to you?
    Mr. Liddy. Sir, I was not there. I just do not know. I 
think the timeline would be important there and I think there 
are some differences in the timeline that maybe we can share 
with you that would perhaps persuade you that is not the case.
    Mr. Scott. Okay. Let me get to my other point, because I 
only have a few minutes.
    Now, we know it's $165 million that is going out the door. 
But, in fact, the true amount of the money is a little over $1 
billion in bonuses that have been agreed-to. Now, you are in 
the seat now. First of all, of the $450 million, $165 million 
of that has gone out the door. That leaves $285 million. Where 
are you on that? Where is that in the process of being 
distributed? Can we not stop that?
    And then, there is another $600 million that is being 
committed to spread over 4,700 employees. What are you going to 
do about the remaining, what amounts to about $835 million, 
that has been committed in bonuses that are yet to be given.
    Mr. Liddy. Let me break your question down into components, 
if I can.
    There is a retention bonus that could be paid in March of 
2010, additional retention bonus to AIG FB employees that could 
total as much as $200 million. As I have said in my 
conversation in my letter to Secretary Geithner, that's for 
work not yet done. It's one thing to evaluate a bonus for work 
already done; quite another one to evaluate for work yet to be 
done.
    That size bonus, there is no way that that would be paid. I 
unfortunately suspect that most of those people will be gone. I 
think they will, in fact. The people at FP will in fact return 
the bulk of the money that has been given to them, and it will 
come with their resignations. So I don't think that size 
payment is going to happen at all.
    We may not like the outcome of that, sir, when those people 
are no longer there. I am worried about the $1.6 trillion of 
exposure, and keeping that business under control. Do not hear 
in that a concession. We are going to do everything we can to 
wind that business down well and wisely. It just got harder by 
many, many multiples, because I think what people will do is 
stay for a short period of time, but they will return that 
money along with their resignation.
    Sir, could I, if you would?
    Chairman Kanjorski. Yes, sir.
    Mr. Liddy. There are so many numbers bandied about with 
respect to AIG and I think the facts should be out.
    The amount of money that we need to return to the American 
taxpayer is right now--at the end of December--$78 billion. We 
have not drawn the additional $30 billion. Other elements of it 
we simply haven't drawn. There is still money available at the 
Federal Reserve.
    We haven't drawn that, but if I could just make sure that 
you have one really important fact as you walk out the door 
towards the end of this hearing, the dollars we owe the 
American taxpayer right now, it totals $78 billion.
    That is a big number, but it is substantially more 
manageable than $200 billion. And I only raised that because 
keeping that in the context of the assets that we have to sell 
so we can raise that number, it is much more reasonable if the 
number is $78 billion than if it is $178 billion or $200 
billion.
    Mr. Scott. Thank you, sir.
    Chairman Kanjorski. Mr. McCarthy of California is not here. 
We will go to Mr. Posey of Florida.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Liddy, we wouldn't care anything about the bonuses if 
it wasn't for the bailout money. You know, if private industry 
pays people what they are worth and they do not ask our 
constituents to pay the bill for it, it really doesn't matter. 
You know why we care so much about this.
    Mr. Liddy. I do.
    Mr. Posey. And I am still not clear how these people earn 
these retention bonuses in the past or the future. I heard your 
answers, but I am not sure that I really understood them. And I 
would think a big bonus for the people who put us in this 
position would be that they're not in jail, number one, and 
number two, that they still have jobs.
    I can't imagine there are a lot of other employers frothing 
at the mouth to hire the people who put AIG in that position. I 
mean, I just can't imagine that the job market is that great 
for somebody who exhibits such a tremendous ability to fail and 
screw up the whole country, basically, or help do it.
    Have you in your analysis of the way AIG operates now, have 
you seen any signs of what somebody might normally consider to 
be criminal activity?
    Mr. Liddy. I have not, sir. I would not condone it. I have 
seen absolutely none.
    We have had a number of investigative authorities looking 
at our practices and our books and records, and nothing has 
come to light that I am aware of. Could I go back to one other 
point?
    Mr. Posey. Certainly, you may.
    Mr. Liddy. It is important to remember at FP, as I said 
earlier, it really is easy to paint with one brush and color 
everyone with the same brush. There are people who worked on 
one piece of FP called credit default swaps. There were people 
who worked on another area of FP called regulatory capital. 
There were people who worked on the derivatives book, the $1.6 
trillion.
    For the most part, those are separate people. I am 
simplifying, but for the most part they are separate groups of 
people. It is the credit default swap people who, really, and 
that was a very small number of folks and a very small number 
of trades. They are the ones who brought our company to its 
knees.
    The folks out here in the derivatives book, you know, they 
are getting tarred and feathered along with everyone else, and 
they are the ones that we're asking to please, please, wind 
this book of business down, orderly, economically, and 
efficiently, so it doesn't cause problems for us. They are the 
ones who got the retention bonus.
    Mr. Posey. I hear what you are saying. Somebody gave me a 
button on November 5th that said, ``Every now and then an 
innocent man gets sent to Congress.'' So we understand that.
    Is there an obligation on your part if you see activities 
that might be considered unethical or perhaps illegal that you 
would have a duty to report that? And, if so, who would you 
report it to?
    Mr. Liddy. Oh, sure. You know, I would report it first to 
our general counsel and to our board and audit committee, and 
our partners at the Federal Reserve, absolutely.
    We are trying to establish a new AIG, one that is 
transparent, one that shares information. It's hard to do. That 
has not been our practice in the past, but that would be 
reported and I wouldn't be shy about taking the lead on that.
    Mr. Posey. Well, let's spur some of these questions. We 
have good reason to believe, obviously, there is plenty of 
evidence that, you know, back in the days when Enron was 
inventing cap and trade or cap and tax, whatever we want to 
call it, that they were also pulling down some pretty good 
bonuses based on cooking the books to make it look like they 
had performed better than they had actually performed.
    And the question that begged for an answer is whether there 
was any sign of that here. You know, people would do a lot of 
things to get a million-dollar bonus, and obviously it has been 
demonstrated that is one of the things they would do.
    Mr. Liddy. Yes, I would say there are no signs of this 
here. What we had at AIG is too much appetite for risk, too 
much appetite for businesses outside of our core competencies, 
contractual commitments, which, when left in place and the 
market melted down, exposed their weaknesses. So we could and 
should be roundly criticized for aggressive business practices, 
but nothing like an Enron or a WorldCom or the things that you 
just referred to.
    Mr. Posey. Okay. And one final one, Mr. Chairman, if I have 
time.
    You know, we understand that 73 people got bonuses that 
exceeded $1 million and they are called retention bonuses. And 
11 of those people are no longer with the company.
    Mr. Liddy. Yes.
    Mr. Posey. Why did we even consider giving a retention 
bonus to somebody who is no longer with the company?
    Mr. Liddy. We specifically asked those people on a book of 
business to wind it down, get it to go away, and get it within 
certain parameters. If you can do that by the end of October, 
that's fine. We will pay you the retention bonus. If it takes 
you until March to do it, we will pay you the retention bonus 
then.
    Those people achieved the objective. That is how we got the 
book from $2.7 trillion down to $1.6.
    Mr. Posey. Thank you.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much.
    Next, we will have Mrs. Maloney of New York.
    Mrs. Maloney. Thank you, Mr. Liddy, for your public 
service. I understand you are a retired CEO of one of America's 
great companies and you were asked to come back and serve. And 
we appreciate it. Thank you.
    I have so many questions I am going to have to submit them 
to you in writing and trust that you will respond to the 
committee because we have very limited time.
    On the question of bonuses, you mentioned that a number of 
people said that they would give back their bonuses. Well, I 
have been told by Chairman Rangel that on the Floor tomorrow 
will be a version of my bill that will tax the bonuses at 90 
percent, so the money will be coming back to the Treasury.
    How many people have said they will give money back to the 
Treasury? And, after this bill passes, maybe more will give 
back. Wouldn't you agree?
    How many people tell you they would give back the money?
    Mr. Liddy. I don't have the information, Congresswoman. I 
have just made that request this morning and I have been in 
this hearing.
    Mrs. Maloney. If you could get back to us on that, we would 
really appreciate it. Also, I requested from Treasury and the 
Federal Reserve for many, many months now to get information on 
who is receiving the money. The taxpayers own AIG now, 80 
percent, yet they were saying it is proprietary. We own it. We 
should see the books.
    Just on Sunday night, they released this information, and 
why were you fighting giving us this information when it 
belongs to the American taxpayer?
    Mr. Liddy. I wasn't fighting anything. The Federal Reserve 
has a policy against disclosure of counterparties, and, when we 
saw the testimony of Chairman Bernanke and Vice Chairman Kohn, 
I had a conversation with the people at the Federal Reserve and 
said we should figure out a way to disclose this.
    We made the various telephone calls to make sure that the 
counterparties would be okay with that, and so we disclosed on 
the credit default swaps, and the RMBSes, the securities 
lending and municipalities. We disclosed all of it, so it 
really wasn't on the part of AIG that we were attempting to 
husband any information or not disclose.
    Mrs. Maloney. Really? So you were willing to disclose and 
the Federal Reserve would not disclose. Is that correct?
    Mr. Liddy. Well, we were never asked. The Federal Reserve 
had a policy of not disclosing counterparty associations. With 
respect to ``Maiden Lane III,'' they are the ones who own that 
structure, and they are the ones who negotiated with the 
counterparties.
    Mrs. Maloney. Are there any other disclosures that you have 
attempted to make, but have been blocked by the Federal Reserve 
or the Treasury? Any other request that has been blocked that 
you would have been willing to give the information?
    Mr. Liddy. Not that I can think of. No.
    Mrs. Maloney. Now, really, the Federal Government is not 
required or obligated to bail out AIG. Isn't that correct? 
Bailing out AIG was never a government obligation?
    Mr. Liddy. It was never an obligation; again, it was a 
decision made before I was there. But as I understand it, the 
representatives of the Federal Reserve and the Treasury 
believed that AIG's failure would cause a shock to the system, 
on a worldwide basis, that would be unpalatable.
    Mrs. Maloney. Yes. AIG prepared a document that I would 
like to put in the record that said if AIG failed, it would be 
a tremendous shock to our American economy. I would venture to 
say that if every company said and prepared a document like 
that, our Treasury would be bankrupt.
    So I looked at the counterparties. We were told that this 
was systemic risk. Now, some of the counterparties were 
municipalities. I'm a former city council member. I love 
cities, but if we bailed out every municipality that made a bad 
decision, we would be bankrupt in this country. So I would 
venture to say that that was not a systemic risk.
    Also in the document that I haven't thoroughly studied, 
because we just got it, there were two foreign banks. 
Certainly, bailing out foreign banks is not a systemic risk to 
the American economy. I would say we were basically bailing out 
the governments of Germany and France. If the bank was so 
important to their economy, they would have bailed it out. So, 
indirectly, we bailed out two different countries, and, I would 
venture to say that it was not a systemic risk to our own 
economy.
    So I would venture, were there any guidelines that said 
what would be systemic risk? Anyway, I just find that very, 
very disturbing. But, the main point is we could have saved the 
insurance arm, but let the derivatives business go, and 
possibly be in better economic condition.
    In the prior hearing, I questioned the insurance regulator, 
one of them, of AIG. He said the insurance arm was very 
healthy.
    Would you agree with that?
    Mr. Liddy. Yes, they were and are very healthy.
    Mrs. Maloney. And I would venture to say that probably not 
many Americans are buying insurance from AIG right now. It 
would probably be better for the company to divide, to have the 
insurance go for it and be healthy, and divide up the 
derivatives that is pulling down the risky products division. 
It is pulling down the company. Would you agree?
    The insurance regulator told me after the hearing that he 
thought it should be divided. It should go that way, that we 
should come in, possibly take control and a bank holiday for a 
day, and divide the company. Would you agree?
    Mr. Liddy. That's exactly what we're doing.
    Mrs. Maloney. That's exactly what you're doing?
    Mr. Liddy. Yes.
    Mrs. Maloney. So are you going to have a bank holiday?
    Mr. Liddy. No.
    Mrs. Maloney. How were you going to do it?
    Mr. Liddy. The dividing of AIG.
    Mrs. Maloney. Pardon me?
    Mr. Liddy. The dividing of AIG is exactly what we are 
doing. So the entity that has existed for 90 years as AIG, it 
will over time cease to exist. We are selling assets wherever 
people can afford to buy those assets. We are taking assets and 
putting them in trust, and giving them to the Federal Reserve, 
big assets that can be taken public at a later time or sold 
when the market recovers. So those assets will move out from 
AIG. We are going to seek the minority interest in our property 
casualty business, possibly take it public and spin it off, so 
that is exactly what we need to do in order to repay the 
taxpayer.
    Mrs. Maloney. Last question: Would you say it is a serious 
mistake to have allowed a risky product to be attached to one 
of the great insurance companies in the world? Was that a bad 
regulatory decision?
    Mr. Liddy. Yes. I would say two things to you, 
Congresswoman. One, any time you see a business stray from what 
it is really good at, watch out. And, two, and Chairman 
Bernanke uses this vernacular, and I think it is very 
appropriate, what we had at AIG was a series of well-regarded, 
well-run, well-capitalized insurance companies, and to it we 
attached an internal hedge fund.
    That internal hedge fund worked fine for a while, but we 
became too aggressive in terms of the risks that we were 
prepared to take, and when the capital markets stopped 
functioning, it exposed that aggressiveness for what it was and 
that is what caused the liquidity problem.
    Mrs. Maloney. My time has expired.
    Thank you.
    Chairman Kanjorski. Next, we have Mr. McCotter.
    Mr. McCotter. Thank you, and thank you for coming, Mr. 
Liddy. I know you are not doing this for the money. You make a 
dollar a year. You are trying to help your country in a very 
difficult time and you relied on people, both at the Fed and 
the Treasury, to try to help you succeed in that job, which is 
why I'm going to try to reconcile much of what we are seeing 
today with how my constituents view this.
    I come from Michigan. It has the highest unemployment rate 
in the country. They quite simply think it is thoroughly insane 
to pay people to stay in a job when they can't find one. They 
think it is insane for the people who helped cause the problem 
to be paid for causing the problem and then have them turn 
around and have to be paid to clean it up. They think that is 
not only insane, it is unfair.
    They think it is insane for people to say that we need the 
best and the brightest to fix this problem when it was the best 
and the brightest who caused the problem in the first place. As 
I have said before, if these individuals are the best and the 
brightest, we live in benighted times and God help us all.
    I think one of the things that we have to remember is these 
individuals have jobs for one reason: The taxpayers decided to 
bail them out. Well, not the taxpayers, but their 
representatives in government when they voted for the Wall 
Street bailout and the individuals at the Federal Reserve Board 
when they decided to start the process.
    So when they look at this, they say to themselves, we would 
really like the money back that is given out in bonuses. And 
credit to you, you have already started that process. You have 
talked about 50 percent coming back. I personally don't know 
that the 50 percent is going to be enough for them. I know it 
isn't for me. They would like full restitution, in their mind, 
of money that was given to people who caused the problem and 
don't deserve another penny for cleaning up their mess.
    You said that you have not asked for the access to the $30 
billion that the Treasury has committed to AIG; am I correct?
    Mr. Liddy. Yes.
    Mr. McCotter. I would like to see Secretary Geithner repeal 
that commitment to that $30 billion and then precondition any 
allowing of that money to go to AIG on first recouping the 
bonuses from the individuals who have done it. And I do think 
it would be in their best interest, not only the taxpayers in 
terms of equity, but as has been pointed out before, there will 
be transparency in the process. The request and potential 
subpoena of the list of individuals who have received and kept 
that money will come to this Congress because the taxpayers 
will need to know.
    I do think and appreciate the threats that may be made 
against them and have been made, but there is a very good way 
to get one's name off the list. It is to give back the bonus to 
the taxpayers of the United States. I think that when you made 
this decision, I can't believe that you made it alone. I think 
you would have consulted with both Treasury and/or the Federal 
Reserve Board.
    We talk about how losing these people would have caused AIG 
potentially to go under, right? Enormous damage to AIG towards 
the attempt at a soft landing, which to me, in and of itself, 
shows the very weakness of AIG and why we can't continue to try 
to effectuate a soft landing because you have said that market 
conditions are going to dictate over the next year or two as to 
how soft that landing will be.
    It will also require a whole bunch more of Federal money, I 
would think, in that 1 to 2 years until the market ``corrects'' 
because I think what you have done--not you specifically, but 
you generally, both you and the government, is you mistake why 
the public has no confidence right now in the economy. We think 
that if consumers just woke up and decided that we are seeing 
signs of light, that potentially I could go out and spend some 
of my hard-earned nest egg, that we would stimulate consumer 
demand and everything would be fine.
    But the reason that we are having this discussion today is 
Americans believe that we have seen institutional failures, 
both in our economic sphere and right now in the government 
sphere, because of a failure to be good stewards of their 
money. And until that institutional confidence is restored in 
the minds of the American people, there will be no recovery in 
the next 1 to 2 years.
    If we continue down the path that institutions that were 
once deemed too big to fail continue to prove too big to fix 
and cost taxpayers billions of dollars at a time when they are 
struggling to keep their homes, their jobs, and their hopes for 
their children, they will have no institutional confidence in 
anything and we will continue on the path that we are on.
    So my question to you is, if we can recover, 
hypothetically, within the next 1- to 2-year timeframe that you 
talk about, how much would it potentially cost the taxpayers to 
keep injecting into AIG during the next 1 to 2 years to have 
that soft landing because as we found out on March 2nd, I think 
AIG reported the largest quarterly lost in corporate history, 
what $61.7 billion, and then promptly received an offer of $30 
billion, which you have not drawn upon. If we continue on the 
path we are on for the next 1 to 2 years, how much money are 
the taxpayers going to be asked to continue to put into AIG?
    Mr. Liddy. Let me see if I can respond to your question, 
sir. As I mentioned earlier, we have roughly $80 billion 
invested from the taxpayer through Treasury and the Federal 
Reserve into AIG with a call on another $30 billion if we need 
it. The comment about soft landing really applies to the book 
of business at AIG FP, its own little--not so little--unique 
world of derivatives trading and hedges, etc., etc. And to a 
certain extent, it works, I'm going to say independently, of 
what is going on in the capital markets. That is a 
simplification. It's clearly aligned to them, but it works 
differently.
    The comment about the markets having to help us is we have 
good businesses to sell, really good businesses to sell, but 
people have no money to buy them, so the price mechanism is 
that which equates. So we have a great business in Southeast 
Asia, but there is no--the companies that want to buy that 
business don't have equity. Their equities are down 70 percent. 
They don't have access to the capital markets, to liquidity 
markets. So as a result of that, the values are depressed. What 
we don't want to do is sell good assets at fire sale prices and 
then not have enough proceeds to be able to repay the Federal 
Reserve and the Treasury.
    I do not anticipate asking the Federal Government for more 
money. I would like it very much if we didn't have to draw on 
the $30 billion and I would like to give you a guarantee that 
is exactly what will happen. I can't do that because my crystal 
ball is not that good and I do not know what is going to happen 
with the value of assets.
    You are 100 percent correct, we reported a very large loss, 
the largest in corporate history in the fourth quarter, and 
three things drove it. When the value of assets goes down, we 
have to write those assets down and we have to recognize that 
loss in our P&L. That is $30 billion of that $60 billion.
    Because we are restructuring the company, we write off 
things like deferred tax assets because we think they are 
valueless. It wasn't a cash loss. It was a loss that had to do 
with the restructuring of the company. I don't believe that it 
will occur again. I certainly hope not, but it will very much 
be dependent upon what happens to the value of assets going 
forward.
    Mr. McCotter. Forgive the indulgence, Mr. Chairman.
    If the loss was as you say, and I'm not disputing that, why 
did Treasury then make available another $30 billion, which you 
have not drawn down upon?
    Mr. Liddy. When you lose that money, it reduces the equity 
that the company has. Think of a home; you need so much equity 
to support the debt. We have all the debt, but the equity 
shrunk because of the loss. So as a result of that, the 
Treasury restructured the TARP arrangement, the original TARP 
arrangement, in such a way that accounted for more equity and 
made the $30 billion available to us if we needed it. That kept 
the rating agencies calm so they don't downgrade the company 
and we don't get into an extraordinarily negative spiral.
    Chairman Kanjorski. Ms. Moore of Wisconsin.
    Ms. Moore of Wisconsin. Thank you so much, Mr. Kanjorski, 
and thank you again, Mr. Liddy, for your service.
    I think the public generally understands the bonus 
structure, and are we calling them the correct thing? Were 
these bonuses that the Financial Product Services division were 
getting?
    Mr. Liddy. They were retention payments, yes, commonly 
referred to as bonuses.
    Ms. Moore of Wisconsin. Okay. Good. Okay. Because here is 
what we don't understand. I guess I think we understand that 
bonuses are for good performance. And earlier we had the Office 
of Thrift Supervision in here, Mr. Polakoff, and he testified 
that as early as December 2005, the Financial Products group, 
on their general observation, knew that the underwriting 
standards for mortgage-backed securities were declining, that 
by March of 2006, that the Office of Thrift Supervision was 
talking to the AIG board about this weakness and certainly by 
June 2007, they had taken supervisory action against them.
    So I am trying to get a timeline of when these bonuses were 
put in place in these contracts because I did read your letter, 
the very difficult situation that you feel that you are in 
having to honor these contracts. What I understand a contract 
to be is kind of a meeting of the minds. I mean, I offer my 
employees a bonus because they are going to produce a good 
result, but clearly, it seems to me, if I have the timeline 
right, that it was--according to your letter, it was the first 
quarter of 2008 when you put these bonuses in place.
    And so I guess what I would like for you to help me to 
understand is how you knew that this particular division of AIG 
was failing, that you would offer bonuses as a sort of a 
perverse thing in terms of what we all understand?
    Mr. Liddy. Congresswoman, I was not there.
    Ms. Moore of Wisconsin. Okay.
    Mr. Liddy. I just wasn't there. So it is very hard for me 
to answer except with broad conjectures.
    Ms. Moore of Wisconsin. I mean, I guess you might agree 
that it is sort of weird.
    Mr. Liddy. Well, I listened to the previous testimony and I 
agree with it.
    Ms. Moore of Wisconsin. Okay.
    Mr. Liddy. There were some--
    Ms. Moore of Wisconsin. Let me ask another question before 
I get gaveled down. Do you know how other divisions fared--
okay. The fiscal year for AIG is January 1st to December 31st?
    Mr. Liddy. Correct.
    Ms. Moore of Wisconsin. So the first quarter of 2008, 
March, is that sort of an awkward time to offer bonuses? I 
mean, wouldn't bonuses come like at the last quarter when you 
get the report and find out that everybody has done 
wonderfully? Was March a sort of an off-schedule time to offer 
a bonus?
    Mr. Liddy. Not necessarily. Remember, these were not 
performance related bonuses. They were arrangements that said 
if you stay in your job and do something specific, wind down a 
book of business, we will pay you a certain amount of money. So 
they were really retention arrangements. And while they were 
signed in March of 2008, the process of deciding should they be 
offered and negotiating them and crafting them would have begun 
6 months before that.
    Ms. Moore of Wisconsin. Okay. Let me ask you this, and 
perhaps you won't know this, sir. Do you know how the other 
divisions of AIG fared? I mean, I guess some people just worked 
in the wrong division. I mean, the healthy parts of AIG, how 
they fared in the bonus area?
    Mr. Liddy. 2006 was a--I'm going to answer generally 
because I just don't--
    Ms. Moore of Wisconsin. Yes, sir. I understand, sir.
    Mr. Liddy. 2006 was a very, very strong year for AIG, which 
means all of the businesses, including FP, would have performed 
well. 2007 was not because towards the end of 2007 was when AIG 
began to write the value of those credit default swaps down. 
But the other businesses within AIG, the commercial insurance 
and the life insurance and the aircraft leasing, they would 
have had good years.
    Ms. Moore of Wisconsin. So sir, let me ask you a question 
while I still have some time. You know, in your letter, you 
talked about your legal department talking about how very 
difficult it would be not to honor these contracts, but again, 
you know, our commonsense, and I'm not an attorney, but our 
commonsense understanding of a contract is that it is kind of a 
meeting of the minds. You know, it is a deal that is made in 
good faith that all things are put together.
    And knowing that there was tremendous--trillions of dollars 
of exposure, not necessarily to the public at that point 
because we hadn't taken over, but to the company and to its 
health, could it--might it just, theoretically, be argued that 
this sort of ethic, you know, negates a contract when in fact 
it wasn't necessarily executed with the great expectation that 
there would be a positive outcome given just the ordinary 
commonsense notion of what bonuses are for?
    Mr. Liddy. I'm only speculating on the answer because I 
simply was not there. I don't think anybody--as the gentleman 
on the panel before me testified, I don't think anybody 
expected that we would have two things: Incredible meltdown in 
the value of residential real estate in this country; and the 
liquidity risk or the liquidity crisis that it unleashed. Both 
of those happened in roughly the second and third quarters of 
2008. But back at the end of 2007 when these contracts were 
being fashioned, I believe there was a belief that this was a 
viable ongoing business. AIG wanted those people in place to 
drive that business forward.
    Ms. Moore of Wisconsin. Well, my time has expired. I just 
want to simply make a comment, Mr. Chairman, that, you know, as 
best as I could reconstruct the timeline, the Financial 
Products group knew that they were in decline as early as 2005. 
So they knew at a minimum that $165 million worth of bonuses, 
perhaps, were not warranted. And with that, I yield back.
    Chairman Kanjorski. Thank you.
    The gentlelady from Minnesota.
    Mrs. Bachmann. Mr. Chairman, thank you, and I appreciate as 
well, Mr. Liddy, your willingness to be here today and the 
candor with which you are answering the questions. I appreciate 
that, and I, too, would like to submit written questions and I 
would appreciate having written responses.
    But I will start. I took some notes during some of your 
earlier testimony. I was wondering, you had said that you 
expect AIG's FP business will be wound down. Do you know when 
you expect that to be? I know you said you don't have a crystal 
ball, you don't know, but just on the basis of your history and 
what your expectations are, when do you believe that FP 
business will wind down?
    Mr. Liddy. Warren Buffett had a business very similar to 
this, except it was about a third the size. It took him 4 years 
to wind it down and he did it in a better economic environment. 
I just put that out there because sometimes other people's 
experience is a good indication of what it is going to take us.
    I think you will see tremendous progress winding it down. 
Much as we did at the end of 2008, you will see tremendous 
progress at the end of the first quarter 2010 because many of 
those regulatory trades go away. But it is difficult because 
you have--some of these contracts go out 50 years. Can you 
imagine debating what the cost of oil is going to be out 50 
years from now? So it requires a delicate balance of you and I 
negotiating whether we want to settle that contract.
    This business will get a lot smaller at the end of 2009, 
and a whole lot smaller at the end of 2010. And as it gets 
smaller, it just represents much less risk. But I think it is 
instructive if it took Warren Buffett, who is an investor of 
some agility and some acumen, if it took him 3 or 4 years to 
wind down a book of business that had many of the similarities, 
but was a third the size.
    Mrs. Bachmann. So Mr. Liddy, what would you say then? What 
would be your guesstimate? We are not holding you to it.
    Mr. Liddy. Four years--
    Mrs. Bachmann. Oh, you think you could do it within 4 
years?
    Mr. Liddy. --before it is entirely gone. I do. I think it 
will be that.
    Mrs. Bachmann. Do you think that once the business has gone 
through this transition, that you will retain the name AIG?
    Mr. Liddy. No, I do not. I think the AIG name is so 
thoroughly wounded and disgraced that we are probably going to 
have to change it and in fact, as we think about our property 
casualty business in the United States, which did travel on the 
AIG name, we have already begun the rebranding process to AIU 
and on the life side, many of those businesses already have 
different names. So where there may have been an approach to 
use one single name like AIG, we are reversing that and going 
back to some other individual brand names.
    Mrs. Bachmann. Thank you. Do you believe that AIG has 
underlying assets sufficient to pay back the taxpayer? You had 
said that you didn't want to sell them at fire sale prices. 
That was part of your concern. Is it your belief, sir, that you 
have collateralization sufficient that the taxpayer will be 
paid back and made whole?
    Mr. Liddy. Yes. It is our belief. It is a belief of our 
financial advisors. It is difficult for me to speak for the 
Federal Reserve, but I think it is their belief, and they have 
a set of financial advisors, and it is their belief. The thing 
I cannot control is when does the market get better and when do 
people begin to want to invest in business.
    Mrs. Bachmann. Mr. Liddy, if you did, you would be worth 
more than a dollar a year.
    Mr. Liddy. I would be.
    Mrs. Bachmann. Thank you, sir. I just want to go back to 
some of your first comments in your opening statement. You had 
said, and I realize this is a long time, but you said the 
Federal Reserve knew about the bonuses and acquiesced to them 
in a meeting that I believe you had in mid-November? Is that 
correct?
    Mr. Liddy. Actually, I think my words were we began this 
process of debating what we should do with these in November. 
We didn't come to a final conclusion until, oh, the early part 
of March, at a board meeting at which the Federal Reserve was 
present.
    Mrs. Bachmann. Okay. And then Mr. Kanjorski had asked the 
question, why didn't the committee know? And I believe that 
your response was that AIG had met with staff from the 
committee. Was that true?
    Mr. Liddy. Yes, it was. I'm told that we have provided a 
great deal of information to the committee and to various 
members of the committee. I can't sit here and tell you exactly 
what it was or whether we previewed these bonuses or not, but 
we have tried to be very responsive to the inundation of 
requests that we have had.
    Mrs. Bachmann. And when was that? Was that beginning in 
mid-November or when was that?
    Mr. Liddy. Oh, that would have--you mean specifically on 
the bonuses?
    Mrs. Bachmann. Yes.
    Mr. Liddy. I'm hazarding a guess. I don't have the command 
of those facts at my fingertips. I would guess that would have 
been starting in December.
    Mrs. Bachmann. Starting in December. Is it possible to get 
a list of which Members of Congress' staff knew about this and 
when?
    Mr. Liddy. We will provide you information of what we 
provided to whom and when we provided it.
    Mrs. Bachmann. Okay. Thank you. How about anyone in the 
Administration? I believe you had been asked that question as 
well. Any members of the Administration who knew about the 
bonuses and conversations about the bonuses?
    Mr. Liddy. As I mentioned earlier, the conversation I had 
was with Secretary Geithner approximately a week ago, two 
conversations on a Tuesday and Friday or Wednesday and Friday, 
and he called to my attention that the first time he had heard 
anything about it was approximately a week before those 
conversations.
    Mrs. Bachmann. And so no conversations with the transition 
team or with anyone else in the Administration other than 
Secretary Geithner.
    Mr. Liddy. Not to my recollection. It is possible that 
there were communications between staff, but I just don't know 
that.
    Mrs. Bachmann. To your knowledge, did any Members of 
Congress know anything about these bonuses?
    Mr. Liddy. The obligation to pay the bonuses, I think 
probably several people did. They have been in our various 
financial documents, our 10-Ks and our 8-Ks and our 10-Qs. And 
to the extent that we have provided that information to 
congressional staff, I would presume the answer is yes.
    Mrs. Bachmann. Could you be responsive about which Members 
of Congress knew about these bonuses?
    Mr. Liddy. We will provide you the information. I can't as 
I sit here, no. I just don't know.
    Mrs. Bachmann. But you will be able to--
    Mr. Liddy. Yes.
    Mrs. Bachmann. --let me know which Members of Congress knew 
and when they knew--
    Mr. Liddy. Sure.
    Mrs. Bachmann. --about the bonuses. Both Members of the 
House and Members of the Senate.
    Mr. Liddy. Sure.
    Mrs. Bachmann. Thank you, Mr. Liddy. I had a few other 
questions as well. One is, it was just about exactly a year 
ago, just over a year, when the United States--when the Federal 
Reserve opened the discount window for the first time to Bear 
Stearns.
    Mr. Liddy. Right.
    Mrs. Bachmann. We just celebrated that anniversary. And I 
wonder had we--had the Federal Reserve chosen not to open that 
discount window and had Bear Stearns failed as a result of 
that, do you think that would have served as an example to AIG 
to stop with the risky bets that were going on?
    Mr. Liddy. It is hard to speculate, but I think the 
aggressive behavior of AIG started really 2 or 3 or 4 years 
before that. So I think by then, it probably wouldn't have.
    Mrs. Bachmann. That is what your testimony indicated.
    Mr. Liddy. I think by then it would have been too late.
    Mrs. Bachmann. Do you think had AIG, had the managers 
involved in that fund, had they seen that, do you think that 
would have altered their perspective?
    Mr. Liddy. I don't think so. Not in the timeframe that you 
have indicated. By the time you have--remember, it was at the 
end of 2005 that AIG, the first quarter of 2006, that AIG 
stopped writing any credit default swaps whatsoever because 
they saw some risk in the housing market. But once you have 
written that contract, you are exposed to it. Now there may be 
things they could have done to hedge it differently, to try to 
offload the risk, and some of that was done. We just had too 
much of it.
    Mrs. Bachmann. Mr. Chairman, I think I will be submitting 
the rest of these questions to Mr. Liddy in writing. I just 
want to end with the Federal Government did approve, prod, 
enable AIG in a lot of ways to ensure these risky bets. And 
what I'm wondering is, why didn't AIG have the institutional 
fortitude to say no to Uncle Sam?
    Mr. Liddy. I think you have to ask to come before you the 
people who constructed these risky businesses at AIG FP and the 
predecessors, my predecessors, who ran this company before I 
was here 6 months ago and ask them that question.
    Mrs. Bachmann. Thank you.
    And I yield back, Mr. Chairman.
    Chairman Kanjorski. Thank you.
    Mr. Donnelly.
    Mr. Donnelly. Thank you, Mr. Chairman, and Mr. Liddy. You 
were handed a mud pie and the thanks of your government and one 
dollar a year for doing this. So we appreciate your efforts.
    In terms of credit default swaps, how much have they cost 
AIG at this point approximately?
    Mr. Liddy. $50 billion.
    Mr. Donnelly. $50 billion. How much of that was the naked 
credit default swaps, would you say?
    Mr. Liddy. How much of it was what?
    Mr. Donnelly. The naked credit default swaps where there 
wasn't even anything to them, other than just a gamble.
    Mr. Liddy. I don't recall what the split of that would be.
    Mr. Donnelly. Does that product seem to be--you know, I 
mentioned earlier today that back home, a naked credit default 
swap is called gambling. And this seems to be very much the 
same exact thing and back home if we do that, we go to jail. 
And it seems that Wall Street dreamed this up to create 
additional profits and if we dreamed it up back in Indiana, we 
would be on the other side of the sheriff's department.
    Mr. Liddy. Congressman, I just do not recall exactly what 
the split was of traditional credit default swaps versus what 
you are referring to as naked ones. I would be delighted to 
have another conversation with you. I just don't--
    Mr. Donnelly. You don't have to do that, but one of the 
things that struck me when you came in, you said, your job is 
to try to pay back everybody who money is owed to with AIG, and 
I understand that. It is incredibly distasteful, especially 
with the naked credit default swaps, where these were nothing 
more than gambling. And when the casino closes down or goes 
bust, usually all the guys who are gambling close down shop and 
head for the next bookie they can find.
    And it is very, very unfortunate that taxpayers from 
Indiana and other places had to pay hedge funds who had gambled 
on the American housing market going even lower. It is almost 
as if they bet against their own country, these people.
    Mr. Liddy. Congressman, if you would. I understand your 
point. I don't know that we wrote any contracts to hedge funds. 
We would have written a contract through--to a counterparty and 
that counterparty could have done--we don't have visibility as 
to what they did.
    Mr. Donnelly. The reason I mentioned that is today's Wall 
Street Journal mentions hedge funds who work through Goldman 
Sachs to AIG for these kind of contracts.
    The derivatives that are left, how much do you think at the 
end of the day? It is about $1.6 trillion?
    Mr. Liddy. Correct.
    Mr. Donnelly. Where do you think we will wind up? Close to 
even on those?
    Mr. Liddy. That certainly would be our goal. As I mentioned 
earlier, I think we probably have a couple billion dollars left 
to put into FP so that they can settle that $1.6 trillion in 
trades. It is hard to tell exactly what the size of the number 
is, but some of those trades are good trades. Some of those 
trades are not good trades, and netting them out, of course, is 
the art or science of it.
    Mr. Donnelly. Sure. And the other divisions, are they 
holding their own at this point? Are they at least staying 
even?
    Mr. Liddy. They are. The insurance operations of AIG are 
rock solid from a policyholder standpoint. The AIG name has 
tarnished those businesses. As I said earlier, we are trying 
very hard to make sure those businesses stay strong and aren't 
contaminated to any great extent. So we are changing names. We 
are isolating those businesses. We are going to take pieces of 
them public in order to protect them.
    Mr. Donnelly. In terms of--not in today's market, but in a 
regular market, would they still command premium prices, those 
other divisions?
    Mr. Liddy. Those are good businesses, sir. I mean, we are a 
leader in the property casualty world, we are one of the 
largest insurance companies in the United States and one of the 
largest in the world, so they would, in a normal world where 
you can actually sell things, they would be very prized assets.
    Mr. Donnelly. The commitment we like to make to the 
American people, and I know you would, too, is that all the 
waitresses and truck drivers whose paychecks are dinged a 
couple of pennies or a buck every week to keep this going, we 
want to try and make this whole so that at the end of the day 
AIG is--it comes out and we can say, well, we may not have made 
a buck, but we didn't lose a buck. That is the goal and I am 
sure that is yours, too.
    Mr. Liddy. Congressman, you and I are in violent agreement. 
That is my ambition as I said in my opening statement. We have 
two things we want to do: We want to pay back the American 
taxpayer every dollar that has been invested in us; but second, 
we need a victory in this country. We need a confidence 
building victory. It is important that President Obama's 
Administration be successful.
    We would like to serve that up just as quickly as we can, 
but the markets are not very cooperative, so we have come up 
with other structures. When you owe people money, you can pay 
them in cash, you can pay them in diamonds, you can pay them in 
gold, you can pay them in anything that is worthwhile. It is 
the anything that is worthwhile that we are moving towards.
    Mr. Donnelly. Well, you just try to run them well and chip 
away a little at a time until the markets do turn, I guess 
would be the other thing.
    Mr. Liddy. The only way I know to solve a problem is take a 
big problem and break it down into small pieces and just keep 
knocking them off, and after awhile you look backwards and you 
have really come a long way.
    Mr. Donnelly. And obviously, on the bonuses, it does rub 
people--or the retention bonuses--it does rub people wrong and 
anything you can do to help on that front certainly makes 
everyone in this country feel a lot better.
    Thank you, sir. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you. The gentlelady from 
California.
    Ms. Speier. Thank you, Mr. Chairman. Mr. Liddy, you are in 
many respects the knight on the white horse, and that is not a 
reference to the color of your hair.
    Mr. Liddy. Sometimes it doesn't feel like a good place to 
be either.
    Ms. Speier. I would like to give you some unsolicited 
advice. The American people and the Congress are at their wit's 
end relative to funding AIG and if you do us the favor of 
communicating directly with the chairman of this subcommittee 
and the chairman of this full committee in addition to the 
Chairman of the Fed, we will be in much better stead moving 
forward on any of the issues that will continue, I think, to be 
challenges for you and for the Congress.
    You referenced just a few moments ago that you were a 
leader in insurance and that it is a solid market and that 
those divisions are doing very well. I believe that they are 
doing very well in part because they have been regulated by the 
States for all these years. Would you agree with me?
    Mr. Liddy. Yes. I would say State regulation didn't cause 
AIG's difficulties.
    Ms. Speier. No. But State regulation may, in fact, have 
saved what is left of AIG in terms of the insurance components, 
correct?
    Mr. Liddy. State regulation has worked well.
    Ms. Speier. So this whole idea of a optional national 
charter may be, in fact, be a very flawed idea?
    Mr. Liddy. Oops, let me see if I can explain my point of 
view. The State regulatory system has worked well, but the 
insurance products have gotten so complicated and the rapid 
rate with which capital moves around the globe now may just be 
surpassing the State regulators' ability to stay current on 
everything.
    Ms. Speier. Wait a minute. Time out. Time out. With all due 
respect, the OTS was in a position to regulate you and didn't 
know what a credit default swap was and, in fact, said they are 
so complex that the risk was not properly addressed because of 
the complexity. So complexity is not something that is going to 
ring well for any of us moving forward because if you can't 
understand it, how can you really assess what the risk is?
    Mr. Liddy. No. I agree with that, and therefore, where I 
was going was, I think there needs to be some overarching 
systemic risk regulator. When you have these large $100 billion 
companies that are so complex and interrelated, it defies the 
regulatory scheme that is currently in place and there has to 
be something that comes along that can really guide and review 
the interaction of those companies. I think that was missing in 
this case.
    Ms. Speier. All right. How much of the $30 billion that is 
now at your disposal do you expect to use?
    Mr. Liddy. I hope none. It is there for a reason. If we 
need it, it is there for us to help accomplish certain things 
that will enable us to effect a plan to pay back the taxpayer. 
It will be difficult to say until we see what happens in the 
marketplace in general.
    Ms. Speier. The $1.6 trillion that has to be unwound is 
probably the toughest credit default swaps left. Is that a safe 
assumption?
    Mr. Liddy. No. Most of the credit default swaps are gone. 
We have--I know people aren't interested in hearing success 
stories--
    Ms. Speier. No. We are, please.
    Mr. Liddy. The original arrangement that the Fed and the 
Treasury put in place for AIG worked. We did not go bankrupt 
and we walled off the securities lending and the credit default 
swap issues. They are gone. So what is left in AIG FP is really 
just--I am going to use the term ``traditional'' book of 
derivatives contracts, although it is hard to use traditional 
and derivatives in the same sentence.
    Ms. Speier. So what is left are derivative contracts. Are 
they going to be more difficult to unwind because they are 
still there?
    Mr. Liddy. Yes. And some of them, as I said earlier, are 
very long so it is you and I entering into a contract; you want 
to hedge against an interest rate increase, so I offer you a 
derivative that does that. Well, you may not want to give up on 
that hedge, and if that is a 20-year hedge you may not want to 
give up on that, so it is an interesting dynamic of give-and-
take to try to resolve these hedges. If we get that book of 
business small enough it is entirely possible that we can sell 
it or we can have somebody else run it off, run the balance of 
it off for us.
    Ms. Speier. In 2008, were there any performance bonuses 
offered to employees in the insurance silos within AIG?
    Mr. Liddy. Performance bonuses, yes, there were.
    Ms. Speier. And how much were they?
    Mr. Liddy. I just don't have that number.
    Ms. Speier. Okay. Would you make that available to the 
committee? How much, how many people, what amounts. And let me 
give you some more unsolicited advice. Right now, AIG is owned 
by the taxpayers of this country. Until the $70 billion is 
returned nobody, in my view, should be getting retention 
bonuses or performance bonuses until that money is paid back. I 
yield back.
    Chairman Kanjorksi. The gentleman from Ohio, Mr. Wilson.
    Mr. Wilson. Thank you, Mr. Chairman. Mr. Liddy, thank you 
for coming today. I don't envy your position but thank you for 
serving in the capacity that you are. I--like all my friends--
am outraged about what has happened with AIG. Back in Ohio 
where I represent, that is a magic word or acronym, if you 
will, AIG; and everybody just--it is sad. I just can't 
understand how people can be so arrogant and impractical about 
thinking that they can dole out bonuses to people who have 
literally run the company in the ground and then also 
contributed to the country being run into the ground.
    And, please, when I hear about contracts that were in place 
and the people needed to have their contracts, I represent an 
area in Ohio where General Motors has had to break their 
contracts, not necessarily because of anything that they have 
done, but what the result has been is how can we ask working 
families to break their contracts and yet support the contracts 
like AIG have done. I just don't think it is fair.
    That being said, I would like you to explain why the pay 
structure at your company is like it is. It is my understanding 
that most Wall Street folks use the compensation approach and 
the bonuses are where they make the majority of their money. 
That kind of a package is certainly something that seems to be 
applied pretty basically. So salaries are kept relatively low 
and then the bonus comes at the end of the period, whether it 
is a performance bonus or whether it is a retention bonus or 
whatever kind of bonus is it.
    Is this the way it works at AIG?
    Mr. Liddy. No, sir. We are a Wall Street firm only by 
geography. You know, that is a term that generally applies to 
investment banks and commercial banks. We are an insurance 
company with this difficult hedge fund attached to it, so we 
tend to have an entirely different pay structure than that 
which you just described where you have across the company, 
excluding AIG FP, you tend to have a little bit higher base 
salaries, not that much in an annual bonus, and then most of 
the upside comes in the performance of the stock, which, of 
course, has been wiped out. The AIG FP structure would be more 
similar to what you described.
    Mr. Wilson. I see. Yesterday, I read in the Wall Street 
Journal an article that companies are anticipating 
congressional action and are trying to go around this by 
proposing significant pay increases as a way of getting around 
the security of bonuses. Have you heard anything of that 
nature?
    Mr. Liddy. I have not.
    Mr. Wilson. Okay. That is why today I introduced a bill 
that is going to be called the TARP Wage Accountability Act, 
and basically what it is for is to prohibit companies from 
going around by switching it back to salary and taking away, or 
lowering the bonus, or minimizing it. We are hoping that it 
will be one of the things that will make salary increases to be 
something that would be along the lines of 3.9 percent, which 
is what is given to the government employees and soldiers of 
our country, and it just seems like if it is good enough for 
them, it should be good enough for the companies that have 
contributed to the problems that we are suffering right now.
    Mr. Liddy. And Mr. Wilson, for the top executives, the top 
70 or 75 executives at AIG, no salary increases for 2009. For 
the top seven or eight people at AIG, including me, no bonuses 
whatsoever. So we clearly understand and agree with the spirit 
of what you said.
    Mr. Wilson. Good. I know that the outrage this week has 
been focused on the bonuses and rightfully so, but I worry 
about what is going to be the next shoe to drop. Will it be the 
additional $30 billion? Will it be the flipping of compensation 
structures, in other words, going back to salary and minimizing 
bonuses? I think it is all about trust and it is all about what 
has happened over the last several months; very, very difficult 
situation.
    I just want to make sure that the taxpayer money does not 
go for outrageous raises and so many times, Mr. Liddy, this is 
the kind of thing that happens in a classic case where a bank 
has failed or a business has failed, the people who ride out 
with their golden parachutes are out with their golden 
parachutes, and thank goodness there is someone like yourself 
who will come in and try to put the pieces back together. It 
just seems terribly unfair and I know, as a representative of 
the taxpayers, that we just feel that it is something that is 
very, very unfair to the people in our country.
    And one of the things that I heard you say earlier is that 
one of the reasons that happened here was the appetite for 
risk, but yet I never heard the word greed, and it just seems 
like that seemed to be what had to be driving what was going on 
with some of the appetite for risk that was going forward. I 
need to be able to wake up in the morning and feel sure that at 
least we are trying to point out the problems that have 
happened and I would like to hear more common sense as to what 
we are going to do in the future. Thank you.
    Mr. Liddy. Thank you, sir.
    Chairman Kanjorski. Thank you very much, Mr. Wilson. Let us 
hear from the gentleman from Florida, Mr. Grayson. I am sorry, 
Mr. Grayson, we have another gentleman from Florida, Mr. Klein.
    Mr. Klein. Thank you. We try to all be gentlemen from 
Florida, but thank you. Thank you, Mr. Chairman. Mr. Liddy, it 
is been a long day and we understand that and you have been 
through a lot of questions. I understand your comments earlier 
today and also appreciate the fact that you came back from 
retirement to work on this. You have heard a lot of frustration 
today. You have heard a lot of concern. We heard your 
explanation about the reason why the bonuses were provided in 
terms of retention. We heard about contractual rights. I 
thought Mr. Kanjorski, earlier today, made an excellent 
observation.
    I am a lawyer by background and I also represent a number 
of people who many times insurance companies first say no 
before they settle claims or settle issues and this seems to be 
one of those times when, you know, with legal advice, I 
understand, your folks seem to tell you that the better way to 
proceed on this was to give the bonuses and not have to deal 
with that. But I think in retrospect I think we all understand 
now this has created a huge backlash of concern, and it is not 
so much about AIG--it is about AIG--but it seems to be that the 
public has just allowed this to accumulate in their minds about 
what has gone wrong in our system.
    And, you know, I know that the comment you made about 
retention, I guess one of my local newspapers this morning 
wrote an editorial about this--and this is the newspaper, the 
Sun Sentinel in south Florida, and it said, ``If not for the 
Federal bailout of AIG, the company would have gone bankrupt. 
Then the contracts calling for the bonuses would have been 
nullified and the executives who wrecked the company would have 
lost their jobs.''
    And I guess the point of that is that even if there were 
some type of performance bonuses--and I don't know all the 
terms of how these were, whether they were discretionary or 
otherwise--but for the Federal Government and all of us as 
taxpayers, the American people having stepped up, there 
wouldn't be a company to pay the bonuses. So I guess the 
notion, and I guess where I still haven't really got the 
answer, and maybe you can just address this for us, is 
understanding that principle.
    You know, why is it that you and your colleagues felt like 
this was necessary? It didn't feel like it was--whether it was 
a legal, or equitable, or moral, or ethical right to say, you 
know, companies that make money pay dividends, companies that 
make money pay bonuses. That is the American way. We all 
support free enterprise. As shareholders, we support that to a 
point. But a company that is not making money as a whole 
doesn't pay bonuses. And if you could just share with me, at 
least, the moral/ethical side of this thing as well.
    Mr. Liddy. Sure. We have talked about that during the 
course of the afternoon. These are not performance-based 
bonuses in the way you are using that word. They are retention 
bonuses. We want to wind down the FP business just as quickly 
as we can so we don't expose the company and the American 
taxpayer to anymore risk than we have right now.
    So the judgment we made was with $1.6 trillion in a 
derivatives book out there we need these people to keep making 
progress to shut it down. We made real progress in 2008. So 
this was more about risk. What I clearly do not want to have 
happen is I don't want to have this company fail after all that 
the American public has gone through with AIG. The judgment we 
made was we stood a better chance by paying these bonuses, $165 
million, a large amount of money, we stood a better chance of 
protecting the business that has $1.6 trillion of exposure.
    And it gave us a better opportunity to wind that down in an 
orderly way and not have it erupt on us in some sort of 
disorderly way. The legal argument was the secondary argument. 
The primary argument, or thought process, was weighing the risk 
of a disorderly breakdown in that business against keeping 
those people in place at the cost of $165 million.
    Mr. Klein. And I appreciate the thinking. But at the same 
time the average American, trying to apply a common-sense 
standard here, would say, well, first of all, some of these 
people left anyway. Secondly, are these really the kind of 
people that you would--because some of them made mistakes along 
the way in creating some of these things, and I recognize that 
not everybody's in that basket.
    And also what about the notion of we are all Americans 
here? This is a serious situation we are in in our economy. 
Isn't there any commitment to our country to stick with it and 
fix this thing as opposed to, if I don't get my million dollar 
bonus I am not staying here? I mean, where is this notion that 
these are Americans and we are all in this together that I 
think most American taxpayers feel? Don't some of these people 
have that same commitment?
    Mr. Liddy. They do, sir, and I think they have been so 
vilified over the last couple of years that really many of them 
just want to go someplace else and work. What we said is, we 
understand that. Please, stick with us until your area of 
responsibility is wound down in a responsible way. We will pay 
you a retention bonus to do that and then you can go someplace 
else. So I would not conclude from their apparent or perceived 
behavior that they aren't Americans very interested in having 
this country get out of the mess that we are in.
    Mr. Klein. Thank you, Mr. Chairman.
    Chairman Kanjorksi. Thank you very much, Mr. Klein. Next we 
will hear from the gentleman from Florida, this time, Mr. 
Grayson.
    Mr. Grayson. Still a gentleman, huh? Thank you, Mr. 
Chairman. Mr. Liddy, I took a look at the 10-K that you filed 
about 2 weeks ago with the Securities and Exchange Commission. 
Are you generally familiar with the AIG 10-K?
    Mr. Liddy. Yes.
    Mr. Grayson. Thanks. We copied some pages for you. Do you 
have it in front of you?
    Mr. Liddy. I do. Someone handed it to me.
    Mr. Grayson. All right. I want to ask you some questions. 
Let's start with page 153. This is a chart of shareholder 
equity, and it says the changes in AIG's consolidated 
shareholder equity from the beginning of 2008 to the end of 
2008 were as follows: Beginning of the year the shareholder 
equity was roughly $96 billion. You had $99 billion in losses 
realized in 2008. And somehow you ended up with a shareholders' 
equity of $53 billion. Certainly 96 minus 99 means that without 
anything else happening you would have ended up $3 billion in 
the hole. Is that correct?
    Mr. Liddy. Yes.
    Mr. Grayson. All right. Now, I see two large entries here. 
I was hoping you would explain them. One is excess of proceeds 
over par value of preferred stock issued. This is $40 billion 
and it was recorded on your books as an increase in the 
shareholders' equity. Can you explain who provided the 
preferred stock that you recorded on your books as a $40 
billion increase in shareholders' equity?
    Mr. Liddy. I believe that is the TARP money that was 
provided to us.
    Mr. Grayson. So you recorded the TARP money in your books 
as essentially equivalent to profit, correct?
    Mr. Liddy. No. It is reported as equity, not as profit.
    Mr. Grayson. As equity?
    Mr. Liddy. Right, this is an equity statement.
    Mr. Grayson. All right. And equity is something that you 
get without any legal liability except to the same liability 
you would have to any shareholder. Is that correct?
    Mr. Liddy. No, sir. I think it comes with a pretty heavy 
liability. You have the liability of making whatever the 
dividend payment rate is that you have to make on it. And in 
our case there is an expectation that at some point in time 
that money will be repaid.
    Mr. Grayson. Well, it is interesting that you say that 
because there is another line here that says $23 billion, and 
without that line then your company would have been close to 
being in the red even by this accounting method. Without this 
you would have been in the red. It says, consideration received 
for preferred stock not yet issued.
    Mr. Liddy. It is the loan from the Federal Reserve. At the 
time this was prepared we had not yet issued, or maybe this was 
the 10-Q or the 10-K with which we actually issued the 79.9 
percent ownership that the Federal Reserve has of AIG.
    Mr. Grayson. So essentially what this means is that the 
taxpayers gave you $23 billion and before you even gave the 
preferred stock to the taxpayers in return, you counted that as 
increase in shareholders' equity for AIG. Is that correct?
    Mr. Liddy. Yes. It was in anticipation of giving that 
preferred stock.
    Mr. Grayson. All right. Let's turn two more pages to page 
179. This is one that says, ``The following table provides 
estimates of AIG's sensitivity to a yield curve upward shift, 
equity losses, and foreign currency; exchange rate losses at 
December 31, 2008.'' And you see the entry that says, yield 
curve 500,000?
    Mr. Liddy. Yes.
    Mr. Grayson. Now that 500,000 actually corresponds to $500 
billion. Is that correct?
    Mr. Liddy. I believe so, yes.
    Mr. Grayson. All right. So what this is telling us, this 
stress test analysis, is that if the yield curve, which is 
simply the difference between long term rates and short term 
rates, increased by 100 basis points, which is 1 percent, then 
you are telling us that AIG would be on the hook for half-a-
trillion dollars. Is that correct?
    Mr. Liddy. I am not sure. I am looking to see whether those 
are billions of dollars or hundreds of millions of dollars and 
I don't see the designation in front me, sir.
    Mr. Grayson. Well, look above the words ``yield curve'' 
where it says ``dollars in millions.'' Do you see that?
    Mr. Liddy. Yes, I do.
    Mr. Grayson. Okay. What is $500,000 million?
    Mr. Liddy. Yes.
    Mr. Grayson. Okay. So is it correct, then, that according 
to your own 10-K, that if the yield curve changed 1 percent, if 
long-term rates went 1 percent higher and short-term rates 
stayed the same, then you would be on the hook for half-a-
trillion dollars?
    Mr. Liddy. Well, you would have the offsetting effect of 
the impact on the liabilities.
    Mr. Grayson. Well, why isn't that reflected here in the 
stress test?
    Mr. Liddy. You know, I can only assume that stress tests 
are put together according to a very specific formula so that 
they can be compared from one institution to the next.
    Mr. Grayson. Well, that sounds like an awful lot of stress 
for the taxpayers if they are on the hook, doesn't it?
    Mr. Liddy. And to that exact point is why we wanted to make 
certain that the AIG FP business gets wound down in an orderly 
way.
    Mr. Grayson. Let's take a look at the next page because 
time is short. If there were an earthquake in San Francisco, 
then according to your table on page 184, that would cost AIG 
$8.6 billion. But if interest rates increased 1 percent, that 
would cost AIG $500 billion. Correct?
    Mr. Liddy. Well, as I said, on the second of those pages 
that you called out, there is an offset on the liability side. 
On the page on the insurance, the cost of insurance, it would 
be $4,966,000,000 after reinsurance if there was an earthquake 
along the lines of what occurred in the early 1900's.
    Mr. Grayson. Well, what exactly was AIG insuring? The 
entire U.S. economy?
    Mr. Liddy. I don't know, sir. That has been my point, that 
we are a very good insurance company with an internal hedge 
fund attached to it. We need to wind down that internal hedge 
fund quickly and efficiently so it doesn't cause the taxpayers 
even more distress.
    Mr. Grayson. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Grayson. We will hear 
from Mr. Peters of Michigan.
    Mr. Peters. Thank you, Mr. Chairman.
    Thank you, Mr. Liddy. I know it has been a long day, and 
luckily I am one of the more junior members here, or probably 
the most junior member, so your day is about over. I know it 
has been a long day, and I want to join some of my colleagues 
in saying that I know you have come into the situation late and 
are faced with a very difficult task.
    I missed some of the most recent testimony. I was just at a 
press conference for a bill that is going to be on the Floor 
tomorrow in which I have worked with leadership to place a 90 
percent tax on bonuses for those individuals working with 
companies with sales--or have received over $5 billion in TARP 
money.
    But I want to ask a couple of questions related to the 
business as a whole. Now, most of the losses from your company, 
from AIG, have come from the Financial Products unit. Let me 
wrap my head around this a little bit.
    How much money was actually lost by the Financial Products 
unit in this last year?
    Mr. Liddy. If you will permit me, I think we have a 
schedule that we submitted for this hearing. Of the money that 
has come in to us, $52 billion has gone out to support 
Financial Products. That might be a better way to--
    Mr. Peters. Is that the money from the Federal Government?
    Mr. Liddy. Yes.
    Mr. Peters. How much was lost? Just how much was lost? 
Because you took a hit on your--how much was the total loss 
that the Financial Products unit has actually had?
    Mr. Liddy. It would be in the range of $30 billion. I am 
sorry, I just don't have that number tucked in the back of my 
head.
    Mr. Peters. And had the Federal Government not put in 
money, that loss would have been considerably larger?
    Mr. Liddy. No. Not necessarily.
    Mr. Peters. So $30 billion was the loss. $30 billion of 
loss required $170 billion of taxpayer money?
    Mr. Liddy. I would like to go back. The taxpayer money is 
not $170 billion. We have $40 billion of TARP money and about 
$38 billion of a loan from the Federal Reserve. So it is $78 
billion.
    Mr. Peters. Okay. So the loss of $30 billion, how many 
people are actually in this unit? There are about 300-plus 
people in the unit?
    Mr. Liddy. At its high-water mark, it was 435. We wound it 
down last year. It is 360 now.
    Mr. Peters. How many are actually involved in the 
derivative business that accounted for these losses? How many 
people are actually engaged in that activity out of the--
    Mr. Liddy. Very, very few. Again, if you think of it as a 
couple of buckets, you have the credit default swaps, you have 
other--the other swap business, and you have the $1.6 trillion 
of derivatives business. Most of what is left in FP now is all 
under $1.6 trillion.
    Mr. Peters. Right.
    Mr. Liddy. The credit default swap business is gone or is 
winding down rapidly.
    Mr. Peters. Well, all of it. So of the whole unit, this 
type of liability that is out there. I mean, I guess my point 
is that you had a relatively small unit. A very large company 
that insures about 81 million people in this country, a large 
insurance company. And it is really a small number of people 
that really brought your company to the brink.
    Now, we want to make sure that we never let this happen 
again. And I know in your testimony, when I heard you earlier, 
you talked about what would happen if AIG failed, that it would 
be absolutely devastating for the entire American U.S. economy, 
devastating for the international economy.
    How can a relatively small number of people bring the U.S. 
economy to the brink? What sort of controls need to be in place 
going forward so this doesn't happen again? How can the fate of 
the U.S. economy be in the hands of just 100 or 200 people? How 
do we prevent this?
    Mr. Liddy. In fact, sir, it wasn't even that many. You 
know, the number of people involved in the credit default swap 
business was probably 20 or 25.
    Mr. Peters. So 20 people brought your company to the brink, 
and brings our economy to the brink?
    Mr. Liddy. I think the answer to your question is we need a 
much more hefty systemic risk regulator. So we get a ton of 
regulation on the insurance side from State regulators, the 
United States, from other regulators around the globe.
    What we need is someone who can look at the systemic risk 
that a large company like AIG represents, pair that with the 
systemic risk that a large bank or investment bank represents, 
and decide whether there is too much risk there or not. I don't 
think that regulation--
    Mr. Peters. But where was your company's risk management? 
To take on, what, $3 trillion in risk, where was the risk 
management of your company? Where was the failure of your own 
internal risk manager procedures?
    Mr. Liddy. We had risk management practices in place. They 
generally were not allowed to go up into the Financial Products 
business. It was--
    Mr. Peters. How could that be? How could they not be 
allowed to go when they are putting trillions of dollars at 
risk?
    Mr. Liddy. As I said earlier to a similar type question, 
you need to get the people who ran FP, Mr. Cassano, and the 
people who ran AIG before my arrival, and ask them that 
question.
    Mr. Peters. Yes. Well, it is a big question.
    Mr. Liddy. It is an excellent question. We should ask the 
right people that question.
    Mr. Peters. Good. I appreciate it, sir. Thank you. I yield 
back my time.
    Mr. Moore of Kansas. [presiding] Thank you.
    Next, Ms. Kilroy of Ohio. You have 5 minutes, ma'am.
    Ms. Kilroy. Thank you, Mr. Chairman. I appreciate it.
    I, like my colleagues, am just absolutely astounded by the 
situation of paying $165 million in bonuses with a company that 
is being propped up with the help of the Federal Reserve and 
with the TARP money, still seeing $62 billion of loss in the 
last quarter.
    And, you know, the question that the average American would 
ask is, how can you pay bonuses when you don't really have the 
money to pay them, when it is somebody else's money that is 
being put to work here to pay down these bonuses, which is, 
just recently commented, bonuses paid to people who have caused 
cataclysmic losses and damage to both AIG, to its shareholders, 
and to the economic system?
    And yet we are told, and I think you said this earlier, 
that if something happens to AIG, that can have dire 
consequences for the rest of the country. And you kind of get 
the feeling that there is a bit of coercion here being put to 
the American taxpayer by saying, you have to--this is another 
version of we are too big to fail And I think the American 
public is really wanting to see something different here.
    This afternoon, we voted on the GIVE Act, people who are 
giving service, people who are working hard to make their 
community better for small stipends. And we have seen people 
around the country--we have heard earlier about the teachers 
who are taking cutbacks in their pay, and the auto industry, 
which is modifying their contracts, and the pensioners who are 
taking cutbacks.
    You see this willingness to come forward and to help out. 
And you are among those as well, serving at the request of 
President Bush and the former Treasury Secretary for $1 a year.
    You know, I am reminded that one of our great presidents, 
John F. Kennedy, said, ``Ask not what your country can do for 
you--ask what you can do for your country.'' And yet my feeling 
is some of these traders and others are asking our country to 
just keep giving them more, and not owning up to the 
responsibilities that they have.
    And one of my concerns is a responsibility that has been 
brought to light, brought to my attention, from the State of 
Ohio, a case brought by the Ohio Public Employees Retirement 
System, the State Teachers Retirement System, and the Ohio 
Police and Fire Pension Fund against AIG, making some very 
serious allegations about misrepresentations and nondisclosures 
of material fact made by AIG that has hurt these pension funds 
with respect to paying contingent commissions and other 
practices alleged to be direct market manipulation.
    And I understand that the suit--other parties to the suit 
have settled; other parties to the suit have paid out a 
significant amount of money in terms of settlement, but that 
the meter is still running with respect to AIG's obligations 
and the attorney fees, which I have been told are somewhere in 
the vicinity of $3 million a month for AIG to defend against 
this suit.
    I am wondering--and I understand that there have been some 
attempts at settlement, and that those attempts at settlement 
have kind of come to an end. But in terms of this orderly wind-
down that you talk about, is that orderly wind-down going to 
include considering the millions that could be owed to the 
pensioners of Ohio, New York, Texas, Florida, New Mexico, 
Virginia, California, or Michigan, all of whom have had 
substantial losses in AIG during the class period, during the 
period involved in this case?
    Mr. Liddy. I have to confess I just don't have any specific 
knowledge of that particular case. I will look into it. My 
general counsel is sitting behind me, and we will look into it, 
and we will do everything we can to make sure that it gets 
resolved. I assume this is the loss of the equity value of AIG. 
I just don't have any perspective on it whatsoever.
    Ms. Kilroy. I appreciate you taking a look at it. I just 
worry about what happens. And that is one of the reasons I 
think Congress is taking a look.
    Mr. Moore of Kansas. We are out of time. Thank you.
    Mr. Foster of Illinois, please, for 5 minutes, sir.
    Mr. Foster. Certainly. Let's see. I was wondering if you 
could walk me through some of the details on the mechanisms.
    When people talk about your assets blowing up or the other 
things you worry about, bad things that would happen, if 
someone--if the people who are currently managing the wind-down 
of the book were replaced by people who are equally expert but 
not familiar with them, what are the sort of mistakes that 
would get made if the people currently managing the books were 
replaced by equally competent people brought off the street? 
And what are examples of the way in which taxpayer funds would 
be at risk in that replacement?
    Mr. Liddy. Sure. First, each contract is unique unto 
itself, as I mentioned earlier. If you have seen one, you have 
not seen them all. So each one will have a specific type of an 
arrangement, a specific type of settlement.
    If we have a hedge on an interest rate and the interest 
rates move a percent in a day or currency moves a percent in a 
day, we have to re-hedge that book. There is some dynamic 
hedging, things that happen automatically. But much of the 
hedging has to be done with some thought attached to it.
    So because each of those contracts--there are now 29,000 of 
them; there used to be 44,000 of them--because each of those 
contracts is somewhat unique unto itself, you have to know what 
to do with respect to currency movements or interest rate 
movements or oil price movements so that you can minimize the 
exposure to loss on that contract.
    Mr. Foster. And what is the range in the final value that 
you would realize after you wound down the things, between ones 
that were managed with the best team that you currently have 
versus the best one you could buy off the street? I mean, do 
you have any feeling for what the difference might be in the 
final valuation there?
    Mr. Liddy. I just don't. I think the issue is how quickly 
could someone else get familiar with each of those individual 
contracts. You know, right now people know those contracts and 
they can react to changes in whatever it is that is the 
underlying instrument; they can react right away. How long 
would it take for people to get up to speed on those contracts? 
That becomes the risk factor.
    Mr. Foster. And you had mentioned you were in the process 
of getting some bench depth in this so that you had a backup 
person in each of these places.
    What fraction of the way along are you on that path?
    Mr. Liddy. Let's call it 40 or 50 percent. Again, it is 
hard to find people who want to work on these books of business 
at AIG. You know, people don't want to work at AIG. They are 
not cheap if you try to get them.
    Mr. Foster. What fraction of their compensation that we 
have been talking about do you have to pay when you get the 
backup person in? Does he end up costing, you know half as much 
or a quarter as much or an equal amount?
    Mr. Liddy. We have tried to do that differently, and we 
have hired a firm. So the firm has the responsibility for those 
people, and they have the responsibility for backing up those 
people. So it is more a matter of a contract with the firm that 
helps to provide the backup or the insurance.
    Mr. Foster. And do you end up spending a roughly comparable 
amount compared to the compensation levels we have been talking 
about?
    Mr. Liddy. I believe so, sir. Again, I just don't travel 
with that information in the back of my brain.
    Mr. Foster. Okay. And when you visited my office yesterday, 
you described some of the legal opinions that you had gotten in 
an effort to understand what your freedom--what freedom you had 
to cancel these things.
    And you had indicated that canceling these, if you just 
refused to pay them, that the likely result, according to legal 
opinions that both you and the Fed had obtained, would end up--
you would end up losing the court cases, in all probability, 
and the likely result would be doubling and in some cases 
tripling the size of the bonus that would eventually be paid.
    Mr. Liddy. Correct.
    Mr. Foster. Correct. And so that is your sworn testimony as 
well. That is your best legal reading of the position you are 
in?
    Mr. Liddy. Yes. And those documents have been provided to 
the committee. But I would just like to add, remember, the 
first issue that we were trying to address here was not the 
legal issue. It was the risk issue of can we effectively manage 
this book of business now in a way that doesn't cause us 
difficulty, that doesn't have it erupt and have to have more 
money come in from the American taxpayer.
    Mr. Foster. Okay. And in regards to the counterparties, are 
you familiar with what happened when European banks were bailed 
out and there were American counterparties? And do you get a 
feeling there is a rough symmetry between European banks that 
are bailed out with U.S. taxpayer money and American banks and 
so on that were bailed out with European or Asian or other--
    Mr. Liddy. I don't have a perspective on it, sir.
    Mr. Foster. Okay. Thank you. Well, I yield back.
    Mr. Moore of Kansas. Thank you, Mr. Foster.
    The Chair next recognizes Mr. Clay from Missouri for 5 
minutes.
    Mr. Clay. Thank you, Mr. Chairman. And thank you, Mr. 
Liddy, for being here today. I know it has been a long day, so 
let me try to expedite some of my questions.
    Initially I voted against the TARP legislation, and at this 
point I have no regrets about my vote. It was still the correct 
thing to do. However, this is not a concern of yours, and I 
know that you were placed in your position just a few months 
ago, after the meltdown.
    The American taxpayers have put over $165 billion into AIG 
in the last several months, and AIG is still not stabilized. 
And it is looking like we are putting money into a sinkhole. I 
also understand that there remains a possibility that AIG will 
come back for additional TARP funds associated with the $1.6 
trillion in your derivatives portfolio.
    Can you convincingly illustrate to us why this is not an 
exercise in staving off the obvious collapse or prolonging the 
agony? Is this a bad deal? And can you elaborate?
    Mr. Liddy. I do not think it is a bad deal. I think the 
Federal Reserve and Treasury made an appropriate decision back 
in September, particularly on the heels of Lehman Brothers and 
the banking crisis and credit crisis that was in place.
    As I mentioned earlier, the amount of money we owe the 
American taxpayer right now, at the end of December, was $78- 
to $79 billion. We have sufficient assets that we should be 
able to repay that in full.
    The market is a pretty difficult place right now. There are 
not people with money who can afford to buy assets. So we are 
attempting to put up a structure which will isolate these 
assets, break the business up into component parts, and isolate 
those that are particularly healthy.
    I would like to wind this whole thing down and be the first 
company that is able to make a meaningful repayment to the 
American taxpayer. I think we have the potential to do that, 
but it is somewhat out of our control because it very much 
depends upon what happens with the worldwide capital markets, 
not just the stock market but liquidity and capital flows.
    I think the American taxpayer has a better chance of 
getting paid from AIG than perhaps many of the other companies 
that have received TARP dollars. I would like nothing better 
than to prove that statement to you.
    Mr. Clay. Mr. Liddy, I am pulling for you to succeed with 
AIG. I want you to succeed. And you have gotten questions today 
from numerous members about the bonuses. But let me ask the 
question a different way.
    I represent St. Louis, Missouri. Our daily paper is the St. 
Louis Post-Dispatch, and they run a political blog. And Geno 
writes on the blog, and hopefully you can answer Geno's 
question: ``How can AIG defend bonuses given to people who have 
run the company into the ground? Every place I have worked, 
bonuses are given to people who make money for the company. As 
far as retaining good help, you have really missed the boat.'' 
End of Geno's blog entry.
    What can you say to Geno?
    Mr. Liddy. These are not performance-based bonuses. They 
are retention bonuses. These are not the people who ran the 
company into the ground. While they are in the FP unit that has 
caused us such distress, they are in a different section of 
that business for the most part.
    I would say to Geno that if we really want to maintain a 
fighting chance to repay the American taxpayer, we have to wind 
down this $1.6 trillion that exists in AIG FP. We can do that 
more securely and more quickly with people that we have asked 
to stay there and run that book down.
    So it is a risk assessment. If we keep those people, we 
have a higher probability of running this book down and not 
having it cost the American taxpayer more. That is what those 
bonuses were about.
    Mr. Clay. And that is based on the familiarity of the 
people who are in place there.
    Mr. Liddy. Correct. Correct.
    Mr. Clay. I mean, even the point about honoring the 
contracts, I mean, don't we change contracts every day in this 
country, and could in some those instances those contracts be 
altered?
    Mr. Liddy. Well, that is why I say it was secondarily a 
legal consideration and primarily a risk consideration. 
Contracts can always be altered as long as the two parties, or 
multiple parties to a contract, agree to it.
    Mr. Clay. Okay. Well, I appreciate your responses and I 
wish you well, Mr. Liddy.
    I yield back, Mr. Chairman.
    Mr. Moore of Kansas. Thank you, Mr. Clay. I next recognize 
myself, the Chair, for up to 5 minutes.
    Mr. Liddy, there are a lot of people in our country hurting 
very badly right now, and I think you know that. I know you 
know that.
    Have you asked any of the executives who received these 
bonuses if they would voluntarily forgo these bonuses and pay 
the taxpayers' money back so we can try to get on with this 
whole thing?
    Mr. Liddy. I have. I asked them this morning.
    Mr. Moore of Kansas. And?
    Mr. Liddy. I have been in this hearing all day. I don't 
know what the outcome is.
    Mr. Moore of Kansas. You haven't received any e-mails or 
phone calls?
    Mr. Liddy. No. I would prefer to ask the right people, and 
I will do that.
    Mr. Moore of Kansas. And we would like a report back. If 
you get information about that, will you be willing to provide 
that information to us, sir?
    Mr. Liddy. Yes.
    Mr. Moore of Kansas. Within a short time after you receive 
it, if you do receive that information?
    Mr. Liddy. Yes. I will be very transparent with you. I just 
want to--I need to get the information. I need people to--I 
need to give them a chance to make a rational decision, and 
then provide it to everyone who has an interest in it.
    Mr. Moore of Kansas. Sure. I don't know that we can--our 
country can afford to wait until 2012 for AIG to pay its money 
back. So if AIG continues to behave like this, despite being 
supported by not only current taxpayers but also by future 
generations, our children and grandchildren, when will you pay 
the money back? When will AIG pay the money back, sir?
    Mr. Liddy. As I mentioned, we have a plan to do that in 2 
to 3 years. We will do it just as quickly as we can. I know it 
is frustrating to hear that long a timeframe. You can't sell 
assets if there is no one prepared to buy those assets. We need 
to sell assets or transfer them to the Federal Reserve in 
payment of that debt.
    We think we have a good plan to do exactly that. We will 
act on pieces of it within the next couple of quarters.
    Mr. Moore of Kansas. Did any of the executives who left AIG 
who received retention bonuses return the money? Were there in 
fact people who left after receiving retention bonuses?
    Mr. Liddy. Yes. There were people at AIG Financial Products 
who had a book of business to wind down, and our commitment to 
them was if they wound it down within certain parameters, they 
would get a retention bonus. In some cases they did that before 
the end of the year. They left. We paid them their retention 
bonus.
    Mr. Moore of Kansas. A retention bonus is to retain the 
person in your employ. Isn't that correct?
    Mr. Liddy. It was offered to them at the beginning of 2008 
for them to stay and be retained and wind down the book of 
business so we could get out of that as quickly and 
expeditiously as possible. So they did stay for the period of 
time we needed them.
    Mr. Moore of Kansas. And how much did you pay to those 
individuals?
    Mr. Liddy. I don't know. I will--
    Mr. Moore of Kansas. Were there different bonuses to each 
different person?
    Mr. Liddy. Well, yes. It would have depended upon what 
their activity was and what their compensation was.
    Mr. Moore of Kansas. But we are talking about several 
million dollars in some cases?
    Mr. Liddy. Yes. It would have probably been in the range of 
a million dollars. I just don't have the numbers, sir.
    Mr. Moore of Kansas. So some of these people received 
retention bonuses of a million dollars or more for staying on 
for an additional, say, less than 1 year. Is that correct, sir?
    Mr. Liddy. Well, they received a retention bonus for doing 
what we asked them to do: wind down your book of business in a 
way that we agree with it and doesn't cost us any money. If you 
can do that in 6 months, that is okay. If it takes you 18 
months, we understand that. But wind that book of business 
down. That is how we got the $2.7 trillion derivatives book 
down to $1.6 trillion.
    Mr. Moore of Kansas. But do you understand how frustrating 
that must be to people who are watching this on television, 
understanding some of these people received in excess of a 
million dollars as a retention bonus and now they are gone? Can 
you understand that, sir?
    Mr. Liddy. I do understand it. And the only thing I can say 
is we got the benefit of the bargain. We got from them what we 
asked them to do. That was, help us reduce the risk in this 
book of business.
    Mr. Moore of Kansas. Can you understand that some American 
people might think you paid way too much to get that bargain?
    Mr. Liddy. I can understand that, yes.
    Mr. Moore of Kansas. Thank you, sir.
    The Chair next recognizes Mr. Cummings from Maryland.
    Mr. Cummings. Thank you very much. Thank you very much, Mr. 
Chairman. I want to thank the committee.
    Mr. Liddy, it is certainly good to see you again, and I 
want to just ask you a few question. The media has been focused 
on the $165 million installment of the $450 million retention 
program for AIG's Financial Products division. However, for 
months, you and I have been going back and forth overall about 
the $1 billion retention program that covers thousands of 
employees throughout AIG.
    We know that the Financial Products retention contracts 
were drawn up before you became CEO of a company in September 
2008, which you passionately stressed to Mr. Lynch a little bit 
earlier today. However, in your letter to me on December 5th, 
you wrote these words: ``On September 18, 2008, AIG's 
compensation committee of the board of directors approved 
retention payments for 168 employees.''
    Did you approve those?
    Mr. Liddy. Yes.
    Mr. Cummings. All right. Because we keep talking about 
things that happened before you came, and I am trying to make 
some--you know, try to figure out what happened under your 
watch.
    How many retention payments of any kind have you approved 
during your tenure? Of any kind?
    Mr. Liddy. There is a group of about 4,500 people who work 
in our healthy insurance businesses that we are trying to sell. 
These are the leaders and critical players in those businesses 
that we have approved retention bonuses for that can go out 2 
years in length.
    Mr. Cummings. On January 15th at a meeting, when you and I 
met, you told me, ``We have expanded the retention program to 
cover other employees since the first phase, and we voluntarily 
announce that we implemented two additional phases of this 
program, covering an additional 2,100 employees.''
    Would that be included in the number that you just gave me, 
the 4,500?
    Mr. Liddy. Yes. I don't remember the exact number. I think 
it is about 4,500 to 4,700.
    Mr. Cummings. And so you approved those additional phases. 
Is that correct?
    Mr. Liddy. Correct.
    Mr. Cummings. You also noted that business units have 
adopted their own retention plans.
    Did you approve those also?
    Mr. Liddy. I would not have. They would have been approved 
by the business units.
    Mr. Cummings. So there are other retention plans within 
AIG, the big AIG umbrella, under the umbrella?
    Mr. Liddy. Those are more--I believe they are more 
severance plans. What happens if somebody buys you and you lose 
your job?
    Mr. Cummings. How much in non-financial product retention 
payments have you paid in 2008, and how much will be paid in 
2009?
    Mr. Liddy. I don't have the numbers at my fingertips. We 
will be delighted to get them to you.
    Mr. Cummings. All right. Have you reduced these payments 
below the levels approved on September 18th?
    Mr. Liddy. We have either--in some cases we have reduced 
them, and in some cases we have stretched them out to a longer 
period of time.
    Mr. Cummings. Now, you sent a letter to Secretary Geithner. 
It was a very interesting letter you sent over the weekend--
well, it is dated March 14th. And it says something that I want 
you to help me out on because I don't understand it, and I 
think the committee has just sort of passed it by.
    It said, ``AIG''--and this is your letter--it says, ``AIG 
hereby commits to use best efforts to reduce expected 2009 
retention payments by at least 30 percent.'' Now, what I am 
trying to figure out is--so we already have some people in 
place. We have been talking about 2008 performance. Now, we 
have some folks in place to get bonuses for 2009 performance. 
Is that correct?
    Mr. Liddy. Yes. That letter specifically relates to AIG FP, 
and it is the second part of the retention program which, if 
they are there and they accomplish their goals, we would pay in 
2010.
    And I don't mean to interrupt you, but I think that whole 
issue is going to be moot because what we will find is those 
individuals will in fact return much if not all of the 
retention bonus that we paid them, and it will be accompanied 
by their letters of resignation.
    Mr. Cummings. Well, I am hoping--another member said 
something a little bit earlier. I am hoping--President Obama 
has made it clear that he is trying to reverse our economy here 
and get it straightened out. And these people are very central 
people, one making as much as $6.5 million in bonuses.
    I would hope that they would stick around, take a regular 
paycheck like most people do, and stick around and help us get 
through this. They have benefitted from the greatness of this 
country, and I would hope that they would do that, and I hope 
you will appeal to them to do that.
    Finally, you wrote in your letter to Secretary Geithner 
that the Secretary had asked AIG to ``rethink our 2008 
corporate bonus proposals.''
    How much in bonuses--we keep saying bonuses and retention 
payments. How much in bonuses, not retention payments, have you 
paid to AIG employees in 2008, and what was the range of the 
bonuses paid?
    Mr. Liddy. I will provide you the information. I think it 
was--I think it might have been in the range of $9 million.
    Mr. Cummings. Thank you very much.
    Mr. Moore of Kansas. Thank you, Mr. Cummings.
    The Chair next recognizes Ms. Kaptur of Ohio for up to 5 
minutes.
    Ms. Kaptur. Thank you, Mr. Chairman.
    I agree, Mr. Liddy, with the statement in your formal 
testimony: ``Insurance is the oxygen of the free enterprise 
system, and without it the fundamentals of capitalism are 
undermined.'' I think that is a very important sentence.
    I think that the spirit of those who work for AIG, whatever 
division it is, isn't being well communicated to the American 
people. I would guess those who received $165 million in extra 
compensation, whatever you want to call it, are probably among 
themselves worth billions of dollars.
    And for them--you know, for you to have to come here today 
and not even say, you know, by such-and-such a date--I thought 
you were going to come and present in your testimony, well, it 
is the middle of March, and this is what is going to happen by 
the beginning of April. This is what they have decided to do on 
behalf of the Republic. I am disappointed that wasn't 
forthcoming in your testimony.
    I have several questions, and I thank you for your 
endurance today. The Wall Street Journal discloses today that 
AIG has put funds in escrow for Deutsche Bank, whose hedge fund 
clients bet against the housing market.
    Could you please disclose which hedge funds could receive 
funds, money, as a result of payments to counterparties, and 
how much each fund could get?
    Mr. Liddy. I can't. I have no access to the information. We 
would have to ask the representatives of Deutsche Bank. What we 
had was a relationship, a credit default swap, between us and 
Deutsche Bank. We honored that. They would have had other 
counterparties beyond that that only they are privy to.
    Ms. Kaptur. Could you provide this information to the 
record if you don't know it here today? I am not only asking 
about Deutsche Bank. I am asking about other hedge funds.
    Mr. Liddy. We don't have it. They are not our customers. 
Our customers are the companies or the names that were listed 
on the release of the counterparty names. What you are asking 
is what did they do? What were the relationships that they had? 
I don't have any access to that information.
    Ms. Kaptur. All right. Then let me ask this next question. 
In terms of the face value of the Financial Products 
derivatives that you stated in your testimony are now worth 
about $1.6 trillion--I read that correctly. Correct? Okay. What 
is your best estimate of the trading value of those securities 
underlying your Financial Products derivatives, as opposed to 
just the face value? What is the trading value?
    Mr. Liddy. I just don't know. I will get the information 
for you. We will provide it for you. I just don't know as I sit 
here today.
    Ms. Kaptur. All right. You don't know that. What is the 
possible remaining taxpayer exposure?
    Mr. Liddy. Well, as I said, winding down that book of 
business in a very effective and costly way is important to us. 
We think it will probably cost us several billion dollars to do 
that. That is baked into the amount of money that we think we 
would have to borrow from the Federal Reserve and that we 
anticipate repaying to the taxpayer.
    Ms. Kaptur. If the contracts are successfully terminated, 
is it possible that the counterparties would have to return any 
of the tens of billions of collateral to our taxpayers?
    Mr. Liddy. No. They are totally different buckets, if you 
will. The first one are credit default swaps, and that was a 
unique set of customers; the second one, our derivatives that 
are with a--could be with a whole different set of customers 
for a whole different set of arrangements.
    Ms. Kaptur. So you are saying from that bucket there might 
not be any return to the taxpayers?
    Mr. Liddy. From the credit default swap?
    Ms. Kaptur. From the derivatives?
    Mr. Liddy. Oh, I am sorry. Yes.
    Ms. Kaptur. From either one.
    Mr. Liddy. Yes.
    Ms. Kaptur. But you are telling me from the credit default 
swaps, no.
    Mr. Liddy. Well, on the credit default swaps, the way that 
was solved was we put it into a financing vehicle with the 
Federal Reserve. The Federal Reserve--we put equity in. The 
Federal Reserve put debt in. They own those at a number of 50 
cents on the dollar.
    If they are worth more than 50 cents on the dollar, the 
American taxpayer will do very, very well on it. That was 
Maiden Lane III. My personal assessment is that they will be 
worth more than what the Federal Reserve paid for them.
    Ms. Kaptur. All right. And what about the derivatives?
    Mr. Liddy. It is not an analogous situation because the 
derivatives are live documents. The credit default swaps are, 
for the most part, already behind us. The derivatives are 
traded on a daily basis, on an active basis. So I simply can't 
answer the question.
    Ms. Kaptur. Okay. What percent of your company is owned by 
the U.S. Government today?
    Mr. Liddy. 79.9.
    Ms. Kaptur. And how does our government get back its money 
out of AIG?
    Mr. Liddy. We have an aggressive plan to do that. We are 
going to sell some assets. That will help us in repayment. We 
are going to give some assets to the Federal Reserve. These are 
very well-performing, good value life insurance companies. We 
will give them to the Federal Reserve in exchange for lowering 
some of the debt.
    We will take some of the insurance policies that we have 
and do what is called a monetization, give that cash flow to 
the Federal Reserve or the Treasury. We will take our insurance 
business, our property casualty business, and sell a minority 
interest in it, and perhaps eventually increase that minority 
interest. We will take the proceeds from that and give it back 
to the Federal Government.
    Ms. Kaptur. How long will it take and how much money will 
the taxpayers lose?
    Mr. Liddy. I would hope the taxpayers won't lose any money. 
It will take us a good 2 to 3 years, but we will make material 
progress quickly.
    Ms. Kaptur. Thank you.
    Mr. Moore of Kansas. Thank you. The Chair next recognizes 
Mr. Crowley from New York.
    Mr. Crowley. I thank the chairman. Thank you for allowing 
me to sit in on the committee, my old committee, Financial 
Services. It is good to be back. Unfortunately, not under these 
circumstances, but it is always good to be back. Mr. Liddy, 
welcome to the committee. Let me thank you for being here.
    I do feel, like many of my colleagues, Mr. Liddy, that--I 
feel for you having to be here today to take this. I know you 
came into the scene in September of last year after the 
government's first bailout of AIG.
    And whether it is fair or not, AIG has become the face of 
everything that has been wrong with Wall Street, and it has 
become the face of American greed. I am a New Yorker as well. I 
come from Woodside, Queens, not Wall Street.
    So I want to make clear that while it is clear that there 
are some bad actors, we must also remember that there are a lot 
of good people working in the financial services sector, on the 
street, and at the businesses surrounding the street as well. 
Take, for example, people who helped the orderly transfer of 
Bear Stearns or Wachovia to prevent the additional chaos in our 
markets.
    But no American, not myself and definitely not any of my 
constituents, can understand millions of dollars in bonuses to 
people at AIG Financial Products division, the very division 
that helped sink the company and caused the government to prop 
the company up with $170 billion in taxpayer funds. In fact, my 
mother always thought that a bonus was given to someone who did 
something good and above and beyond the call of duty, not 
actually help bring down a company.
    During tough economic times, we must all make sacrifices. 
In doing so, we share each other's pain and we earn each 
other's trust. I feel that AIG's actions demonstrate a complete 
lack of understanding for the need for shared sacrifice, and in 
turn, it has triggered a complete lack of confidence in my 
constituents, in our economy, and it has shaken their belief in 
the system of capitalism.
    As such, I want to touch on a few other compensation issues 
outside of bonuses at AIG FP that have preoccupied this hearing 
today. There are reports that AIG is considering awarding 
additional bonuses in the coming days, including an additional 
$121.5 million incentive bonuses for 2008 that AIG will start 
making this month to approximately 6,400 of its roughly 116,000 
employees; and that AIG is also making over $600 million in 
retention payments to an additional 4,000 employees.
    Could you comment on those bonuses?
    Mr. Liddy. The first number you have I believe is an 
accurate number. It's about $120 million. It is to all of the 
good businesses that performed in accordance with business 
objectives that we established in the beginning of 2008. It is 
a very traditional and very classic annual performance, 
variable performance, award.
    Mr. Crowley. I think it is important to state that for the 
record, as we anticipate this coming down the road, that there 
is some understanding that this is not necessarily--this is not 
the FP? This is not AIG FP?
    Mr. Liddy. No. No. No. It is entirely separate. Now, you 
asked a question similar to what Mr. Cummings had asked, and 
that is, we are going to sell many of these--or transfer them 
to the Federal Reserve--
    Mr. Crowley. Right.
    Mr. Liddy. --many of these good assets that we have. We 
want the good players, the really critical players in those 
businesses, to please stay with us and not go someplace else. 
So there are retention payments for those folks, much simpler, 
much smaller in value than what we have been talking about with 
AIG FP, that would be paid over the next 12 to 18 to 24 months.
    Mr. Crowley. Thank you. Let me just go back a moment to 
something that Mr. Cummings also mentioned, and that was the 
retirement--the retention programs that were entered into.
    Prior to coming there, when was the last one entered into, 
the agreement, retention agreement?
    Mr. Liddy. Prior to my coming there?
    Mr. Crowley. Yes.
    Mr. Liddy. March 2008.
    Mr. Crowley. Do you think the people who put those 
agreements together had any indication back then that their 
company was in deep trouble?
    Mr. Liddy. I really don't think so, Mr. Crowley. Those 
agreements would have been started, the discussion and 
negotiation process would have been started--it takes a while 
to get these done--probably in mid-2007. So I don't think it 
was done in anticipation of anything. That is speculation on my 
part.
    Mr. Crowley. Can we find--is it possible for this committee 
or the House to know who those individuals were who entered--
who made those agreements?
    Mr. Liddy. Who authored them? Who signed--
    Mr. Crowley. Who authored those agreements?
    Mr. Liddy. I am sure that information exists. We will try 
to get it for you.
    Mr. Crowley. Were any of those individuals beneficiaries of 
those agreements?
    Mr. Liddy. I just don't know. I'll--
    Mr. Crowley. Was there a conflict of interest? In other 
words, would they have benefitted by the agreement?
    Mr. Liddy. Well, no. For AIG Financial Products, it would 
have been negotiated by an individual to whom that business 
works. He would not have been covered by those retention 
agreements.
    Mr. Crowley. Well, if we could--if it is possible to get to 
us that information, I would appreciate that as well.
    As many of the people who work under you within AIG know, I 
have been very interested in this issue for some time. And 
unfortunately, it has gotten to a point I had hoped we could 
have avoided, but unfortunately, that didn't happen, because I 
think--not because of the people who work for you, but others 
within your company who put the company and their country last 
and themselves first. And I yield back.
    Mr. Moore of Kansas. Thank you, Mr. Crowley, and thank you, 
Mr. Liddy.
    Are there any additional questions? Do you want to submit 
those in writing or take a couple of minutes here? We do want 
to wind up this hearing, sir.
    Mr. Grayson. For a couple of minutes, thank you.
    Mr. Moore of Kansas. All right. Mr. Grayson is recognized 
for a couple of minutes.
    Mr. Grayson. Thank you. Mr. Liddy, you said before that 
there were 20 or 25 people who were involved in the credit 
default business.
    What are their names, please?
    Mr. Liddy. I don't have their names at my disposal, sir.
    Mr. Grayson. Well, I am sure you remember a few of the 
names. I mean, they did cause your company to crash.
    Mr. Liddy. You know, I have been at the company, as you 
know, for 6 months. I don't know all the people who were in AIG 
FP, and many of them are gone.
    Mr. Grayson. Well, there or gone, it doesn't really matter. 
I want to know who they are. Names, please.
    Mr. Liddy. Yes. If you're asking for the names of the 
people who got the bonuses at FP, is that--
    Mr. Grayson. No. I am asking for the names of the people 
who ran the credit default business, the 20 to 25 that you 
referred to earlier who caused your company to lose $100 
billion.
    Mr. Liddy. If it is possible to provide you the names, we 
want to. If we are--we will cooperate with you.
    Mr. Grayson. Well, that is good. But I want to know the 
names you know right now.
    Mr. Liddy. I don't know them, sir.
    Mr. Grayson. Not a single one? You are talking about a 
group, a small group of people who caused your company to lose 
$100 billion, and as you sit here today, you can't give me one 
single name?
    Mr. Liddy. The single name I would give you is Joseph 
Cassano, who ran--
    Mr. Grayson. That is a good start. You already gave that 
name. Give me another name.
    Mr. Liddy. I just don't know them. I do not know those 
names. I don't have them all at my command.
    Mr. Grayson. Well, how can you propose to solve the 
problems of the company that you're now running if you don't 
know the names of the people who caused that problem?
    Mr. Liddy. Because there are great people running AIG FP 
now who do know each and every one of those individuals.
    Mr. Grayson. That is a great thing to say. But the fact 
remains that I would expect you to at least know more than one 
name. How about two names?
    Mr. Liddy. Yes, sir. I am just not going to do that, sir, 
because that could be a list of people that--individuals who 
want to do damage to them could do that. It is just not--
    Mr. Grayson. Well, listen. These same people could now be 
working, right now, today, at Citibank. Is it more important to 
protect them, the ones who caused the $100 billion loss, or 
protect us? Which is more important to you right now?
    Mr. Liddy. The important thing is to protect both--I will--
if that is the information you want, we will do everything we 
can to cooperate with you. I am just not going to sit here and 
give it to you until I understand what the implications are.
    Mr. Grayson. Can I count on you to give us that list? Yes 
or no?
    Mr. Liddy. I will--I do not know. I will consult with our 
general counsel and decide what the appropriate course of 
action is.
    Mr. Grayson. Not the answer I was hoping for, but my time 
is up.
    Mr. Moore of Kansas. Thank you, sir.
    At this time, the Chair notes that some members may have 
additional questions for this witness which they may to submit 
in writing. Without objection, the hearing record will remain 
open for 30 days for members to submit written questions to 
this witness and to place his responses in the record.
    Before we adjourn, the following will be made part of the 
record of this hearing: a letter Chairman Kanjorski received 
from Secretary Geithner last night. Without objection, it is so 
ordered.
    The panel is dismissed, and this hearing is adjourned. 
Thank you, Mr. Liddy.
    [Whereupon, at 6:45 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 18, 2009


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