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 

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ON THE GLOBAL ECONOMY: BEFORE, DURING, 

AMERICAN INTERNATIONAL GROUP’S IMPACT 

AND AFTER FEDERAL INTERVENTION 

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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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

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 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

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 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

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 

Page

VI 

Liddy, Edward M.—Continued 

Written responses to questions posed during the hearing (questions are 

provided directly before responses) by—Continued 

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 

(1) 

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] 

2 

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 

3 

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 coopera- tively 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 

4 

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 

5 

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 beginVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
6 

ning 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, 

7 

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 

8 

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 

9 

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 11⁄2

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. 

10 

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. 

11 

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. 

12 

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 

13 

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 

14 

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. 

15 

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. 

16 

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. 

17 

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. 

18 

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 

19 

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 

20 

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. 

21 

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. 

22 

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 

23 

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 

24 

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. 

25 

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 

26 

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— 

27 

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 

28 

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 

29 

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 

30 

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. 

31 

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. 

32 

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. 

33 

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, 71⁄2 minutes left. Are you a fast talker, Mr. Price? 

Mr. PRICE. I think 5 minutes. 

Chairman KANJORSKI. In 21⁄2, you can do 5 minutes? 

We will recognize Mr. Price for his 5 minutes reduced to 21⁄2 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 hapVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
34 

pened, 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] 

35 

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 

36 

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. 

37 

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. 

38 

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 approVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
39 

priate 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 

40 

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. 

41 

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 closeddoor 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 

42 

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. 

43 

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 

44 

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 

45 

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. 

46 

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— 

47 

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. 

48 

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, 

49 

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 

50 

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. 

51 

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 

52 

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. 

53 

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 

54 

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. 

55 

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, 

56 

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? 

57 

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. 

58 

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? 

59 

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 ringfence 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. 

60 

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. 

61 

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 

62 

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. 

63 

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 onesize-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. 

64 

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 bil- lion 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. 

65 

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 

66 

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 

67 

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 

68 

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. 

69 

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 ex- perts 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. 

70 

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-anhour 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 receiver- ship, 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. 

71 

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 

72 

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. 

73 

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? 

74 

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 

75 

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. 

76 

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? 

77 

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 

78 

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. 

79 

So they did the work, they reduced the risk from that $2.7 tril- lion 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 bullVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00087 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
80 

ish 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 

81 

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 

82 

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 

83 

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 

84 

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. 

85 

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. 

86 

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? 

87 

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; 

88 

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. 

89 

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? 

90 

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 

91 

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. 

92 

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 ex- ceeded $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. 

93 

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? 

94 

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 

95 

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 perVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
96 

cent 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 hardearned 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 

97 

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 

98 

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 

99 

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. 

100 

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? 

101 

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. 

102 

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 predeVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
103 

cessors, 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? 

104 

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. 

105 

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. 

106 

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 

107 

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 

108 

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 

109 

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 

110 

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. 

111 

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 quickVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00119 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
112 

ly 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. 

113 

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. 

114 

I, like my colleagues, am just absolutely astounded by the situa- tion 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 

115 

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. 

116 

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 

117 

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 

118 

$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 

119 

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. 

120 

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? 

121 

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 compensaVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00129 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
122 

tion, 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. 

123 

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 wellperforming, 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 

124 

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 

125 

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? 

126 

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 writVerDate Nov 24 2008 11:49 Jul 14, 2009 Jkt 048868 PO 00000 Frm 00134 Fmt 6633 Sfmt 6633 K:\DOCS\48868.TXT TERRIE
127 

ing. 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.] 

(129) 

A P P E N D I X 

March 18, 2009 

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