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53–019 PDF 2009

AIG: WHERE IS THE TAXPAYERS’ MONEY GOING?

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

MAY 13, 2009

Serial No. 111–19

Printed for the use of the Committee on Oversight and Government Reform

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Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

——— ———

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

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C O N T E N T S

Page

Hearing held on May 13, 2009 ............................................................................... 1

Statement of:

Feldberg, Chester B., trustee, AIG Credit Facility Trust; Jill M.

Considine, trustee, AIG Credit Facility Trust; Douglas L. Foshee, trustee, AIG Credit Facility Trust; and Professor J.W. Verret, George Mason

University School of Law ............................................................................. 72

Considine, Jill M. ...................................................................................... 117

Feldberg, Chester B. ................................................................................. 72

Foshee, Douglas L. .................................................................................... 118

Verret, Professor J.W. ............................................................................... 119

Liddy, Edward M., chairman and CEO of American International Group,

Inc. ................................................................................................................. 12

Letters, statements, etc., submitted for the record by:

Connolly, Hon. Gerald E., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 141

Feldberg, Chester B., trustee, AIG Credit Facility Trust; Jill M.

Considine, trustee, AIG Credit Facility Trust; and Douglas L. Foshee,

trustee, AIG Credit Facility Trust, prepared statement of ....................... 75

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 10

Liddy, Edward M., chairman and CEO of American International Group,

Inc., prepared statement of .......................................................................... 15

Towns, Chairman Edolphus E., a Representative in Congress from the

State of New York:

Information concerning the Federal Reserve Bank ................................ 50

Prepared statement of ............................................................................... 4

Verret, Professor J.W., George Mason University School of Law, prepared

statement of ................................................................................................... 122

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AIG: WHERE IS THE TAXPAYERS’ MONEY

GOING?

WEDNESDAY, MAY 13, 2009

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10:05 a.m., in room

2154, Rayburn House Office Building, Hon. Edolphus Towns (chairman of the committee) presiding.

Present: Representatives Towns, Kanjorski, Maloney, Cummings,

Kucinich, Tierney, Clay, Watson, Lynch, Connolly, Kaptur, Kennedy, Van Hollen, Cuellar, Hodes, Welch, Foster, Speier, Issa, Burton, Mica, Souder, Westmoreland, McHenry, Bilbray, Jordan,

Flake, and Fortenberry.

Staff present: Beverly Britton, counsel; Kwane Drabo, investigator; Brian Eiler, investigative counsel; Linda Good, deputy chief

clerk; Jean Gosa, clerk; Adam Hodge, deputy press secretary; Carla

Hultberg, chief clerk; Marc Johnson and Ophelia Rivas, assistant

clerks; Phyllis Love and Christopher Sanders, professional staff

members; Mike McCarthy, deputy staff director; Jesse McCollum,

senior advisor; Amy Miller, special assistant; Leah Perry, senior

counsel; Jenny Rosenberg, director of communications; Joanne

Royce, senior investigative counsel; Ron Stroman, staff director;

Lawrence Brady, minority staff director; John Cuaderes, minority

deputy staff director; Jennifer Safavian, minority chief counsel for

oversight and investigations; Frederick Hill, minority director of

communications; Dan Blankenburg, minority director of outreach

and senior advisor; Adam Fromm, minority chief clerk and Member

liaison; Kurt Bardella, minority press secretary; Christopher Hixon,

minority senior counsel; Ashley Callen, minority counsel; and Brien

Beattie and Molly Boyl, minority professional staff members.

Chairman TOWNS. The committee will come to order.

Good morning and thank you for being here today. Eight months ago the American taxpayers came to the rescue of AIG with an $85

billion bail-out.

That was followed by more money in November, more again in

December, and more money still in March. The taxpayers have now

provided more than $180 billion in financial assistance to the AIG.

Yet, much of what has been done with that money has been done

in the dark. In fact, the one thing that stands out most about the

collapse and Federal rescue of AIG is the shroud of secrecy that

has blanketed the entire sequence of events. This secrecy has only

made the situation worse.

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I get the sense when I talk to people back home in Brooklyn that

they simply don’t understand what happened. And, let me point

out they don’t like the idea that their tax dollars are being used

to bail out a big business. They want to believe that this Federal

bailout is necessary, but they wonder whether the money is being

used wisely and they want assurances that ultimately they want

to get their money back. What is the plan to repay the American

people, and does it have a realistic chance of working?

Are the trustees adequately protecting the interest of the American people? In my view, AIG needs to demonstrate that it is headed in the right direction. We need to understand what the longrange plan is for AIG. Are you going to liquidate it or are you going

to restructure it in such a way as to return it to profitability and

repay the taxpayers’ investment?

According to testimony we will hear today, AIG plans to liquidate

much of the company and spinoff its insurance assets. Does liquidating the assets in the midst of a bear market make sense? Will

this plan maximize the returns of the company in today’s economic

client?

We know AIG agreed to sell their auto insurance unit. We hear

they are negotiating the sale of their Tokyo headquarters building,

a unique property adjacent to the Imperial Palace. Will the taxpayers get the best return on their investment by selling a premier

property during the worst commercial real estate market in years?

A few days ago we learned that AIG has put together a plan

called ‘‘Project Destiny.’’ ‘‘Project Destiny’’ is described as a multiyear roadmap for the restructuring of AIG. I requested a copy of

this plan, but AIG says that disclosing the plan would undermine

its efforts to achieve its goal for the benefit of American taxpayers.

AIG says it is consulting on the issue with the New York Feds. In

other words, ‘‘Trust us. Don’t rush us.’’ Everything will be all right,

but everything is not all right.

People in my district and throughout the country are hurting, yet

AIG has spent millions of dollars on high-priced PR firms and big

time lawyers to attack its critics. AIG is paying PR executives as

much as $600 an hour in taxpayer dollars. Clearly, AIG is making

sure its lawyers and PR firms are watching its back, but who is

watching the backs of the American people? The taxpayers.

What should the American people think, when millions of dollars

in bonuses are paid to the very people who caused AIG problems

in the first place? Less than a week ago, the AIG trustees still felt

it necessary to write to Mr. Liddy and urge him to get executive

compensation under control. I am surprised and disappointed to

see that AIG continues to argue for secrecy. And in his testimony,

Mr. Liddy seems to argue that criticism of AIG will somehow hurt

the company.

Again, we are hearing ‘‘trust us,’’ but we are not willing to let

$180 billion go on ‘‘trust us.’’ We will question. We will inquire. We

will verify and we will not hesitate to probe every aspect of AIG’s

management and operations to protect the taxpayers’ investment.

It is our responsibility to ensure that those public moneys are

spent wisely, legally, and in the best interest of the American people. And we will continue to do just that. The question we are raising today should be easy enough to answer, but unfortunately AIG

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has failed to fully respond to straightforward requests for information. This cannot continue. As AIG moves forward it has to know

that Main Street is just as important as Wall Street.

I am looking forward to hearing today from Mr. Liddy and also

the AIG Trustees. On that note, I now yield to the ranking member, Congressman Issa from the State of California.

[The prepared statement of Chairman Edolphus E. Towns follows:]

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Mr. ISSA. Maybe Florida someday, Mr. Chairman. Thank you,

Mr. Chairman, and thank you for facilitating this hearing today

over the administration’s management of $190 billion in bail-out

money.

I think it’s reasonable to say that most Americans, even Bill

Gates, cannot break $190 billion down into a meaningful increment. So, hopefully, accurately, I divided the 300 million or so

Americans into that and found it’s about $633 for every man,

woman and child in this country, plus or minus the latest census.

Mr. Chairman, I voted against these bail-outs; however, I am in

the minority, so I have to accept the policies given to me until the

American people get their chance to vote on a different policy. And

I have an opportunity as the ranking member to demand transparency and accountability on behalf of the American people who

have a right to know how their money is being spent. And, Mr.

Chairman, I want to thank you for being an equal partner in ensuring that we have that opportunity on a bipartisan basis in this

important investigation.

Ensuring transparency and accountability for the more than

$190 billion of taxpayers money injected into AIG is a key component of this committee’s responsibilities. Just last week we learned

AIG paid $454 million in bonuses to its employees in 2008, while

in March we were told it was only $120 million. While I understand that there is confusion and it may be that in fact the blame

is based on different questions asked to different people in the

process of getting the information, this confusion illustrates as

much the serious problem in government trying to manage a company this large and this complex.

The continued lack of transparency in this administration’s bailouts adventures, and I just admit much like the previous administration caused me to say, ‘‘How dare we find out drip by drip by

drip that our government has no ability to say how much money

has been spent or on what? How much longer can the American

people tolerate the lack of transparency?’’

I am pleased that Mr. Liddy is here today and I want to acknowledge that he did not create the problems at AIG, but instead has

taken on the very difficult challenge of unwinding an incredibly

complex company while facing tremendous scrutiny from the public

and from those of us here in Congress. I want to personally say to

Mr. Liddy today we will make every effort to make this about how

we can work together; how we can achieve the transparency the

American people are entitled to; and how we can do no harm to

your efforts to maximize the return to all the stockholders of AIG;

and, particularly, we are going to be asking about 80 percent that

the American people own.

Mr. Chairman, President Obama has promised the American

people an unprecedented level of transparency and accountability,

and I see our role on the committee as one of holding the President

to that promise; and, that includes understanding the role of the

three powerful individuals who now head the AIG trust. As designed by Treasury Secretary Geithner, when he ran the New York

Fed, I believe that this trust is inherently unconstitutional, unaccountable entity that manages the taxpayers’ investments in AIG,

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not for the taxpayers, but in the interest of the Federal Government, specifically the U.S. Treasury.

It is important to remember, Mr. Chairman, that those two

things are not one and the same. The U.S. Treasury is in fact not

the same as the American people who have invested $633 for every

man, woman, and child into this company. I want to acknowledge

also that for the second panel, the trustees, they did not create this

problem, and they will not be held accountable for what was created. However, since they now control 80 percent of the stock of

AIG on behalf of, I believe should be the American people and not

just the best interest of the Treasury, we must question why AIG

trustees are immune from legal liability, so long as they act in the

best interest of the Treasury and are indemnified against any lost

cost or expense of any kind or character whatsoever.

Who can tell, Mr. Chairman, in light of recent public bullying of

Chrysler bondholders who were derided as speculators by President

Obama that these causes insulate the trustees from the normal accountability and transparency we demand of all our representatives. The ‘‘New York Times’’ recently reported that this unprecedented trust structure provides cover for officials, who despite the

government’s large stake in various banks, want to preserve the

notion that neither the Treasury or the Fed owns AIG or controls

any banks.

Mr. Chairman, I would submit that this is inappropriate for regulators and bureaucrats to use this legal sleight of hand to obscure

the influence in running the U.S. financial sector. The American

people have a right to know what is being done with their money

and how these companies are being run.

Mr. Chairman, I look forward to our witnesses. I appreciate your

indulgence, and would ask that additional material be placed in the

record so as to preserve time and yield back.

Chairman TOWNS. Without objection.

[The prepared statement of Hon. Darrell E. Issa follows:]

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Chairman TOWNS. Thank you very much, Congressman Issa.

I now ask unanimous consent to leave the record open to Members who may submit their opening remarks and questions for the

record, and I will leave the record open for that. At this time, I

would like to ask the witnesses to please stand, and swear in all

of our witnesses.

[Witnesses sworn.]

Chairman TOWNS. Let the record reflect that they answered in

the affirmative. You may be seated. I’m sorry. We have the lights

here. When we start out, it’s on green. Then it goes to yellow, and

then it’s red. So when it gets on yellow you can start trying to wrap

up, which will allow all the Members an opportunity to raise questions. And maybe something that you didn’t say you will get a

chance to say it during the question period.

OK. You may begin.

[Mic was off.]

Mr. LIDDY. Let me start over.

Mr. ISSA. You’ll never be misquoted until you turn it on.

STATEMENT OF EDWARD M. LIDDY, CHAIRMAN AND CEO OF

AMERICAN INTERNATIONAL GROUP, INC.

Mr. LIDDY. Mr. Chairman, Ranking Member Issa, members of

the committee, thank you for the invitation to appear before you

today.

I appreciate the opportunity to describe for the committee the

business plan we are executing in order to put AIG’s troubles behind it, to repay the moneys that we owe the American taxpayer,

and to secure an outcome that helps to put the American economy

back on track. We are working hard to determine the destiny of the

component parts of AIG.

Our plan contemplates that AIG’s best businesses will establish

separate identities from the parent holding company. The parent

company will become smaller. The Financial Products unit will

cease to exist. How long the plan will ultimately take will very

much depend on how quickly and how strongly the global economy

recovers, but let me be clear.

Our plan is explicitly designed to avoid having to divest AIG assets at fire sale prices. Just the opposite is true. We intend for taxpayers to realize the fullest possible value from every asset disposition, and we have already made substantial progress in this restructuring. We have reduced but not yet eliminated the systemic

risk that AIG presents to the global financial system. We are selling assets where possible despite adverse conditions in global financial markets.

We are stabilizing AIG’s liquidity so that we do not need support

beyond those amounts already authorized by the government; although, as I said, the economy will be a factor in this. And we are

restructuring some businesses for public offerings. We are restructuring other businesses for later disposition or to be wound down

so that future losses can be mitigated or avoided. Across these four

areas we have in recent weeks achieved a number of important

milestones.

We are transferring two major foreign life insurance companies,

ALICO and AIA, into special purpose vehicles in exchange for a

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substantial reduction in AIG’s debt to the Federal Reserve. We expect to complete the contractual arrangements for these transfers

in the near future. We are also transferring the global property and

casualty insurance franchise, known as AIU holdings, into an SPV,

a special purpose vehicle. This will secure the value of that very

substantial business in preparation for the potential sale of a minority stake, which ultimately may include a public offering of

shares, again depending upon market conditions. And we continue

to make significant progress in winding down AIG Financial Products. We have reduced the FP risk positions from 44,000 to 27,000

and we have reduced the notional exposure from a peak of approximately $2.7 trillion to just under $1.5 trillion today.

We continue to weigh every action with several criteria in mind.

Will it reduce systemic risk? Is it the best use of Federal assistance? Will it enhance our ability to pay back the government? Does

it keep our insurance businesses strong and well-capitalized? And

does it protect our policyholders?

We are working hard to improve governance at the company.

AIG is an incredibly complex entity with over 4,000 legal entities,

cross-ownership and a myriad of special purpose structures. Our

restructuring plan must make AIG less complicated, less risky, and

more transparent. The infusion of government capital to AIG

brought with it a substantial new set of relationships with the

American taxpayer as AIG’s largest single shareholder with the

taxpayers’ representatives here in Congress, with the Federal Reserve and U.S. Treasury; and, more recently, with the Trustees

also appearing today. These relationships are new and in many

ways unprecedented.

We work closely with the Federal Reserve Bank of New York and

the U.S. Treasury; representatives of the Fed and Treasury and

their advisors are engaged with various AIG offices every day. We

view them as our partners. We also consult closely with the Trustees, and we appreciate the time they have devoted to understanding our restructuring plan and other critical issues. Their mature

business judgment is a major asset.

I have led AIG now for 8 months, almost 8 months, and I want

to assure you that the people at AIG today are working as hard as

we can to serve our policyholders, our customers, and taxpayers.

We need your help as well. It’s critical to remember that we are

partners. When we at AIG make mistakes, we expect to be criticized, but rampant, unwarranted criticism of AIG serves only to diminish the value of our businesses around the world, the businesses we are attempting to sell to repay the American taxpayer.

We continue to welcome a frank and open dialog with Congress

so that you can be in a position to support our efforts. This support

is essential and will benefit AIG stakeholders, the American taxpayer most of all. We cannot control the market conditions that

will partly determine the timing of AIG’s restructuring, but we are

confident that our approach is right and that if we do this together

we can demonstrate to the world that responsible government and

capitalism still strive in the United States.

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Mr. Chairman, thank you again for the opportunity to appear before you today; and, I am happy to answer questions that you or

the committee might have.

[The prepared statement of Mr. Liddy follows:]

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Chairman TOWNS. Thank you very much for your testimony. You know, AIG has received over $180 million in financial assistance. Can you provide this committee with assurances that AIG

will not require any additional Federal money?

Mr. LIDDY. Congressman, the assurance I can give you is we will

do everything we can to not require additional Federal money. But

the answer to that question, as I said in my prepared remarks, is

so dependent upon what happens to the world economic conditions;

and, perhaps more particularly, the world financial markets; we

think the money that’s been dedicated to us thus far—that’s $40

billion of TARP money and approximately $43 billion of Federal

Reserve borrowings, when coupled with another $30 billion of

TARP, just under $30 billion of TARP that is available to us and

the balance of the Federal Reserve borrowing—we think in today’s

marketplace that is sufficient and we will not need additional

money. But that answer is very dependent upon what happens to

the overall economic conditions and financial marketplace around

the globe.

Chairman TOWNS. Well, can you assure us that the taxpayers

will get their money back?

Mr. LIDDY. Again, I’ll assure you we’re doing everything we can.

We have what we think is a terrific plan, a viable plan that’s not

as dependent on the capital markets as other plans might have

been. But asset values have to stay strong. There has to be a capital market that enables us to take businesses public. I think that

will happen, but I can’t give you a guarantee on that. I can’t control what happens in the worldwide financial marketplace.

Chairman TOWNS. Does ‘‘Project Destiny’’ provide that the taxpayers will recover 100 percent of their money?

Mr. LIDDY. It does. Project Destiny, as you indicated in your remarks, basically provides a strategy for each business that comprises AIG, and if the marketplace holds the way it is right now,

we think that the American taxpayer will be fully repaid. Again,

that’s very conditioned upon, the assumption that the world economy and the world financial markets stay where they are or improve as opposed to deteriorating.

Chairman TOWNS. Right. Last week I wrote to you requesting a

copy of your plan for the future of AIG called ‘‘Project Destiny.’’

Your outside lawyers sent me a letter on Monday saying it was too

sensitive to give to the committee and you were discussing it with

the New York Feds. Are you trying to hide something? I mean, why

can’t we get it?

Mr. LIDDY. No. I’m prepared to share with you the broad brush

strokes of that plan for as long as you’d like. When we get into the

operating details, that is commercially sensitive material. There’s

a lot of people with whom we compete in the United States and

around the globe. And to the extent they have access to that information it would impair our ability to operate those assets and sell

those assets for the benefit of the taxpayer.

Chairman TOWNS. Let me ask one other question. Who’s in

charge of AIG, you or the New York Fed?

Mr. LIDDY. AIG is a shareholder-owned company and we operate

according to that, because the largest single shareholder we have

is the American public through an 80 percent ownership. The FedVerDate 11-MAY-2000 15:00 Feb 01, 2010 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 U:\DOCS\53019.TXT KATIE PsN: KATIE
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eral Reserve and the U.S. Treasury are our partners. We don’t do

anything without reviewing it with them, making certain that they

are in concurrence with it. So it is very much a partnership in

terms of the way we think about making decisions.

Chairman TOWNS. Right. So for the record, Mr. Liddy, I want

your commitment that you will provide us with a copy of ‘‘Project

Destiny’’ by the close of the business day.

Mr. LIDDY. I’ll talk to my lawyers about it, sir. I want to provide

you everything that you need to understand ‘‘Project Destiny,’’ but

we are told and the Federal Reserve has asked us to be very careful with the amount of detail we describe. Because that information, as I said, could be very commercially sensitive in the hands

of our competitors and it could destroy our ability to pay back the

American taxpayer.

So if you will let me please consult with our attorneys about

what we can do with that, we will work with you and your staff

to provide you what is feasible as quickly as we can.

Chairman TOWNS. Yeah, that kind of goes to a comment that was

made by the ranking member. You know, we were talking about

transparency. I mean, in some instances some of this we just can’t

quite understand why we can’t have it. And I want you to know

that’s a big issue as we walk the street. You know, people are saying that they’re doing things in secrecy. They’re talking about the

bonuses that people are getting. And I think that’s something that

you have to be concerned about in terms of the image of AIG as

well.

Mr. LIDDY. I’m very sensitive to it, sir, and that’s why we share

with the Federal Reserve and the U.S. Treasury everything that

we’re doing. There are no secrets. Everything that we are doing we

share with them. I’m just uncomfortable that if all of the operating

details of Project Destiny were to be made public, that it would put

us at a severe disadvantage in terms of trying to realize value for

the benefit of the American taxpayer.

Chairman TOWNS. Do you honestly believe that you have a right

to prevent Congress from reviewing how the taxpayers’ money is

being spent?

Mr. LIDDY. No. As I said, I’m delighted. I will share as much of

the overall broad brushstrokes as I possibly can and I think that

will satisfy you. It’s the operating details of that plan that I am

more concerned about.

Chairman TOWNS. Thank you. My time is expired.

I yield to the ranking member from California.

Mr. ISSA. Thank you, Mr. Chairman, and I would let you go on

as long as you wanted to. You were doing extremely well.

Mr. Liddy, I’m going to pick up where the chairman left off, because I think he’s on the right track. Did you share this project in

its entirety with individuals working for the New York Fed or

Treasury?

Mr. LIDDY. Yes, we did.

Mr. ISSA. And was that in camera? And, if so, how did you make

that determination that what you shared with them was not going

to be shared with your competitors?

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Mr. LIDDY. Well, the Federal Reserve is present at every one of

our strategic discussions at all of our board meetings and all of our

committee meetings.

Mr. ISSA. No. I appreciate what you’re saying, but let me move

to the point. The point is they’re not stockholders. They’re sitting

as members of the board, members of your executive committee.

They’re operating your company in the sense that they’re insiders.

I sit on the board of a public company even today. I’m very familiar

with the fact that what you’re telling us you can’t give us; and, you

did tell us you couldn’t give it to us, because you said you’d give

us the broad brush, the overview.

Basically, you said I won’t share with you what I’m sharing with

the Treasury. I’m going to ask you in a different way. I know you’re

going to talk to your lawyers, and Mr. Boggs back there is about

the best in town. So maybe you just reach over your shoulder when

you get a chance.

Will you, given the same protections from disclosure to your competitors, make available to Congress the information? I understand

the information is insider information, and people who have access

to it need to understand they can’t trade in the stock. They can’t

do other investments. Given those assurances, will you make that

available to designated people from Congress?

Mr. LIDDY. Congressman, I will talk to my lawyer.

Mr. ISSA. Tommy’s shaking his head no, so——

Mr. LIDDY. At some point in time, so he’ll tell me what we can

and cannot do and what we should and should not do.

Mr. ISSA. Mr. Chairman, can we suspend for a moment to give

them a chance to talk to counsel?

Chairman TOWNS. I’d be delighted to do so.

Mr. ISSA. Thank you.

[Brief conference held.]

Chairman TOWNS. Yes, you may continue.

Mr. LIDDY. Congressman, there is commercially sensitive information in there. My attorney advises me will work with you to provide everything that we possibly can. The material that goes to the

Fed or Treasury goes pursuant to a confidentiality agreement; and,

what we are concerned about, if it goes to Congress, does it give

free access to our competitors. If we can find a solution to that,

we’ll provide it to you.

Mr. ISSA. And I appreciate that, so I’ll rephrase the question for

counsel.

Assuming that we provide for in camera for lack of a better term

review by individuals who have signed onto the confidentiality

agreement a limited amount, not Congress as a whole, are you prepared to turn over to this committee’s designated people for their

evaluation, and we would presume. We would probably have

knowledgeable people outside this.

Mr. LIDDY. Yes.

Mr. ISSA. The answer is yes?

Mr. LIDDY. Yes, again, exactly the way you worded it, as long as

we can get assurances that it doesn’t go beyond that group.

Mr. ISSA. OK, well, the chairman and I, I’m sure, will work together to find a way to make that happen because it is important

that this branch of government have the same transparency as the

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other branch of government currently has on your governmentowned entity.

Let me just go through one or two more quick things. If I read

the arithmetic roughly right, 80 percent of your company was

bought for $40 billion by converting preferred to common. Is that

roughly right?

Mr. LIDDY. Yes, except another $30 billion or just under $30 billion is available if we need it. So you need to decide whether you

want to include that in the calculation or not.

Mr. ISSA. But that would further dilute the stock?

Mr. LIDDY. Well, it would keep the ownership at 80 percent, so

you don’t go above the 799.

Mr. ISSA. OK, so getting mark to market, if we will, what is the

current value of your stock as an enterprise, your market cap?

Mr. LIDDY. It would be approximately $5 to $6 billion.

Mr. ISSA. So we spent $40 billion, agreed to spend $70 billion to buy $5 billion?

Mr. LIDDY. Well, it’s $5 billion plus what it can be worth at the

end, if the ‘‘Project Destiny’’ execution goes well and the marketplace cooperates.

Mr. ISSA. But you are a publicly-traded company, so you are

worth what you are worth on a given day. Your classic mark to

market justification: you’re worth $5 billion today; if I went into

the market to buy I wouldn’t have to pay $30 billion to get no

more. I wouldn’t have to pay $70 billion to get 79 percent. I would

pay a fraction of that if I bought into the other side of the equation.

Is that right?

Mr. LIDDY. Yes. The company is worth as you say, the company is worth about $5 to $6 billion.

Mr. ISSA. OK. Additionally, the last point I’ll make on the finances, the government lowered your rate to LIBOR plus one,

roughly; or, no, LIBOR plus three. Your 31⁄2, 4 percent cost of

money on a big part of what the government has loaned you. Is

that right?

Mr. LIDDY. Yes.

Mr. ISSA. So the government is making money, because we borrow for less than that, but that’s commercially what? Less than

half of what you would normally in your financial condition borrow

at. Is that right?

Mr. LIDDY. Yes. I don’t know whether half is the right number,

but it’s substantially less than what the rate would be if we were

trying to borrow on our own.

Mr. ISSA. The BB&T’s preferreds now are trading at par, at 9

percent.

Mr. LIDDY. Right.

Mr. ISSA. So you’re getting about half that.

Mr. LIDDY. Yes, it’s extensions.

Mr. ISSA. So the government is not losing money on the loan, but

in fact you’re getting a preferential treatment which hopefully

comes back in the stock.

Mr. LIDDY. Correct.

Mr. ISSA. OK, Mr. Chairman, I hope we have a second round, but

thank you for the indulgence.

Chairman TOWNS. We will. We will have a second round.

27

I yield to the gentleman from Pennsylvania, Mr. Kanjorski.

Mr. KANJORSKI. Thank you, Mr. Chairman.

Good morning, Mr. Liddy.

Mr. LIDDY. Good morning.

Mr. KANJORSKI. Since you last appeared before Congress, and

that was several months ago, at that time you had indicated that

when you took command at AIG it had counter-party obligations of

approximately $2.7 trillion and you would reduce that to approximately $1.7 trillion at the last time you testified. Could you give

us any indication where that exposure is today?

Mr. LIDDY. Yes, at its zenith, that number was $2.7 trillion. At

the end of the first quarter, at the end of April, it was down just

below $1.5 trillion. So we continue to make progress. We continue

to make good progress.

Mr. KANJORSKI. Do you have any timeframe in mind as to when

you will get down to the level that there will not be systemic risk

exposure to the taxpayers of the United States?

Mr. LIDDY. I do. First, we’d like to make progress and not every

single month and every single quarter, but we think by the end of

the year that $1.7 trillion and the 27,000 trades that exist will be

materially smaller. The challenge is if you go too fast you wind up

settling those trades at a disadvantage to us; and, therefore, it

costs the American taxpayer more. So trying to do that with a little

balance in the system is appropriate. We think we can get the right

balance and make material progress by the end of the year.

Mr. KANJORSKI. Right, thank you.

Did I detect in your response to the chairman and the ranking

member in regard to providing your bailout plan of your plan of

final execution that you have recorded or indicated exposure to

Federal Reserve and Treasury—but have not made it available to

the committee staff—is that because you may be suspicious of the

congressional billboard company that we have up here on the Hill?

Mr. LIDDY. No, it reflects really just my concern that if that information gets out and gets in the hand of our competitors and it

tells them what our roadmap is to resolve AIG’s difficulties that

they will use it against us, and it will make it even harder to

achieve the success that we want to achieve. It’s as simple as that.

Mr. KANJORSKI. I’m not criticizing your judgment in humor of the

chairman’s and the ranking member.

The one thing I’m interested in, and you can be very helpful to

us, you know, I am involved in another committee and we are writing and deciding on what we’re going to do at the insurance industry; and, when you analyze AIG, you recognize, for all intents and

purposes it was a wonderful and very successful insurance company, except it had, as some people call, rogue organizations or offshore organizations, the London group, the financial products division of AIG in London.

They were really the organization that in getting involved in taking positions as counter-parties that they made the great opportunity of risk and weren’t the best purchaser of those documents

or situations, now that was not regulated, I take it, very stringently by your New York State regulator. Is that correct?

28

Mr. LIDDY. The financial products business was not regulated by

any of the insurance regulators, because it wasn’t an insurance

subsidiary. It was regulated by the OTS.

Mr. KANJORSKI. OK, now, does OTS have a history or real experience with regulating that type of offshore operation to ICE success

in your estimation?

Mr. LIDDY. I think not. I think the last time I was before Congress, I was part of a panel that included the interim director of

the OTS and I think he said as much. They simply lack the capacity and the ability to adequately supervise businesses that were in

Connecticut, London, Paris, Tokyo, what have you, dealing in these

very complicated financial instruments.

Mr. KANJORSKI. After 9 months now, that’s a short period of time

relatively speaking to get the total lay of the land to understand

the culture, but would you feel qualified to render an opinion at

this point, that looking at the existence of not only AIG but several

insurance companies that have the opportunities to do what they

did in getting them to the offshore operation in London and getting

into derivatives.

Do you have any opinion as to whether or not it would be helpful

and more protective to the American taxpayer to avoid their exposure and to the economy to avoid systemic risk if in some way we

developed a Federal insurance charter that would be a regulator of

that operation and much more closely involved than the present

regulators have been. Can you render that opinion, first; and, if

you can’t, will you?

Mr. LIDDY. I can give you some preliminary thoughts. I don’t

know if it’s a Federal insurance regulator as much as there needs

to be someone who looks at systemic risk across large organizations, so in my judgment, it should have been a great insurance

company and should have stuck to that knitting. It should not have

gone off into the financial products world. Once it did, I think it

would have been helpful if there was an overseer or regulator.

Once a company gets to a certain size or engages in certain kinds

of products, that company ought to be subject to some broad brushstroke regulation, which I think right now does not exist.

I saw that the individual, Sheila Bair, who heads up the FDIC,

had a proposal where you bring together the heads of the Federal

Reserve and Treasury, and FDIC, and they would share common

knowledge about which institutions perhaps are engaging, either

are too large or have too much systemic risk or are engaging in

practices that could cause difficulty.

That struck me as a sensible way of using the current regulatory

environment, but getting more emphasis on those businesses that

simply have become either too large or are engaging things that

are outside of their core skills.

Mr. KANJORSKI. I think you are referring to Senator Collins’ proposal in the Senate. Is that correct?

Mr. LIDDY. Yeah, I’m sorry. I don’t know. When I first read it I

thought it was part of an FDIC, part of Sheila Bair’s recommendation, but I could have that entirely wrong.

Chairman TOWNS. The gentleman’s time is expired.

Mr. KANJORSKI. Thank you, Mr. Chairman.

Chairman TOWNS. Congressman Bilbray from California.

29

Mr. BILBRAY. Thank you, Mr. Chairman.

The chairman was rightfully saying the concerns of transparency

and how far we can go with that just sort of reminded me of the

fact that if you had a proposal for major bonuses for your executives, the proposal had billions of dollars out there. Would you ever

propose to present them with that argument at midnight and expect them to vote on the commitment within by noon the next day?

Mr. LIDDY. No. I think my approach generally is to provide people the information they need in order to make an informed judgment.

Mr. BILBRAY. Well, do you think the 12 hours for a 1,000-page

proposal would be appropriate time for consideration?

Mr. LIDDY. Well, as I said, I want to work with the Congress. I

want to work with what you’ve asked for. I just want to make sure

that I protect the interest of the American taxpayer at the back

end of this process.

Mr. BILBRAY. I just pointed out, frankly, is that the representatives of the taxpayers, we were actually asked by our chief administrative officer of Congress to ask us to vote to make that kind of

commitment within that short a period of time, where I don’t think

any executive for any company would ask their board of directors

do that. But we were asked to do that, and that’s when all-hell

broke loose when they realized there was a whole lot in that proposal that wasn’t there.

Mr. LIDDY. I understand.

Mr. BILBRAY. This issue of hyper-inflation coming down the pike

is something we haven’t talked about, and I just want to sort of get

reassured that with all the hyper-spending that we are seeing the

Federal Government do in the last few months and the projects

were going to continue to do it, most economists feel there’s a great

threat that we’ll go into hyperinflation.

If hyperinflation kicks in, what are the results on our payback?

Now, I assume that we will not be going dollar-for-dollar. It will

be value to some degree, but will it be dollar and dollar, and will

hyperinflation then reduce the net value of what was paid back to

the Treasurer?

Mr. LIDDY. It’s a great question. It’s a very difficult one to answer, because hyperinflation would be accompanied by a lot of

other factors, so you’d have to kind of go through a string of events.

What would hyperinflation unleash?

You know, if you owned real assets, fixed assets in a

hyperinflationary period, that could be a good thing, because the

value of those goes up, but there’s nobody around that has any

money in order to buy it. So you’d really have to step back and look

at it. You know, our plan takes anywhere from 3 to 5 years to fully

unfold, given current market conditions.

How quickly a hyperinflation scenario, if it were to occur, how

quickly it would occur, don’t know. So we could be well down the

path toward realizing the repayment of the American taxpayer before any hyperinflationary situation were to occur.

Mr. BILBRAY. So in other words, you’re hoping to be able to pay

back the taxpayers before the ceiling falls in on the inflationary

spiral?

30

Mr. LIDDY. Well, I’d like to make some major inroads into repaying the American taxpayer and I’m not so sure the ceiling falls in.

As I said, hyperinflation will be one element. There could be a host

of other things and some offsetting that come with that.

Mr. BILBRAY. OK. Here’s the catch. The followup question here

is how long you anticipate AIG to take to pay off the debts of the

taxpayers.

Mr. LIDDY. Well, I think it will take somewhere between 3 and

5 years; and, what makes the answer so difficult is in formulating

a response you have to make a judgment about how strong will the

economy be worldwide and how good will the capital markets be

worldwide. If they stay about where they are or get better, it’s that

3- to 5-year timeframe. If they were to get worse, it could get elongated.

Mr. BILBRAY. Has the administration given you any guidelines on

when to start repaying AIG staff?

Mr. LIDDY. They have not given us any guidelines. We work with

the Federal Reserve. Any time we use any of the dollars that have

been allocated to us, we have to get a waiver from the Federal Reserve. It’s our intent to try to start repaying that as quickly as possible. As I mentioned in my oral testimony, we want to take some

of our largest assets, and put them in a special purpose vehicle.

When we do that, the amount of debt that we’ve borrowed from the

Federal reserve will be reduced proportionately. So we can do that

in a matter of months, assuming we can get all the regulatory approvals for these special purpose vehicles done in that timeframe.

Mr. BILBRAY. To what extent have Federal Reserve officials been

involved in the strategy of how to pay back this?

Mr. LIDDY. They have been very involved in it. As I said, we

treat them as a full partner. We don’t do anything without getting

involved.

Mr. BILBRAY. So they’re involved in day-to-day decisions involved

here or is it just general policy?

Mr. LIDDY. No. I wouldn’t say day-to-day decisions. I would say

more strategy and policy. Sometimes it’s hard to tell when you

moved from strategy to a policy to a decision, but we just don’t

want them to be caught off-guard by anything that we are working

on.

Mr. BILBRAY. OK. Thank you very much.

Thank you, Mr. Chairman. I yield back.

Chairman TOWNS. Thank you very much. The gentleman’s time

is expired.

Congressman Cummings from Maryland.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

Good morning, Mr. Liddy.

Mr. LIDDY. Good morning.

Mr. CUMMINGS. First of all I want to thank you for your comments about being concerned about the taxpayers.

We too are concerned, and I heard your comments about criti- cism. Let me say this. When anyone is getting $182 billion of taxpayers’ money, many of those taxpayers who have lost their jobs,

savings, health insurance, you are going to get some criticism, no

matter what. But let me go to something that Mr. Bernanke said,

Fed Chair Bernanke said just a week ago; he said he had no probVerDate 11-MAY-2000 15:00 Feb 01, 2010 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 U:\DOCS\53019.TXT KATIE PsN: KATIE
31

lem with people receiving high paychecks. He said, but there

should be a pay system that prevents excessive risk-taking and at

the same time is directly related to performance. Do you agree with

that?

Mr. LIDDY. Yes, I do.

Mr. CUMMINGS. And, so, I know that you have come under, AIG

has come under criticism for these retention payments and the bonuses and whatever. What is being done consistent with

Bernanke’s statement that I just quoted to address that issue, if

anything?

Mr. LIDDY. It’s a great question, Congressman.

Mr. CUMMINGS. Thank you.

Mr. LIDDY. I would say the most important thing we can do is

not allow a situation like AIG FP to ever get started again. So

when AIG FP, the participants in that business generally got 30 to

35 percent of the profits, that can encourage some risk-taking that

simply is out of bounds. So the winding down of FP and the comp

programs that we have in place up there right now are not nearly

as lucrative.

They are specifically targeted so that you get paid if you achieve

certain objectives. So I think that is right on point with Chairman

Bernanke’s view that there’s got to be a risk reward and a pay for

performance standpoint. So I think we are making good progress

on that. In the basic operations at AIG, we have almost always had

that, you know, that is much more traditional-looking in terms of

the leverage than there is on a bonus plan, how much of a relationship there is between a base salary and a performance-based

bonus, and they are very performance-based. So in most areas at

AIG I think we are in pretty good shape. It was more in the AIG

FP area where I think the compensation systems got out of bounds.

Mr. CUMMINGS. So let me make sure I understand now. We had

bonuses and retention payments, I think, in more than just FP.

Right?

Mr. LIDDY. Yes. I was trying to respond to the specific part of

Mr. Bernanke’s comment that there ought to be a tradeoff between

risks and rewards.

Mr. CUMMINGS. All right. Now, what can the American people expect as owners of 79 percent of this company with regard to bonuses and retention payments in, say, the next year? After all, and

I am going to say this over and over again wherever I go, to losing

their jobs, their homes, to losing everything. And so they have no

sympathy for AIG.

So I’m just wondering what can you tell them? They’re watching

you, about what they can expect to see as they’re seeing the foreclosure signs go up in front of their houses. What can they expect

to see in the ‘‘New York Times’’ and ‘‘The Washington Post’’ about

bonuses and retention payments at AIG?

Mr. LIDDY. Specifically, with retention payments we are trying to

recast as many of those as we can to make them performancebased so that you have to earn them, not simply stay for a certain

period of time. As I am told there are Treasury regulations which

will be forthcoming that will be very specific about how much you

can pay, what base salaries are, what bonuses can be, how those

bonuses can be paid. As soon as we get that material, we will reVerDate 11-MAY-2000 15:00 Feb 01, 2010 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 U:\DOCS\53019.TXT KATIE PsN: KATIE
32

vise our comp systems to be in 100 percent compliance with those

regulations.

Mr. CUMMINGS. Last question: did AIG write swaps on any debt

held by creditors to General Motors or Chrysler? And, if so, what

can you tell me about those swaps?

Mr. LIDDY. I don’t know. I saw that question someplace and I

just don’t have any information on it.

Mr. CUMMINGS. It is a very important question.

Mr. LIDDY. I’d be delighted to get the information.

Mr. CUMMINGS. How soon do you think we can get it?

Mr. LIDDY. We’ll do it as quickly as we can, sir.

Mr. CUMMINGS. Yeah, we want to look into that very carefully;

and, let me ask you this. On January 15th you told me when we

met that you expected to be able to pay back the debt within 5

years. At that time, of course, I didn’t know that AIG would have

its largest loss in the history of any company in the world when

we lost. What’s your project today?

Mr. LIDDY. As I answered this Congressman over here, I think

the answer is 3 to 5 years, but it is very dependent upon what happens to the capital markets. And that loss, as I have attempted to

explain in the past to many of you, that loss had two major components. One was worldwide asset values plummeted in the fourth

quarter.

When asset values go down, we have to reflect that loss in our

P&L and that’s what drove that loss. Second, when you’re worried

about the components of your business, you have things like good

will and deferred tax assets. You aren’t going to be able to realize

those and you write them off. Those two things alone were the

major drivers of that loss.

I think the answer, we will be able to repay the taxpayer in that

3- to 5-year timeframe, but it is heavily dependent upon what happens with the worldwide economic situation, the success of the

stimulus programs that all of the world’s governments are bringing

to bear, and the condition of the financial markets. We are not an

island and those issues play such a large role in our ability to

make progress paying back the taxpayer.

Chairman TOWNS. The gentleman’s time is expired.

I yield 5 minutes to Mr. Fortenberry.

Mr. FORTENBERRY. Thank you, Mr. Chairman.

If you decide to start a subcommittee on oversight of AIG I will

volunteer to serve on it.

Chairman TOWNS. That’s good to know.

Mr. FORTENBERRY. Mr. Liddy, thank you for coming. You are in

a difficult position. I understand you are basically not paid for this.

You have taken this on to restructure the company.

In that regard I appreciate your willingness to do it. You very

much understand though the cynicism with which very often your

testimony is not because of the pent-up anger, and particularly in

Congress, but more specifically among the American people about

the reckless actions of this company previously.

And in that regard I’d like to take a step back if we could and

trace a process by starting with just a general question. Can you

explain to the American people who is AIG? You were formerly organized as a thrift holding company. The various business compoVerDate 11-MAY-2000 15:00 Feb 01, 2010 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 U:\DOCS\53019.TXT KATIE PsN: KATIE
33

nents of that, the business sector or one of those components that

went bad in terms of the creation of exotic financial instruments,

and then how are you suggesting a restructuring of the company

and management to deal with it?

Mr. LIDDY. Sure. AIG consists of a number of component parts,

and let’s just think about it as a string. There are property casualty businesses. There are worldwide life and savings businesses.

There are domestic life and savings businesses. There’s a couple of

large businesses like International Lease Finance.

I think we own more airplanes than any other entity in the

world. And in that general area there’s also the AIG Financial

Products. So most of what I tried to describe very briefly just now

is it’s an insurance company with a few exceptions.

One of those large exceptions was starting in about 1987 or so

AIG got into a non-insurance business called AIG Financial Products, FP for short. And that’s where we wrote very sophisticated

derivatives, credit default swaps, hedges and things of that nature.

The credit default swaps generally performed well until the complete liquidity collapse that occurred in 2007. Many of the credit

default swaps, the multi-sector credit default swaps that were written by AIG were tied to the housing market. When the housing

market collapsed, those credit default swaps called for the posting

of collateral. We had to keep ensuring the value of those instruments and we ran into a severe liquidity squeeze.

That’s when the Federal Reserve and the U.S. Treasury came

forward and the first rescue package was essentially a loan of up

to $85 billion extended to us by the Federal Reserve. While that

solved one problem, it created another problem because we didn’t

have enough equity to support the $85 billion, so that then was

subsequently redone to include a balance of equity from TARP and

debt from the Federal Reserve.

Mr. FORTENBERRY. You stated that the default swaps performed

well; that, however, the reserves underlying the risk to manage

those default swaps were clearly not there, which begs the earlier

question about the overall structure under which AIG was operating, a thrift holding company and lack of regulatory oversight

there.

Mr. LIDDY. Yeah. As you know, Congressman, I was not there.

I had been at the helm for 8 months, and so my time and energy

is focused on today, tomorrow, and less on yesterday. What I do appreciate after being on the job for almost 8 months is I don’t think

the financial products business belonged or attached to AIG in any

way, shape or form.

And so when Congressman Kanjorski asked me the question

about oversight, I think there needs to be substantially greater

oversight of financial institutions. And maybe we can do that with

any existing regulators to make sure that those that are either

very large or pose systemic risk really get monitored on a regular

basis so you can’t have this kind of event occur again.

Mr. FORTENBERRY. Let’s quickly move to an issue of the bonuses. We were told earlier it was $120 million. In 2008 new information

has come out that it is $450 million. Why the discrepancy?

Mr. LIDDY. We apologize for any confusion. We are asked so

many questions on bonuses and each person wants it sliced a

34

slightly different way. The first question we were asked was corporate bonuses. To us that means bonuses paid at the corporate

center or paid from the corporation. That was the $121 million. We

were then asked a separate question, a subsequent question. Well,

how many bonuses were paid corporate wide anywhere in the company, worldwide, in Japan, in South America or whatever.

That’s a different question and that’s the larger number, so we’re

trying to slice the information in accordance with each individual

request that we get. We get them from Congress. We get them from

the Senate. We get them from regulators and from the Fed and

Treasury. We’re being as cooperative as we can. Sometimes, we are

drowning in requests.

Mr. FORTENBERRY. Back to the earlier question about your plans

for management restructuring. For management restructuring we

have divided the business into three categories. The three largest

and most valuable businesses that we have we intend to take public or sell a minority stake in. That will generate much of the funds

we need in order to repay the taxpayer. Some of the businesses will

be held and we will wait for a better day to sell them. Another section of the business is maybe a part of AIG going forward. It will

take, we think, 3 to 4 to 5 years, if the marketplace stays where

it is today or gets better in order to repay the taxpayer, but we

have a strategy to do exactly that.

Chairman TOWNS. The gentleman’s time has expired.

Mr. FORTENBERRY. Thank you, Mr. Chairman.

I yield now 5 minutes to the gentleman from Ohio, Mr. Kucinich.

Mr. KUCINICH. Thank you very much, Mr. Chairman.

Mr. Chairman, I am asking these questions on behalf of my constituents in Ohio who are policemen, firemen, teachers and other

public employees in Ohio, who AIG defrauded, defrauded their pension funds. These are people who protect our neighborhoods, teach

our children, dedicate themselves to public service, and AIG cheated them out of $96 million.

Now, AIG has admitted on multiple occasions to guilty pleas and

restatements of 24 transactions that the company defrauded investors and lied to regulators. My question to Mr. Liddy: Does your

business plan include settlement of lawsuits against AIG for bid

rigging, accounting fraud, and market manipulation of AIG stock

prices?

We know that you paid an $800 million settlement to the SEC

and $375 million to the New York Attorney General. And, if it does

include it, why after receiving $85 billion on September 16, 2008,

and after you assumed the duties of CEO of AIG on September 18,

2008, why is it that AIG has cutoff communications with representatives of a class action which includes police, firefighters, teachers

and other public employees in Ohio whose pension funds AIG defrauded? And, how can you tell this committee that those 8 months

which have passed, which are contemporaneous with you becoming

CEO, that you did not direct AIG to basically stall and continue the

defrauding of these public employees in Ohio? Mr. Liddy.

Mr. LIDDY. Congressman. I’m sorry. I just am not familiar with

all the particulars of the particular suit that you have just referenced.

35

Mr. KUCINICH. Well, let me help you. On March 26th you sat in

front of a Financial Services Committee when this issue was asked.

I want the members of this committee to follow this now.

You were asked about this before. You told the committee you

would look into it, do everything you can to make sure it gets resolved. Now you said you would do everything on March 26th. This

was after people had already been waiting for months to hear

whether their pensions were going to be secure. Can you name one

thing?

Just name one thing that you’ve done to get this matter resolved

with respect to defrauding policemen, firemen, teachers and the

public employees in the State of Ohio defrauding the pension fund.

Can you name one thing that you as the CEO have done about

this?

Mr. LIDDY. Anything involving legal settlements or legal challenges I depend on our very substantial legal department to resolve. I believe that they have been in either negotiation or contacts. I don’t know but we will meet with you. I will personally

meet with you to make sure that we advance the situation.

Mr. KUCINICH. Well, that’s fine. I want the committee to be

aware of this. AIG repaid counter parties one to one. Counter parties in England, in Germany, in France. Dollar-for-dollar you repaid them, but when it comes to police and firefighters and teachers in Ohio, zero for the dollars they invested. This is during your

watch. You can’t say this is about some other CEO. This is not acceptable, Mr. Liddy. You cannot get $182 billion, as my friend Mr.

Cummings pointed out, and say, well, we want to be spared criticism. Yes, this is criticism.

AIG cheated police, firefighters, teachers, and public employees

in Ohio out of $96 million. That may not seem like a lot of money

to a firm that’s used to dealing in trillions. But you cheated people

who save lives, who teach our children, and I want to know right

now what you’re going to do about it. What are you going to do

about this?

Mr. LIDDY. Well, as I said, we will meet, and I will meet with

you right after this meeting if you’d like and we can begin to understand exactly where we are. I just don’t have the information

on it. All of the things that you’ve mentioned, I’m very sensitive to

them. They did all occur before my watch, but I am prepared to

take responsibility to decide whether they should be resolved; and,

if so, how.

Mr. KUCINICH. Well, you know, we know the two other parties

have already been settled in the class action case: Price

Waterhouse and General Reinsurance Corp. Do you just feel that

when it comes to public employees you can roll them? You can just

dismiss them? Is this your attitude? You haven’t resolved this, Mr.

Liddy, on your watch.

Mr. LIDDY. We will work with you and do everything we can to

get it resolved, sir.

Mr. KUCINICH. Mr. Liddy, I am the chairman of the Subcommittee on Domestic Policy; and until this matter is resolved, you are

going to keep getting called in front of Congress to explain why it’s

OK for AIG to cheat police, firemen, teachers and public employees.

36

We’re not going to let you go, Mr. Liddy, and I will talk to you after

the meeting, but you are not going to roll this Member, guaranteed.

Mr. LIDDY. Yes. We’ll get together after the meeting. We will do

everything we can to make sure we resolve it.

Mr. KUCINICH. You said that on March 26th. I have your quote.

[Audience member sneezes.]

Mr. KUCINICH. God bless you. Mr. Liddy, thanks for being here,

but there is a moment here of truth and you are going to have to

remember these police, firefighters, and teachers. Mr. Chairman, I

came to this Congress not to represent these people on Wall Street

who have been shafting the American people. I came here to represent my constituents and that is who I am speaking on behalf of

right now. Not going to let you go. Not going to let you get away

with it.

Thank you.

Chairman TOWNS. Thank you, and the gentleman’s time is expired.

The gentleman from North Carolina, Mr. McHenry, 5 minutes.

Mr. MCHENRY. Thank you, Mr. Chairman.

Mr. Liddy, thank you from coming back before Congress and I

know this is not one of the more joyful days of your life. When did

you receive the honor of being CEO of AIG?

Mr. LIDDY. When did I?

Mr. MCHENRY. Yes.

Mr. LIDDY. Middle of September; September 18th, I think was

the date.

Mr. MCHENRY. September 18th, OK. And in the whole run-up

there’s a Washington Post story today, which I am sure you caught

this morning about AIG entitled, ‘‘Officials knew of AIG bonuses a

month before fire storm.’’ Now, I just want to touch on this.

You have received enough in the way of questions on this and

I think you have answered everything to the fullest extent you

could, but documents show that senior officials of the Federal Reserve Bank of New York received details about the bonuses more

than 5 months before the fire storm erupted and were deeply engaged with AIG as well as outside lawyers, auditors, and public relations firms about the potential controversy.

But, the New York Fed did not raise an alarm with the Obama

administration until the end of February. So, interestingly enough,

the New York Fed was very engaged and well-informed on this

matter long before it came to public light. Is that true?

Mr. LIDDY. Yes, the AIG FP bonuses were a topic of great consideration starting in about the end of October, beginning of November.

Mr. MCHENRY. Was the chairman of the Federal Reserve and the

Bank of New York informed of these bonuses?

Mr. LIDDY. I can’t answer that.

Mr. MCHENRY. Did you have a conversation with the chairman

of the Federal Reserve or the Bank of New York?

Mr. LIDDY. No. I did not. I don’t think so.

Mr. MCHENRY. In the fall you never had a discussion?

Mr. LIDDY. The conversations as I remember them would have

been more with the people that we interface with at the Federal

Reserve on a regular basis; but there would not, if you mean by

37

chairman, you mean Chairman Bernanke, no. There would have

been no conversation with him and I don’t think there was any.

Mr. MCHENRY. What about the head of the New York Fed?

Mr. LIDDY. Yeah, I just don’t recall who the conversations were

with.

Mr. MCHENRY. Did you have any conversations in the fall with

Timothy Geithner?

Mr. LIDDY. Not in the fall. I don’t believe so. No.

Mr. MCHENRY. OK, so you had no conversations.

Mr. LIDDY. Mr. Geithner had pretty much recused himself from

many of these activities because either they were considering him

for the spot of the Treasury Secretary or he had already been nominated.

Mr. MCHENRY. Well, when some of these actions took place,

there wasn’t even a President-elect at the time. So you didn’t have

any conversations with Timothy Geithner during September or October of last year?

Mr. LIDDY. Not on this topic. I don’t remember that, but I’d have

to go back and check. I don’t think so. No.

Mr. MCHENRY. OK. If you could submit that to the committee I’d

certainly appreciate it. So you are saying you didn’t have any? Apparently, you are saying you didn’t have any conversations with

him whatsoever?

Mr. LIDDY. Oh, on bonuses you mean, or in general?

Mr. MCHENRY. If you listen to me specifically, did you have any

conversations with a Mr. Timothy Geithner in September, October,

November or December of last year?

Mr. LIDDY. Yes, I would say in October or November preceding

the revision of the original bail-out program, I would have met with

Mr. Geithner.

Mr. MCHENRY. Did you have any mention of the word bonus with

Mr. Geithner?

Mr. LIDDY. No. Not in those meetings. No.

Mr. MCHENRY. Did you have any discussion with Mr. Geithner

in September, October, November or December in any way, shape,

or form regarding anything to do with the word bonus or what a

bonus means?

Mr. LIDDY. No. I don’t believe so.

Mr. MCHENRY. OK. Thank you. I’m not an attorney, but it seems

a little slippery the way you are trying to answer this so I want

to make sure we have that on the record.

Recent data about commercial real estate predictions for this

coming year and the following year, this is the substance of what

I’d like to talk about. And I am sorry we had to belabor that and

it was painful for me as well to try to ask that question and get

a direct answer from you. But increasing vacancies, we have a discussion about the real estate industry, and specifically with the

commercial real estate industry this year and next regarding increasing vacancies, and perhaps loan defaults, as liquidity for refinancing remains very scarce.

We see a lot of troubles in the CNBS market, obviously, so we

talk about AIG’s commercial real estate portfolio and loan exposure, and how you think this portfolio will hold up if it were subjected to a stress test style of assessment that the 19 largest banks

38

went through, if you could touch on commercial real estate in your

loan portfolio and your exposure there.

Mr. LIDDY. We have a substantial commercial real estate portfolio either in owned real estate or CNBS’s as you refer to them.

Those things lost substantial value in the fourth quarter and our

write-down of those in fact was what contributed to our very large

loss in the fourth quarter.

You know, I am worried about that portfolio. I am worried about

real estate in general. If there is a lack of economic activity, I think

it does not go well for commercial real estate at all. If the stimulus

money that’s being brought to bear on our economic travails does

in fact work, then I think we could work our way out of that.

I do not have a sense of what that timing would be, but I think

commercial mortgages and CNBS’s in general, which a lot of insurers invest in, because they are long-dated assets that match longdated liabilities. I think that those asset classes could be under

some stress for a while.

Chairman TOWNS. The gentleman’s time has expired.

I yield 5 minutes to the gentleman from Massachusetts, Congressman Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman. Thank you, Mr. Liddy,

for being here with us today.

Let me ask you. About November 2008, the Federal Reserve

Bank of New York established Maiden Lane 3, a financing agency.

And correct me if I’m wrong. Was that the agency that provided

the money for AIG to then go out and purchase some of the underlying subprime securities, about $27 billion?

Mr. LIDDY. Yes.

Mr. TIERNEY. Now, you did that and you canceled the contracts

that you had with those counterparties. Am I right?

Mr. LIDDY. Yes.

Mr. TIERNEY. OK. Would you provide copies of those contracts to

this committee?

Mr. LIDDY. The Federal Reserve would have to do that, because

the Federal Reserve did that. So let me just explain. While we were

the counterparty, we would fight tooth and nail with them. Once

the Federal Reserve decided that we would put money into a financing entity, a special purpose vehicle, then the Federal Reserve

took over the responsibility for the negotiation of those settlements

and the cancellation of the contracts. They would have to provide

those. So they took them all.

Mr. TIERNEY. All right, thank you. The special purpose entity,

will you explain to me how that was structured?

Mr. LIDDY. AIG put in the equity. AIG sold the underlying assets

at some cents on the dollar. I don’t remember the exact number,

45 or 50.

Mr. TIERNEY. To raise the equity?

Mr. LIDDY. No. The equity came from money that the U.S. Treasury had provided us, but then we sold the assets and the sale of

those assets went into Maiden Lane 3.

Mr. TIERNEY. So, I’m just trying to learn here. So the sale of the

assets were the subprime instruments?

Mr. LIDDY. It was the underlying assets that were valued at, as

I said, 45 or 50 cents on the dollar. The Federal Reserve then

39

bought them and that money went into the funding of Maiden Lane

3.

Mr. TIERNEY. The reports are that you paid full value for the

subprime securities. Is that accurate?

Mr. LIDDY. Again, the Federal Reserve did that.

Mr. TIERNEY. They paid full value for that?

Mr. LIDDY. Yeah, the Federal Reserve did that. In fact, we don’t

even know what they did because we were out of that process.

Mr. TIERNEY. Before that all happened, AIG had been having serious collateral disputes with Goldman Sachs over certain values

involved in their portfolios. Correct?

Mr. LIDDY. Oh, it was any counterparty, not just Goldman Sachs.

It was any counterparty. It gets to the root of mark to market. You

and I can look at the same set of facts and you can take it as one

value. I can take it as another.

Mr. TIERNEY. And, I guess, Mr. Chairman, we would need to go

and get those contracts from the Fed.

The question here, Mr. Liddy, obviously is why we paid full value

when there was legitimate disputes as to the value and that’s why

we didn’t negotiate a better arrangement on that. And you’re telling us that it’s the Fed we should speak to and not you, because

you weren’t involved in that.

Mr. LIDDY. Yes, we were asked to step aside once those financing

vehicles were set up; and, I believe the Federal Reserve had the responsibility for those.

Mr. TIERNEY. OK. Now, Mr. Kanjorski asked you a question

about regulation going forward and you answered on that. Why

wouldn’t we favor some sort of a regulatory system that disallowed

entities like this from getting too large and too diverse as opposed

to just having somebody oversee them and sort of watch over them?

Why wouldn’t we go back to something in the nature of Glass

Steagall and that type of operation where we just simply say you

can’t get that diverse and that large. Do you want to comment on

that?

Mr. LIDDY. You know, I would. I’m not so sure it’s the issue of

large. It’s a matter of breadth. So if you are in one product line and

you are really muscular in it, and you are very good at it and you

know it, that’s one thing. But if you are in 20 different product

lines, and that’s the definition of large, that seems to me to have

a different level of risk. So I think it’s probably the center point

for a debate that ought to occur. I just don’t think a situation

where an AIG of really a primary insurance company should have

a Financial Products business attached to it.

Mr. TIERNEY. Thank you for that. You had another $43.7 billion

between September 2008 and December 2008 that was from the

public that used to satisfy financial counterparties with respect to

the securities lending operations of AIG. Were there any negotiations involved in those payments, or were they contractually obligated for the amount that you paid?

Mr. LIDDY. No. That’s a whole different situation. It’s where we

have to pay a dollar back to somebody who’s got our assets. If we

want our assets back, we have to give them a dollar. But the investments we had invested are a dollar and had declined, so it’s a

much different situation than a credit default swap.

40

Mr. TIERNEY. All right. Would you be able to make those contracts available?

Mr. LIDDY. I assume I will ask our general counsel and I’m always worried about who’s on the other end and did we sign a confidentiality agreement that we won’t make anything available if

you will give us the time to research whether we can do that. We

will come right back to you.

Mr. TIERNEY. Thank you. I yield back, Mr. Chairman.

Chairman TOWNS. Thank you very much. The gentleman yields.

The gentleman from Arizona, Congressman Flake.

Mr. FLAKE. Thank you, Mr. Chairman.

Mr. Liddy, can you tell us what the administration’s plans are

moving forward with AIG?

Mr. LIDDY. I cannot. I don’t have any idea. I think I know what

my marching orders are and that is to run the company as well as

we can and in a way that is responsible. It gives us a chance to

pay back the American taxpayer, preserves the jobs, and that’s

what we are trying to do.

Mr. FLAKE. Well, great. I didn’t think you could answer that

question. I just asked that to point out that the minority has asked

for an administration witness for quite a while. It would be helpful

to know what the administration has planned, but we are unable

to ascertain that and I appreciate that’s not your job to answer

that question. It was just difficult from our side.

We don’t know what the administration has planned and I hope

that we have some hearings coming up where we can find that out.

I would ask, though. There has been some talk that AIG, in its effort to come back, is undercutting competition offering insurance

products under value and making it difficult for competition. Who

are your main competitors?

Mr. LIDDY. Domestically, Ace, Zurich, OCSA, Alliance, Travelers;

I would also say that a number of organizations have looked at

that issue. The GAO looked at it and they commented on it the last

time I was here before Congress. The Federal Reserve has commissioned its own study of that, and we just don’t do that. We don’t

put the Federal money into the property casualty businesses and

then use that as a competitive advantage. And I think any analysis

that’s been done would support that. Brokers have done that same

kind of analysis, and there doesn’t appear to be much validity to

it.

Mr. FLAKE. So any allegation that is taking place has no basis

in reality?

Mr. LIDDY. I don’t believe so. You know, it’s a very competitive

marketplace, and like most areas of business people fight tooth and

nail, but in terms of us appropriately or inappropriately pricing our

product, we do not do that. What I don’t want to do is have this

company get out of the mess that it’s in, and then find out that the

book of business that we have is underpriced and we’ve got insurance issues. We are just not going to do that.

Mr. FLAKE. Right. Well, you can see why some might be concerned about that whenever government is backing someone. We’ve

seen it with the GSEs. There’s simply less care taken.

Mr. LIDDY. Yes. No, I understand it 100 percent. Again, I’d say

if you look at the early results of the GAO study or some work done

41

by the Federal Reserve or work done by Brokers, I think you’ll find

little, if any, validity to that issue.

Mr. FLAKE. OK. Thank you, Mr. Chairman.

Chairman TOWNS. Thank you very much.

The gentleman from Missouri, Mr. Clay.

Mr. CLAY. Thank you, Mr. Chairman.

Chairman TOWNS. Five minutes.

Mr. CLAY. Thank you.

Mr. Liddy, welcome back. AIG continues to pose significant losses, despite infusions of taxpayer dollars amounting to over $180

billion. Just last month AIG experienced a shocking $61.7 billion

loss, a quarterly loss, which was the highest in U.S. corporate history. Is AIG really too big to fail and hasn’t it already failed?

Mr. LIDDY. Well, as I explained earlier, there were reasons for

that loss. It had to do with market valuations and then writing off

assets on our balance sheet which we thought did not have as

much value as we were carrying them on.

I would point out to you that just last week we reported our re- sults for the first quarter and that loss was not $62 billion. It was

$4.3 billion, which was substantially less than the loss was in the

first quarter of 2008. So we believe we are making some progress.

I don’t think that AIG has failed. I think, as I’ve attempted to say

in my oral remarks and in response to several questions, it’s a very

complicated institution. It’s a very complicated situation.

We have a good plan to work our way out of this and hopefully

to repay the American taxpayer, but it is heavily dependent upon

economic recovery and the capital markets staying where they are

or improving.

Mr. CLAY. Now given these jaw-dropping figures, I am concerned

that any taxpayer investment in AIG can be equated to throwing

money into a bottomless pit. It appeared that taxpayers are simply

propping AIG up. Is AIG in effect a sinkhole?

Mr. LIDDY. No. As I said, I don’t believe so. I think we have a

good plan that we will be able to pay the American taxpayer. Some

very vital businesses will emerge from AIG, will be a much smaller,

more transparent, more nimble company, so I would not categorize

it as a sinkhole.

Mr. CLAY. Let me ask you about the AIG Financial Products Division. Did AIG retain any of the executives in its Financial Products Division that ran AIG into the ground?

Mr. LIDDY. The short answer is no. The top three, four or five

people are folks that I would say I characterize as the architects

and builders of the multi-sector, credit default swap, those people

are gone. Do we have people who do credit analysis or trade on securities, yes; but, they weren’t the architects and builders and engineers of that program.

Mr. CLAY. So you are not working with a completely new team

at the Financial Products Division?

Mr. LIDDY. We are working with a completely new leadership

team. Many of the folks who are executing on those contracts are

the same, but they are executing under different standards, and

different leadership, and different requirements.

Mr. CLAY. You know, all of the losses that we have talked about

today have occurred under your watch as CEO. So tell the commitVerDate 11-MAY-2000 15:00 Feb 01, 2010 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 U:\DOCS\53019.TXT KATIE PsN: KATIE
42

tee what exactly you are doing today that is so different from what

you have done in the past few months so you will better protect

taxpayers’ investment in AIG and ensure a return on their investment.

Mr. LIDDY. Well, we are trying very hard, and I think making

good progress to wind down the AIG financial progress, which

posed the systemic risk that we represented to the U.S. financial

system. And we’ve made good progress on it. If asset values continue to go down, we could continue to record losses. Hopefully,

that does not occur.

Mr. CLAY. Thank you for your answers.

Mr. Chairman, I yield back.

Chairman TOWNS. Thank you very much.

As you know, we have votes on the floor and what I would like

to do is recess until 12:15 and return. And of course that would

give us enough time to have the three votes plus get a drink of

water. So we will recess until 12:15.

[Recess.]

Chairman TOWNS. I recognize the gentleman from Massachusetts

for 5 minutes.

Mr. LYNCH. Thank you, Mr. Chairman.

I also thank the ranking member in his absence for holding this

hearing, and I want to thank Mr. Liddy for appearing before this

committee again to help us with our work.

Mr. Liddy, the title of today’s hearing is ‘‘AIG: Where Is the Taxpayer Money Going?’’ And, in addition to that, in the letter of invitation that was sent to you and discussed with your counsel, in

part, we asked you to respond to the question where is the Federal

financial assistance going. Where is the taxpayer money going?

Regrettably, in your written testimony, we gave you ample opportunity to provide a written response of reasonable length to that

question, where is the Federal money, where is the taxpayer money

going. You did not respond to that in any significant fashion.

There’s not a sentence in there that addresses the central questions

of where is the taxpayer money going. And, look. I am trying to

work with you.

I understand that you came out of retirement to do this. I understand you are working for a dollar a year. I understand all that,

but we are not getting the responses that we expect. I don’t think

there’s a majority shareholder in this country—only 80 percent of

any company—that is being treated like the American taxpayer is

in this case. It’s a plain fact that AIG would have gone bankrupt

but for the goodness of the American people to step forward and

rescue this company. That should have been a game changer on

your side. That should have signaled a shift that this company is

now 80 percent or 79.9 percent owned by the taxpayer, and it is

a new ball game, one of transparency and accountability to the

American taxpayer.

I have not seen that happen. I did not see that happen in the

bonus controversy, which continues, because the numbers are different now than the last time you were here. And this lack of information that will get back to you—I’ll have somebody dig up those

documents for you—and a complete absence of any response to the

central question of where the taxpayer money is in your opening

43

statement or in the written testimony that we asked you to provide.

I am disappointed at that. I would love to work with you. You

know, I am not here to be contentious, but I am here to do my job

on behalf of the American taxpayer. And I associate myself strongly

with the words of Mr. Kucinich earlier today. I feel like you’re trying to roll us and you’re trying to obfuscate things and obstruct us

from doing the job that we need to do.

You did mention in your statement the fact that AIG has reduced

their nominal exposure from $2.7 trillion to $1.5 trillion. So let me

ask you about that, since you haven’t responded to the central

question of the hearing. Let me ask you about that and reduce the

nominal issues and the notional exposure from $2.7 trillion to $1.5

trillion. But, how much of that reduction have you accomplished by

shifting the exposure to the American people, either through the

Fed to Treasury, through Maiden Lane, or through any of these

TALF or any of these other federally or taxpayer-backed entities?

Mr. LIDDY. Little if any of that reduction to notional exposure

would have anything to do with the number of items that you just

mentioned. That notional exposure had been reduced by settling

those trades, selling the books of business, and just overall

downsizing of the business known as AIG FP.

Mr. LYNCH. Well, let me ask you. I know the Treasury approved

up to $52.5 billion in loans in order to purchase troubled assets

that were formerly owned by AIG, now owned by the U.S. Government. Wouldn’t that result in a shift from AIG to the Government?

Mr. LIDDY. Yes, that would have. And, I’m sorry. I was trying to

draw a reference to the last time we had a conversation about this

what has changed. So Maiden Lane was put in place in November

2008 and you are absolutely correct. Some of those assets would

have been transferred into the Federal Reserve after they did a

very thorough valuation analysis of what their potential would be.

Since then, any reduction in the notional value has not been as the

result of a transfer.

Mr. LYNCH. OK. There’s also up to $34.5 billion in Fed loans retired by securities and equity interest provided to the government

by AIG. That’s on top of the $52.5 billion that I first mentioned.

Mr. LIDDY. Those were all items that were a part of Maiden

Lane, either 2 or 3, and go back to November. Since then we

haven’t transferred any additional risk to the American public.

Mr. LYNCH. So you are basically saying this is right then. The

$87 billion here went from AIG to the U.S. Government here.

Mr. LIDDY. Well, assets. Assets with real values got transferred

to the Federal Reserve, and they got transferred at—I don’t remember the exact number—45.

Mr. LYNCH. Are these?

Mr. LIDDY. No. The assets got transferred to the Federal Reserve

at cents on the dollar. Let’s say 50 cents on the dollar, so the Federal Reserve has the opportunity and the American public has the

opportunity to benefit from any appreciation or recovery in those

asset values. That’s what Maiden Lane 2 and 3 are all about.

Mr. LYNCH. I don’t have enough time. I wish you had in your testimony outlined where the taxpayers’ money has gone.

44

Mr. LIDDY. Congressman, can I address that? The last time I was

here, we provided a very exhaustive document that showed exactly

where all of the taxpayer money has gone. So of the $82 billion,

$40 billion of TARP and roughly $42 or $43 billion of a loan from

the Federal Reserve, it’s a very exhaustive analysis.

It breaks it down into how much went to the counterparties, how

much went to municipalities to protect the guaranteed investment

contracts, how much to pay off debt that was called because we’d

lost our ratings. How much went to securities lending? There’s a

very exhaustive analysis that’s a part of the record that explains

that in some detail. We aren’t trying to obfuscate anything. We

thought we had already provided that. And, if you like, we will provide you another copy, but I think it will answer all your questions.

Mr. LYNCH. Well, I think when we titled this hearing ‘‘Where did

the money go,’’ and we send you an invitation, and we say, ‘‘tell us

what you did with the Federal financial assistance,’’ I think that

sort of is asking that. And so now we have this hearing and we

have you up here and we don’t have any response, and that bothers

me to no end. You know?

We are going to have to have you back up here. You know, I’m

with Kucinich on this. We’re not going to be rolled on this and

when we ask you a question and we get all these people together

and we have a hearing, and we ask you a specific question to address on your testimony, by God we want the answer.

We own 80 percent of your company. You exist because the

American taxpayer purchased, you know, 79.9 percent of your

shares. And so there’s an obligation due here. There’s a transparency that’s owed to the American taxpayer and we don’t see it,

and it is particularly frustrating. Let me ask you.

I did see some of the counterparty obligations here that when the

first money went into AIG, one of the top beneficiaries was Goldman Sachs at $12.4 billion. Now the person who arranged that deal

was Secretary Paulson, formerly of, associated with that firm. Did

you feel any pressure or anything in terms of the order in which

you had to compensate or provide those funds to those individual

firms? Did you feel any conflict there?

Mr. LIDDY. I did not. And the final resolution, the final determination of who got what, was made by the Federal Reserve, not

by people at AIG.

Mr. LYNCH. OK. Well, that explains a lot. OK. But again I’m

going to ask that the committee reinvite you to another hearing at

which you actually can get into that central question of where that

taxpayer money went. Maybe we could do that in conjunction with

Mr. Kucinich and the questions he had. But at this point, I will

yield back.

Thank you, Mr. Chairman.

Mr. LIDDY. And Congressman, I will provide to you within the

next couple days a fresh copy of what we provided the previous

committee that I was at, which goes into great detail as to where

the money went.

Chairman TOWNS. Thank you very much.

Congressman Connolly from Virginia.

Mr. CONNOLLY. Thank you. Thank you, Mr. Chairman; Mr.

Liddy.

45

Welcome, Mr. Liddy. A couple of questions. Your predecessor, Mr.

Greenberg, testified before this committee a few weeks ago, and he

indicated that he would now favor Federal regulation of credit defaults, swap instruments and derivatives, for that matter.

Do you share that opinion that the Federal Government needs to

regulate those financial instruments?

Mr. LIDDY. Yeah. I think they need to be put on an exchange.

I think they need to be standardized, and there needs to be a lot

more transparency. And if there was Federal regulation, you would

get all of those.

Mr. CONNOLLY. And if I understood your testimony this morning,

Mr. Liddy, you believe that in retrospect, where AIG went wrong

was frankly branching out into such financial instruments in the

form of AIG FP, specifically.

Mr. LIDDY. Yes. Those instruments are more appropriate for

large commercial banks and investment banks that have the skill

sets, a more refined skill set to handle them. It’s not appropriate

for an insurance company, in my judgment.

Mr. CONNOLLY. Right.

Could you just review for me the figures I thought I heard you

give in your testimony this morning. How much did AIG get

pumped into the company directly from appropriated dollars from

this body? And how much came directly from the Federal Reserve?

Mr. LIDDY. As we stand right now, the money that’s been ad- vanced to the company is $40 billion out of TARP, out of the Treasury program, and about $43 billion in loans from the Federal Reserve.

Mr. CONNOLLY. Got you.

Mr. LIDDY. Now, in addition to that—let me just finish—in addi- tion to that, there’s another $30 billion of TARP that we can draw

on if we need it; and there’s an additional $17 billion to top the $43

billion off to $60 billion, that we could drawn from as a loan from

the Federal Reserve.

Mr. CONNOLLY. OK. Thank you.

Now, with respect to governance, if I understand it correctly,

there are three federally appointed trustees?

Mr. LIDDY. Yes.

Mr. CONNOLLY. All of them are appointed by the Federal Reserve, is that correct?

Mr. LIDDY. You should ask them. They represent Treasury as the

owner of the $79.9. I think they were appointed by the Federal Reserve, because the Federal Reserve delegated that responsible by

Treasury.

But I’m not involved in that process.

Mr. CONNOLLY. Right. But with respect to thetrustees, I mean,

their names are Jill Considine, Chester Feldberg, and Douglas

Foshee. That ring a bell?

Mr. LIDDY. Yes. Yes.

Mr. CONNOLLY. Those are all Federal Reserve appointees, are

they not?

Mr. LIDDY. Yes. But I’m sorry, where I’m stumbling, because I’m

just not involved in it, as I think they represent the Treasury’s interest, the ownership interest——

Mr. CONNOLLY. You say you’re not involved——

46

Mr. LIDDY. In the selection and role of the trustees.

Mr. CONNOLLY. In the selection. But you certainly are involved

in interaction with——

Mr. LIDDY. Oh, absolutely, yes.

Mr. CONNOLLY. Are there any other Federal trustees?

Mr. LIDDY. No.

Mr. CONNOLLY. So, for example, there are no elected officials or

anyone appointed by this elected body as a trustee of AIG?

Mr. LIDDY. No. Certainly not that I’m aware of.

Mr. CONNOLLY. Hmm.

They don’t attend board meetings, is that correct?

Mr. LIDDY. They do not. The Federal Reserve has delegates at

every building meeting and every committee meeting.

Mr. CONNOLLY. And is the board still pretty much a private sector-like board?

Mr. LIDDY. Private sector?

Mr. CONNOLLY. Well, what I’m asking is, is there a clear delineation between the public trustees representing Federal interests of

almost 80 percent and the board of directors that apparently, I’m

asking, stays pretty much privately controlled and appointed?

Mr. LIDDY. There is a delineation, but again the linchpin of that

would be the representatives from the Federal Reserve, who are observers and overseers at every board meeting, every committee

meeting, every strategy meeting, every discussion that we have.

Mr. CONNOLLY. So representatives of the Federal Reserve sit in

on board meetings?

Mr. LIDDY. Yes, they do.

Mr. CONNOLLY. Got you. Unlike these trustees?

Mr. LIDDY. Correct.

Mr. CONNOLLY. Going back to the governance question, what is

the distinction, then, between the role of these trustees and those

members of the Federal Reserve who sit on board meetings, overseeing that procedure?

Mr. LIDDY. I’m going to answer, and then I think you should address that to the trustees.

The trustees are the protectors of the 79.9 percent ownership and

the value that we’d like to create for that. The Federal Reserve is

representing its interests as a lender, and has in the past been

asked by the Treasury to also kind of coordinate Treasury’s interaction with the company, so that there can be only one organization doing it instead of splitting it.

We have 360-degree oversight with an awful lot of people wanting to understand what our strategy is, and what our execution is.

The Fed has been asked to try to coordinate that 360-degree oversight.

Mr. CONNOLLY. My time is probably running out. But let me ask

a final question. With respect to bonuses, one of the rationales, in

the public record anyhow, for bonuses, was recruitment and retention. How many folks—with respect to the bonuses in question—

how many folks left the company, who received bonuses?

Mr. LIDDY. Yeah. I would say very few.

Mr. CONNOLLY. Now are you talking about—and here’s where it’s

very easy to get off the track—you’re talking FP retention bonuses,

or overall company bonuses? Or what——

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Mr. LIDDY. Well, I’ll gladly go with the FP bonuses for a minute.

On the FP sector, we had about maybe 10 to 12 to 15 resignations.

We’ve had several of those people rescind those resignations and

stay with us, even as they worked to return their bonuses.

I don’t know if the resignations are over yet. Some have said, you

know, ‘‘I’m going to help you wind this down and be as professional

as I can, but then I want to get on with my life, and I want to resign.’’

So I don’t know that my answer is reflective of what will eventually happen.

Mr. CONNOLLY. If it’s possible to get us data for the record in

terms of that list of people who qualified for bonuses and/or got bonuses, and how many of them left the company or stayed with the

company?

Mr. LIDDY. OK.

Mr. CONNOLLY. I would appreciate that.

Mr. LIDDY. Thank you.

Mr. CONNOLLY. Thank you, Mr. Chairman. I yield back.

Chairman TOWNS. Thank you.

I yield 5 minutes to Mr. Westmoreland, gentleman from Georgia.

Mr. WESTMORELAND. Thank you, Mr. Chairman.

Mr. Liddy, how many lawsuits are currently pending between

AIG and CV Star, Star International, and/or Mr. Hank Greenberg?

Mr. LIDDY. I can’t give you an exact number, but several, and

there are several that are quite large. I try to keep a finger on the

pulse of the largest ones, but then I rely upon our general counsel

and our legal department to handle those issues.

Mr. WESTMORELAND. How much money has AIG spent on these

lawsuits and legal fees so far? And how long do you think this

could go on? And how much money has AIG set aside or projected

for the future cost of these lawsuits?

Mr. LIDDY. I don’t have the details, sir. We can provide them to

you. But I would say the largest one and largest lawsuits we have

involves a lawsuit with Seco, and it has a $4 billion potential recovery attached to it.

And so working to get that money so that it can be used for the

benefit of the taxpayers, we think makes some sense.

Mr. WESTMORELAND. OK. But you know, from what I’ve been

reading or told is that this could take 3 or 4 years and tens of millions of dollars to get these lawsuits settled, with CV Star or Mr.

Greenberg or Star International.

Mr. LIDDY. Well, the first of those lawsuits is scheduled to go to

trial on June 15th of this year.

Mr. WESTMORELAND. OK.

Mr. LIDDY. And the start of that lawsuit would go back to, oh,

2005, 2006. So an awful lot of work has already been done with respect to it. So the issue becomes: Do you continue to pursue it, because you’re not very close to what you think will be a legal victory

involving a fair amount of money.

Mr. WESTMORELAND. But that’s one of the lawsuits. You said you

didn’t know exactly how many are pending.

Mr. LIDDY. No. I know that one, because it’s one of the larger. Then there’s a suit against Mr. Greenberg to the tune of about $1.6

billion to recover the fines and penalties that the company paid as

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a result of his behavior, that was determined. That’s what we had

to do in order to pay the attorney general of the State of New York.

Mr. WESTMORELAND. OK. But you will get us the information

about how many lawsuits are pending?

Mr. LIDDY. Yes.

Mr. WESTMORELAND. And where they’re at in the legal process,

if you don’t mind?

Mr. LIDDY. With respect to Mr. Greenberg?

Mr. WESTMORELAND. Yes. That would be fine.

According to the news reports—and I want to ask you if this is

true—that Mr. Greenberg has offered to submit all these matters

to a mandatory arbitration. Are those news accounts true?

Mr. LIDDY. We’ve gone through various forms of either mediation

or arbitration in the past, generally without any successful conclusion. And now that all the work has been done and this trial is

ready to start, and the judge who is going to hear it has been

briefed and is knowledgeable on it, most of those activities are no

longer ongoing, but we certainly have engaged in those discussions

before.

Mr. WESTMORELAND. But I think my question is: Are the news

reports true that it would be mandatory arbitration? Binding arbitration? Binding arbitration?

Mr. LIDDY. Yeah. I don’t think so. No. Again, we’re going to

quickly exhaust my level of expertise in terms of exactly what that

would be. And that’s what I——

Mr. WESTMORELAND. Well, could you get that information too? To

find out if these news reports are true that it would be a binding

arbitration that he has suggested that he and AIG go through?

Mr. LIDDY. Yes.

Mr. WESTMORELAND. Because, you know, to be honest with you,

Mr. Liddy, now that AIG is about 80 percent taxpayer owned, I

would think that if this binding arbitration was an offer that was

out there for both sides to do, that it might be in the best interests

of the American taxpayer to get these things settled, rather than

going on for years and years and years, paying these legal fees.

And I’m sure that binding arbitration with whoever the arbiter

would be could, in fact, in the end result, bring this to a close and

save the taxpayers, myself, and my kids and grand kids millions

of dollars over this period of time.

You mentioned yourself that this had been going on since 2005

in this one case. And so if there’s more than one case, how much

longer could it go on? How much more money are we going to

spend on lawyers? And what would be the harm in going to a binding arbitration?

Mr. LIDDY. Well, as I said, we have attempted to do that on numerous occasions with Mr. Greenberg on at least one suit, and

probably others.

And now all of the work and effort has been teed up to actually

take this to trial. So we think we have an excellent chance to——

Mr. WESTMORELAND. So you’ve never been to binding arbitration

is what you’re saying?

Mr. LIDDY. I’ll provide you the detail. I just don’t know.

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Mr. WESTMORELAND. OK. Because I mean, if you’ve been to binding arbitration, it looks like it will be binding. I don’t want to badger you, and I’m not trying to——

Mr. LIDDY. No—I’ve been through several rounds of

mediation——

Mr. WESTMORELAND. Well, I would like to know the details on

that, because I feel like since, you know, we now own 80 percent

of the company, that we do have an interest in that, and an ongoing litigation that could cost millions of dollars——

Mr. ISSA. Would the gentleman yield?

Mr. WESTMORELAND. I will.

Mr. ISSA. Thank you.

Mr. Liddy, earlier I asked you about the current stock value, you

know, of your stock. But I didn’t ask you about your portfolio in

its entirety. As an enterprise value, what would you say the fairly

stated enterprise value of the going concern you run today is? Not

what could liquidate it for, but what the enterprise value is? So

that we could decide what you believe it is worth in a fair market.

Not what it’s going to earn over years in which you get artificially

low loans and stock, which is paying no dividend; but what do you

believe the enterprise is worth today?

Mr. LIDDY. I would go back to the discussion we had earlier. I

think it’s the equity value. It’s about 2.7 billion shares, I think, at

approximately $2 a share. Because it’s not just the assets that you

have to value. It’s all the liabilities.

It’s the $40 billion that we want to pay——

Mr. ISSA. Well, that’s why I asked for the enterprise value——

Mr. LIDDY. There’s $250 billion of other debt that we owe. So I

think the enterprise value is at most what the equity value is

worth today.

Mr. ISSA. So you’re saying you’re worth $5 billion, and you’ve got $190 billion of the stockholders’ investment?

Mr. LIDDY. Well, again, the key is to be able to manage this situation over time, so that we can liquidate the liabilities, pay back

everything, and then have a value retained, which the trustees are

the guardians of.

Chairman TOWNS. Thank you, gentlemen. The time is expired.

Mr. ISSA. Mr. Chairman—and I’ll yield back my time—but I

would like to make a request that we do get this information from

Mr. Liddy and AIG as far as the future liability that could be imposed upon the taxpayers.

Chairman TOWNS. Without objection, and we will hold the record

open for the information.

The Gentlewoman from Ohio, Ms. Kaptur.

[The information referred to follows:]

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51

52

Ms. KAPTUR. I thank you, Mr. Chairman, and welcome, Mr.

Liddy.

Mr. Chairman, I would like to place in the record, as I begin my

questioning here, the list of the current board of directors of the

Federal Reserve Bank of New York as well as the list of primary

dealers with the Federal Reserve Bank of New York, and the

amount of funds that have been provided to the different institutions that are primary dealers, as being counterparties to some of

the funds that were received through AIG.

Chairman TOWNS. Without objection.

Ms. KAPTUR. I thank you.

Mr. Liddy, may I ask you, what is the actual address at which

AIG is headquartered?

Mr. LIDDY. 70 Pine Street.

Ms. KAPTUR. 70 what?

Mr. LIDDY. Pine, P-i-n-e, in New York.

Ms. KAPTUR. P-i-n-e. Is that in New York City?

Mr. LIDDY. Yes, it is.

Ms. KAPTUR. OK. Where in New York City is it? Is it part of the

Wall Street Community?

Mr. LIDDY. Yes. It’s lower Manhattan.

Ms. KAPTUR. It’s lower Manhattan. Who would be your closest financial neighbors there?

Mr. LIDDY. The Federal Reserve is two blocks away.

Ms. KAPTUR. All right. Thank you.

The American people have now given AIG nearly $200 billion,

and I guess others have stated we own about 79.9 percent of AIG.

Have you paid the taxpayers back any of the money that they have

lent you to date?

Mr. LIDDY. We have. We’re required—whenever we sell an asset,

we’re required to take the proceeds of that asset, to the extent we

can get out of the insurance companies whatever’s been sold, we

pay it back to the Federal Reserve.

Ms. KAPTUR. And how much have you paid back to the taxpayers

of the United States?

Mr. LIDDY. Several billion dollars. I don’t have the exact——

Ms. KAPTUR. Billion? Several billion?

Mr. LIDDY. Yes.

Ms. KAPTUR. So it was paid to the Federal Reserve. That doesn’t

necessarily mean it’s deposited in the Treasury to be refunded to

the American people, I take it?

Mr. LIDDY. That’s correct. It’s in satisfaction of the debt that we

owe to the Federal Reserve.

Ms. KAPTUR. All right. So you could provide more accurate numbers, dates, and amounts returned to the Federal Reserve——

Mr. LIDDY. Yes——

Ms. KAPTUR. Since the original infusions to AIG?

Mr. LIDDY. Yes.

Ms. KAPTUR. And could you also submit for the record, a list of

your board of directors, please?

Mr. LIDDY. Sure.

Ms. KAPTUR. Thank you.

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Next question. Approximately how much have you paid out to

your employees in bonuses and dividends to your shareholders over

the last 6 months?

Mr. LIDDY. We’ve paid no dividends to shareholders. We’re not

allowed to do that. As soon as we received help from the Federal

Reserve, all dividends to the shareholders were not allowed.

Bonuses. There are so many ways to slice this number. I just

can’t answer it. If you would give us the time to respond in writing,

that’s a better way to do that, and we will do that shortly.

Ms. KAPTUR. All right. We would very much appreciate that as

soon as you can give it to us.

Let me ask you, the funds AIG has been given by the American

people, 40 percent of it was then redirected to other Wall Street

firms, as I understand it. And the largest recipient was Goldman

Sachs, that received $12.9 billion. Is my understanding correct?

Mr. LIDDY. Yes. There are two or three firms that received double-digit—you know, $10, $11, $12, $13 billion in settlement of

legal contracts.

Ms. KAPTUR. Yes. And at least five of those that received these

funds are the worst offenders in the subprime market, including JP

Morgan Chase, Wachovia, Citigroup, HSBC, Bank of America. It’s

very interesting to see who got funds, when they’re responsible for

three-quarters of the subprime mess in the housing market that

this country is facing.

I would ask you to use your power, since you’ve given them

money, to get them to do loan workouts at the local level, where

citizens are outraged that companies like JP Morgan Chase, which

is the top of my bad-boys list for not returning phone calls.

Thousands and thousands of families in places like Ohio are affected by their recalcitrance, and arrogance. And it offends me to

see that they get money and they perform so poorly.

But my question in regards to Goldman Sachs. Could you clarify

your relationship with Goldman Sachs, the largest recipient of

these counterparty funds through AIG, $12.9 billion? What years

did you serve as a member of the board of Goldman Sachs, please?

Mr. LIDDY. I was on the board for approximately 51⁄2 years. Don’t

remember the year exactly I went on, but I exited that relationship

as soon as I became the chairman and CEO of AIG back in September 2008.

Ms. KAPTUR. September 2008. Is there a specific date?

Mr. LIDDY. Tendered my resignation as soon as I could get to it,

within a week or 10 days of my being appointed.

Ms. KAPTUR. Did you leave in early September or late September?

Mr. LIDDY. It would be after September 18th, but before September 30th.

Ms. KAPTUR. After September 18th. Thank you. Is it true that

you served as chairman of the audit committee of the Goldman

Sachs?

Mr. LIDDY. I did for the last year of my service.

Ms. KAPTUR. All right. So you would have done that through

middle-to-late September last year?

Mr. LIDDY. Yes.

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Ms. KAPTUR. All right. Bloomberg News reported on April 17th

that you currently own 27,129 shares of Goldman Sachs stock. Is

that true?

Mr. LIDDY. Yes.

Ms. KAPTUR. All right. Could you please estimate the market

value of that to date?

Mr. LIDDY. $3-plus million.

Ms. KAPTUR. All right. And you currently hold that?

Mr. LIDDY. No, I don’t. I own about 8,000 shares outright, which

I bought when Goldman Sachs went public in 2000–2001, and the

rest of it I receive as compensation as a director. I did not take any

cash. I took it in deferred stock, the deferred stock you can’t get

at until you retire from the board. And some time in May or June

that would be available to me. So it’s been restricted.

Ms. KAPTUR. But in any case, you have a direct interest in Goldman Sachs. You have a financial interest in Goldman Sachs. And

I understand you may also have some other type of agreement with

them, where you were paid some type of lump sum?

Mr. LIDDY. I don’t have any other type of agreement with——

Ms. KAPTUR. So your only interest would be the stock then? Several million dollars?

Mr. LIDDY. Yes.

Chairman TOWNS. The gentlewoman’s time is expired.

Ms. KAPTUR. I thank you, Mr. Chairman.

Chairman TOWNS. Congressman Souder from Indiana?

Mr. SOUDER. Thank you. I’m going to yield to the ranking member in a minute. I didn’t want to repeat questions when I was over

at Homeland Security earlier.

But I have a question on the bonuses. What on bonuses at AIG,

what percent of a normal salary typically before all this happened

would bonuses be? In other words, is it an integral part of someone’s pay or is it intermittent? Is it a small amount, 5 percent? Is

it——

Mr. LIDDY. It’s literally all over the lot. There’s 115,000 people

who work at AIG, so typically that bonus as a percentage of the

base would be lower, at the lower ends of the organization, and

higher as you work higher into the organization.

Mr. SOUDER. And since, just like at Goldman Sachs you were getting stock dividends, that was as a trustee, did AIG get stock dividends, or were they always cash?

Mr. LIDDY. No. At AIG you could have a base salary. You could

have an annual performance bonus and then there’d be a long-term

bonus. The long-term bonus would be stock, and at the time you

were expected to hold that stock until you retired from the company, and if you left before you retired, you could lose it.

Mr. SOUDER. And my understanding as we’ve gone through these

different hearings is the argument for the bonuses was, is that we

needed to retain personnel. The company could fold, and particularly keep personnel.

Is that——

Mr. LIDDY. Again——

Mr. SOUDER. Not the last round on the legal argument, but this

has been going—AIG has had these problems way back before December. And the question is that in the bonus round, part of the

55

feeling was, and what my question is to follow that—and you can

explain if that’s not true—is that right now there’s not a lot of

whole lot of other types of jobs available, certainly with the resume

coming off of some of the problems at AIG, it would be a very difficult time to do that.

In my district, we’re getting hammered by unemployment.

They’re looking at the bonuses, and they’re saying ‘‘We don’t get

bonuses when our company goes down. We get laid off.’’

And it becomes problematic as to why AIG would need the bonuses to retain personnel, why AIG would be paying such huge bonuses, when I have some companies in my district where bonuses

can be 40 percent of their normal salary, and they’re not getting

any bonuses.

Why is it unique in your industry and firm? Are they like commissions? And I’d just like to hear a little bit more of an explanation.

Mr. LIDDY. Sure.

Mr. SOUDER. Because I don’t know how to explain it, because I

haven’t heard a good explanation anybody’s buying.

Mr. LIDDY. Mm-hmm. I think we need to be careful with how we

use that word, bonus, because it can represent so many different

things, and it’s what’s caused members of this committee some

frustration, so let me see if I can quickly explain it.

There are normal annual performance bonuses; if you do a good

job on this, in addition to your salary you’ll get 15, 20, 25, 40 percent over and above that.

So I guess you could look at it as a commission, but it’s in our

industry. It really is a performance based bonus.

That was earlier in the day we had the conversation about that total, about $450-some million paid over the entire breadth of our

company and against a payroll of some $7.5 to $8 billion in size.

So that’s one form of a bonus, an annual variable pay or a performance bonus.

Then there were retention bonuses put in place. I think the ones

you were referring to are at AIG FP. They were designed in 2007,

put in place in 2008.

And when we decided and knew that we were going wind that

business down, we asked people to stay, to not leave until they accomplished certain things: Sell a book of business, make it less

risky. To the extent they did that, they were paid a retention bonus

or an award, again, for some level of performance.

So it depends upon which area of that you’re really poking at.

Mr. SOUDER. In other words, I understand the basic choices. I’ve

been in the middle of companies before I came to Congress that

had all those different ranges. Sometimes things like annual performance bonuses don’t become performance bonuses. They become

expected. And that my question is so were dividends, yet your dividends are zero.

So why would the company have made decisions to continue, at

any level, things that are supposed to be performance based? Did

you have a big exodus of employees at different times, indeed? Was

it critical to the survival of the company? Because it seems odd

that you were saying to the people who invested—many of whom

were trust funds and retired people, people who owned that—that

56

you get nothing, but we’re going to continue things that are supposed to be performance-based, when the performance of AIG was

not good for an extended period of time, not just the last few

months.

Mr. LIDDY. Well, I think, Congressman, you have to break it

down into pieces, so the total performance of the business as a

whole may not have looked good because it was severely damaged

by one or two enterprises—but then there were a host of other enterprises that performed well.

And to the extent that those people who work in those businesses

earned those performance bonuses, they would have been paid. If

they didn’t earn them, they would have gotten zero.

Chairman TOWNS. The gentleman’s time is expired.

Mr. SOUDER. It’s an interesting thing that people with the stock

didn’t get treated the same way.

Chairman TOWNS. Thank you very much.

Gentleman from Rhode Island, Mr. Kennedy.

Mr. KENNEDY. Thank you, Mr. Chairman. Welcome, Mr. Liddy.

I think you obviously heard a great deal of frustration from many

people here, because obviously we represent our constituents, who

are undergoing a great deal of economic struggle, and as you no

doubt understand yourself, are very frustrated just with their own

economic circumstance, and after having seen the travails of the financial system, are questioning the very basic foundation of our financial system in every form.

And that’s the reason why these questions seem so directed at

you, but please understand, we understand that your goal is to try

to get the best deal possible for the taxpayer. And believe me, in

doing so, it will be for the best interest of all of our constituents

that AIG is able to pay back the taxpayer, and certainly I think

all of us are interested in that.

And certainly taking your expertise to be able to do that will be

something that we’re all interested in seeing being fruitful and successful.

One of the things that I think will be of a great deal of concern,

I know, for all of our constituents down the road, as you’ve heard

echoed over and over again with respect to these bonuses, is this

notion of transparency.

And when you started in your remarks talking about how, you

know, AIG is the parent company, and you talked about separating

off various other entities from AIG, I think that what it raised in

terms of questions with respect to Project Destiny and how you’re

going to move forward, is when we as a Congress passed limitations on, you know, future bonuses, you know, from being used out

of the TARP, the question is, is whether these future, if you will,

special purpose vehicles, these separate entities that are no longer

part of ‘‘AIG proper’’ are going to be considered TARP recipients for

purposes of the rules and governance of these bonuses.

And as such, you know, all I know is that if my constituents here

a couple years down the line, that there’s a subsidiary of a TARP

recipient whose CEO is pulling down some huge bonus, albeit it’s

a successful subsidiary and you know, it’s helping to kick back the

dollars that we need for the taxpayers overall, it’s just going to

drive them nuts.

57

And so, what I need to get an answer from you now is: are these

kind of separate companies, are they going to be under the same

governance for purposes of the TARP regulations that AIG is

under?

Mr. LIDDY. If they’re still owned by AIG and a part of AIG, yes,

it’s our understanding they absolutely will be. There will come a

point in time when they’re completely disassociated from AIG.

They’re totally separate companies.

That will be a good day, because that means we will have gotten

dollars, and we’ve used those dollars to repay the Federal Government—either the loan to the Federal Reserve or the TARP dollars.

I suspect when that occurs, because they will not be TARP-related at all, then they would not be subject to it. But that would be

a good thing. As long as they’re owned by AIG and a part of AIG,

and AIG is subject to TARP dollars, then the subsidiary and pieces

of AIG are subject too.

Mr. KENNEDY. Mr. Chairman, I’d just call your attention to this.

I think it’s going to be a fine line where we’re going to have to

watch. Because I guarantee it’s going to come back and bite us all

in the behind, if we’re not careful in terms of what constitutes

something that’s owned by AIG or something that’s now no longer

part of AIG, because it’s been spun off by AIG.

American people aren’t going to look at it so clearly as, you

know, maybe lawyers might. And we all are going to be in the soup

politically, if we’re not careful. And I just would like to make sure

that we are very sensitive to that.

For purposes of the fact that down the road, we’re going to need

to go back to the taxpayer on occasion to get them to, you know,

have their confidence in their Federal Government.

And if they don’t have confidence that we were true to our word

at the beginning, and if they perceive that there was some kind of

shades of gray here that we’re held back and not fully forthcoming,

they are going to feel as if nothing was on the level.

And I just worry about the kind of perception that it’s going to

create, in terms of future efforts on our part to get any kind of support in the future for our financial system, which, of course, as you

know, has been key to our being able to recover the confidence that

we needed in order to keep this financial system from going completely belly up.

I’d also like to ask just——

Chairman TOWNS. The gentleman’s time is expired.

Mr. KENNEDY. OK.

Chairman TOWNS. The gentleman’s time is expired.

Mr. KENNEDY. Thanks.

Chairman TOWNS. Congressman Turner.

Mr. TURNER. Thank you, thank you so much, Mr. Chairman.

Ranking member, I appreciate your continued focus on the issue

of the financial crisis that we’ve had, and how that we look further

into holding people accountable.

My community has been significantly impacted by the mortgage

foreclosure crisis, which was a precursor of the financial meltdown

that we saw in our financial industry.

My primary county in my district of Montgomery County, with

a population of approximately around 500,000, since I have been in

58

Congress for 61⁄2 years, has had 27,000 foreclosures, 27,000 foreclosures in an area of about 500,000 people.

Most recently, last week, this Congress moved forward with calling for a commission that would look at the mortgage foreclosure

crisis and its contributions to the financial crisis.

When the financial crisis was first identified, there was a discussion of the issue of toxic assets, which people described as mortgage-backed securities. And we know that AIG had issues with

mortgage-backed securities, and also credit default swaps that were

related to mortgage-backed securities.

From the experience in my community, where we had the mortgage foreclosure crisis, what we saw with those individuals at the

Fair Housing Lending Center saw, and others who tried to impact

this and to assist families that were going through it, is that the

loan-to-value ratio of loans that the families received, primarily

through refinancing started with the family being underwater—

meaning that the value of the loan that the family was given exceeded the value of the property.

I’m from Ohio. We’re not an area that has had wild speculation

in property values and escalation, modest appreciation. So that a

loan-to-value ratio where you’re underwater, where you start the

loan underwater, structurally is a loan that if there’s any difficulty

at all is going to go to foreclosure.

The asset, of course, is not valued high enough to back the loan

as collateral, and the family is left with leaving the home sometimes to abandonment, and to the financial institutions.

This commission that’s moving forward is going to take a look at

this issue. It’s going to take a look at the issue of how did we get

into this problem of the mortgages that were granted?

And I believe that what we’re going to see is probably the largest

theft or fraud in history, where there was a systematic effort to

give people loans that either exceeded the value of their property

or were in such a high loan-to-value ratio that the loan itself was

likely to result in foreclosure.

So, sir, what I want to ask you is: I’m looking for documents

where our financial institutions had knowledge or knew that this

process was happening.

I believe that if there were mortgage-backed securities that were

issued, where the issuers knew that the collateral was insufficient

to support the value of the loan, that’s fraud.

I believe that if the loan-to-value ratios are not disclosed to subsequent purchasers, that it affects the very level of the risk for the

mortgage-backed securities, and therefore, I think that also is

fraud.

And it certainly affects the value of the underlying mortgage and

the suspicion that it would have a higher likelihood for default.

I understand you have a very big organization, but I am assuming that somewhere along the way, someone in your organization—

an analyst, someone who is reviewing the processes of the trading

of mortgage-backed securities, the issuing of them, the issuing of

mortgages—someone who is looking at this, may have brought to

the attention of the company, or others that there was a problem

with the loan-to-value ratios that were being packaged and then

traded.

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Because I can tell you that in my community, on the ground, the

problem existed.

So my question to you is: Has anyone ever discussed this issue

with you that there was a problem with the loan-to-value ratio of

the underlying mortgages inherent in the mortgage-backed securities that were subject to credit default swaps?

And also, would you be willing to share with this committee, for

the purposes of sharing with the commission that’s going to be

empaneled, any documents or information that you have, where

there is a discussion of how that loan-to-value ratio affects the level

of risk for the mortgage-backed securities, with it being out of

whack?

In other words, any documents that you have where someone

says, ‘‘I have a concern that this loan-to-value ratio is such that the

loan exceeds the value of the asset, that the collateral is insufficient to support the value of the loan, the mortgage, that lack of

collateral value and that excessive loan-to-value ratio affects the

level of risk for these mortgage-backed securities, and therefore

their ultimate value?’’

Mr. LIDDY. Yes. I would add one thing to what you just said. In

AIG’s—particularly AIG FP’s situation, we ensured those values.

So it wasn’t just one individual home. They all went into a pool,

and different institutions would aggregate those pools. So what

would come out of it, you’d have 100,000 loans.

So you didn’t get to look at the loan-to-value ratio at each one

of those. You’d look at the rating. Many of those were rated tripleA by the rating agencies, and when the AIG FP people underwrote

them, they took at face value that they were triple-A rated.

So we have some of the same angst over the situation, as you do.

We’ll help you in whatever you’d like and any way we can. I just

caution you that we’re kind of down at the bottom of the food chain

as well, and by the time we looked at these things, they had been

aggregated to a point where we didn’t look at loan-to-value ratios

on an individual house; we looked at them, at a whole pool of

items.

So we may not be a source of information that you’re seeking. If

we are, we’ll help you with it. But we could be a source, at a minimum, equally frustrated. Because we assumed, we took at face

value that these were triple-A rated. They were not.

Mr. TURNER. And that’s why I’m asking for your help. Because

if we have this commission empaneled and they’re given the responsibility to look at it, this is going to be like pulling threads to

get to what was, I believe ultimately a systematic process for this

to occur.

And you might have information that helps lead us in the right

direction.

Mr. LIDDY. And if we do, we’ll be delighted to share it with you.

Chairman TOWNS. The gentleman’s time is expired.

The gentlewoman from California, Congresswoman Speier?

Ms. SPEIER. Thank you, Mr. Chairman. Thank you, Mr. Liddy,

for appearing before the committee and answering our questions.

Let me just at the outset underscore something you said now a

couple of times. Today and once before the hearing before the Financial Services Committee. And then one way or another, you said

60

AIG should return to its core operations, to its knitting, as you put

it.

That would suggest that we should reinstate the Glass Steagall

Act, doesn’t it?

Mr. LIDDY. I’m not sure if we should go back to it, but we should

sure have a very rigorous debate between whether what we’ve allowed to happen has gone too far.

Ms. SPEIER. Well, you, by your own admission today, said you

should never have been involved in derivatives. It was Glass

Steagall that gave you the opportunity to get involved in derivatives.

Had you been just an old-fashioned insurance company with reserves that you had to maintain, none of this would have happened, correct?

Mr. LIDDY. Oh, with respect to AIG and our insurance operations

versus AIG FP, correct. But I don’t necessarily—my response to

you was meant to suggest I don’t necessarily know that I would

generalize from our situation to the overall Glass Steagall situation.

Ms. SPEIER. All right. Let’s kind of talk about where we are.

When Secretary Paulson came before us, he said we’re going to get

all of our money back from AIG; in fact, we’ll make money.

We spend a lot of time around here talking about a 79 percent

interest that we own AIG; except for the fact that we have no say.

And that’s the big problem. The taxpayers are absolutely apoplectic about the fact that there were hundreds of bonuses of a million dollars or more given to AIG employees, who brought this company down, and the taxpayers are picking up the tab.

Now, my question to you is: On the heels of what the gentleman

from California, Mr. Issa asked earlier: Can we really ever expect

that the taxpayers are going to be repaid? I mean, if in fact you’re

talking about $70 billion in TARP money, another $50 billion that

we paid for Maiden Lane, and another $60 billion in a loan from

the Fed. And you’re worth $5 billion.

I mean, we’ve all got to be scratching our heads. How can you

possibly repay the taxpayers?

Mr. LIDDY. Well, the $5 billion is what’s worth after you’ve sold

many of the good assets and paid off many of your liabilities, including the Federal Reserve and all the other debt that we have.

So some of the businesses that I’ve mentioned in the course of

our discussion today, a business like AIA, it’s probably got a value

of $25 billion. A business like ALICO, it probably has a value of

18. Our property casualty business has a book value of $35 or $38

billion.

So you just keep going down the list, and there’s great opportunity for the taxpayer to be repaid. But—sorry to be repetitive—

it’s very much a function of what happens to the economy and what

happens to the capital markets.

Ms. SPEIER. How much did the Financial Products Unit pay in

taxes? Or did it pay anything in taxes since it was located in London?

Mr. LIDDY. The taxes would have been, their earnings would

have been added in with all the other earnings of the businesses

that comprise AIG to get an aggregate number, and we would have

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paid taxes to the appropriate jurisdiction on that aggregate number.

So if that’s important to you, we’ll get you the number in terms

of what we’ve paid in taxes over the last couple of years. But AIG

FP would have just been a piece of it.

Ms. SPEIER. But if it was located in London, I mean, it could

have been a tax haven for AIG, could it not? And all of the profits

just retained in AIG FP and not brought back to the United States,

and therefore taxes not paid on it.

Mr. LIDDY. Yeah. It would depend upon where those taxes were

recognized. And as we sit here right now, I just don’t have the answer to that.

Ms. SPEIER. Would you report back to the committee on precisely

how much AIG paid in total in taxes, and then if in fact AIG FP

paid any taxes at all?

Mr. LIDDY. Mm-hmm.

Ms. SPEIER. The GAO recently came out with a report in April,

recommending that all the contracts be renegotiated regarding executive compensation at a AIG, if and when the $30 billion was

sought by AIG.

I presume you’ve seen that report, and I’d like you to comment

on it.

Mr. LIDDY. You, we are trying to do that in many cases, particularly with respect to FP. We’re going back to the contractual arrangements that were entered into at the end of 2007, beginning

of 2008. They call for retention payments in 2010. We are working

now to restructure those payments to make them more performance oriented. We’re going to comply with whatever the rules and

regulations are that come out when the Treasury promulgates

them.

Ms. SPEIER. And I guess my final question—although my time is

now up—I will yield back.

Chairman TOWNS. Thank you very much.

We’re not going to have a second round. But if you have a question, I will recognize you to ask your question.

Congressman Kucinich.

Mr. KUCINICH. Thank you very much, Mr. Chairman and Mr.

Liddy.

The AIG had a filing with the Securities and Exchange Commission recently, in which was included a letter that you sent to individuals who were to receive bonuses. If you need to, I have a copy

of the letter to refresh your memory.

Now in this letter—this letter by the way was sent 4 days after

you became the CEO, you became the CEO on the 18th, the letter

was sent on the 22nd—it was a little more than a week after AIG

received $85 billion from the Fed.

And what you write—and after you called for transparency, you

wrote a letter to employees who were disclosed the company’s recent SEC report, saying, ‘‘As this special award is being made to

a very select group of executives, I ask that you treat it as confidential.’’

The letter goes on to assure this select group that ‘‘in the event

the AIG entity that is your employer, the company, experiences a

change in control that is consummation of a merger, consolidation,

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statutory share exchange and similar form of corporate transaction

involving the sale or other disposition of all or substantially all of

the company’s assets to an entity that is not in an affiliate of the

company, AIG guarantees the payment of the 2008 special cash retention award on the dates and under the conditions specified

above.’’

First of all, you are familiar with that letter, are you not?

Mr. LIDDY. I haven’t read it in quite a while, so I’m familiar with

the issue, yes.

Mr. KUCINICH. OK. Based on that letter is it true that even if

the United States took over AIG 100 percent that these bonuses

would be awarded?

Mr. LIDDY. No. In fact, many of them have not. Many of them

have been restructured, or they have been—the payment of them

has been delayed, and we’re looking at revising them and trying to

figure out how do we pay them? How do we keep people that we

need to run these businesses? But how do we honor both the spirit

and the intent of what comes out with the Treasury regulations?

Mr. KUCINICH. So you’re telling this committee that it is the position of AIG management, of which you’re the CEO, that this letter

that you sent, that’s part of your SEC filing, is no longer operative?

Mr. LIDDY. No. It’s what causes us such difficulty, Congressman.

We have that letter, which can be viewed as a contract; but we

have a new set of events, which says it’s going to take a lot longer

to pay back the American taxpayer. How do we balance those two?

How do we balance a commitment that we made, with the understanding that we have right now, that the fact that it’s going to

take us longer to repay the American taxpayer?

It’s difficult. We need the leadership of this business, of our businesses, if we’re going to keep them viable, sell them, and pay back

the taxpayer. So that’s where there’s great tension in the system

right now. How do you keep the leadership, pay them competitive

wages, honor a commitment like that, but still be responsive to

whatever new legislation is put in place?

Mr. KUCINICH. So do you intend to honor the commitment that

you made in the letter?

Mr. LIDDY. I’m going to wait to see what comes forward from the

Treasury to see if those kinds of payments are permitted, if they

need to be restructured, if they need to be more performance-based.

I just don’t have enough information to answer the question. And

I’m told that those rules and regulations will be forthcoming in a

number of weeks.

Mr. KUCINICH. Will you be able to let this committee know

whether or not you intend to honor the letter that says that you’re

going to pay bonuses to people, essentially that they’d be able to

collect bonuses at taxpayers’ expense, even if the government has

a bigger stake?

Mr. LIDDY. Yes. Many of those dollars, to the extent they go to

people that are senior executives, that would have to be reported,

we’d have to make an 8-K filing or a 10-Q filing. You’ll know it.

Mr. KUCINICH. Well, because the reason why I ask if we’d know,

Mr. Chairman, is because you had asked the previous recipients of

this letter to keep the matter confidential. So are we to expect a

more forthcoming approach, more transparency in the dealings

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with this committee? Or are you going to have the confidential relationships with your employees to pass on bonuses to them, without this committee being aware of it?

Mr. LIDDY. No. We intend to be transparent in everything that

we do.

Mr. KUCINICH. Thank you, Mr. Chairman.

Chairman TOWNS. All right. Let me just say this before I recognize Congressman Tierney. You know, Mr. Liddy, I hope you recognize what people on the street are saying. You know, like when I

go home to Brooklyn, they are saying, ‘‘How do you pay a person,

give him a bonus, when they have failed? They put us in this mess,

and now you’re going to give him a bonus for it.’’

I mean, I don’t know how we answer people when we hear that.

So I think that you need to really keep that in mind, as you move

forward, because that’s the thing that the people out there are so

angry about.

And then of course when they say it’s a retention, why would you

want to retain them? You know. And that’s what we’re hearing in

the street.

And I don’t know whether or not, you know, you’re getting this

as you talk to people, but that’s the thing that we’re really, really

getting.

And then the other one is they say to us, you know, ‘‘Why would

you give them, you know, a retention bonus? First of all, they’ve

failed. And the fact that the economy is so messed, where can they

go?’’

I mean, these are issues that are being raised. So I just think,

you know, so you can sort of get a feel from our frustration up here,

as we deal with our constituents in terms of how we answer this.

And believe me, that’s an issue that’s been raised, you know, day

in and day out.

I yield to the Congressman from Massachusetts, Congressman

Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

Mr. Liddy, when Hank Greenberg was in front of this committee,

I asked him whether or not he believed that AIG should have been

allowed to go bankrupt, or whether they should have been bailed

out. And his answer was that he thought that the company should

have been allowed to go bankrupt, that would not have created a

systemic problem.

What’s your response to that? What do you believe to be the

case?

Mr. LIDDY. I wasn’t there when that decision was made, and neither was Hank, so that——

Mr. TIERNEY. No——

Mr. LIDDY. That was the decision that the Treasury and Federal

Reserve made. You know, as I examine the situation, I think it

would not have been good if it had gone bankrupt.

And the reason I think that is first, the institutional shock wave

at that time—I mean, those were dark days in the middle of September when people were very concerned about the survivability of

the worldwide financial system.

So we had had Fannie and Freddie being taken over. We had

had Bear Stearns several months before that. We had WAMU, we

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had the failure of Lehman Brothers. I think if AIG had gone bankrupt, it really would have sent shockwaves through the system.

So I think the passage of time has led me to conclude it would

not have been a good idea to do that.

AIG also, not just institutionally, from a retail standpoint, an individual customer standpoint, we have 81 million policies. Life insurance, pensions, retirement and savings plans. The difficulty of

managing something that large in 130 different countries, regulated by 400 regulators, would have been something the world has

never seen.

So I think it would have created much more difficulty than the

current situation that we find ourselves would have.

Mr. TIERNEY. And yet we could still end up there?

Mr. LIDDY. You know, we have a plan that we don’t think puts

us there. You just, you never know what’s going to happen. As I’ve

said many times, we are so dependent upon what happens with the

economic recovery and what happens to the values of our assets,

which are driven by the capital markets.

We think we have a plan that prevents that, it’s a good plan. It

takes time to implement.

Mr. TIERNEY. I just note there’s a distinct possibility to me that

would not have been good, which I think the way you phrase it,

and whether or not it still should have been allowed to go bankrupt, because, you know, no bankruptcy situation is good.

The question really would have been: Would it have been catastrophic or would it have been systemic?

Mr. LIDDY. Yes.

Mr. TIERNEY. And your belief is that it would have?

Mr. LIDDY. I think it would have been catastrophic and systemic.

As I said, the folks that had to make that decision, they were making that decision not in a vacuum, but in the context of an awful

lot of other moving pieces. And people I think were genuinely

afraid of the damage that an AIG bankruptcy could do on top of

the heels of the Lehman Brothers’ bankruptcy.

Mr. TIERNEY. Thank you.

I yield back, Mr. Chairman.

Chairman TOWNS. Thank you very much.

Yes, Congresswoman Marcy Kaptur.

Ms. KAPTUR. Thank you, Mr. Chairman.

Going back to Goldman Sachs, Mr. Liddy, as a member of the

board of Goldman Sachs through last September, were you involved

in any of the meetings or discussions leading up to the disposition

of Lehman Brothers or Bear Stearns, during which time advice was

given to Treasury Secretary Paulson, the former chairman of Goldman Sachs, on those institutions’ disposition?

Mr. LIDDY. Yes. Anything that would have transpired before

whenever I resigned, which I think is the 23rd, 24th, 25th, if there

were board meetings on those subjects, I would have participated

in those meetings.

Ms. KAPTUR. Yes. And how would we obtain minutes of those

meetings, and a full understanding of your role?

Mr. LIDDY. I don’t keep any records like that. You’d have to go

to the Goldman Sachs general counsel and ask them for that.

65

Ms. KAPTUR. Mr. Chairman, I would very much like to ask that

the committee use its subpoena power to obtain those records.

Let me ask this. Today there are many people staffing you. We

recognize some of their faces. And I’m wondering if for the record,

those individuals who currently are working for AIG directly or on

contract to AIG, could stand up in the audience and provide for the

record the organizations or firms for which they work and the

terms of their contract? For those individuals that are currently

under contract or working directly for AIG, could you please stand

up?

Thank you. Anyone else? Anyone else?

All right. I’d appreciate it very much if those firms and the contracts could be made a part of the public record, Mr. Chairman.

Chairman TOWNS. Without objection, so ordered.

Ms. KAPTUR. I thank the gentleman very much, and I have two

additional requests for information. One, Mr. Liddy, can you provide for the record the names of individuals who in late 1998 or

thereabouts worked for and ran the AIG Financial Products Division, created it actually, and developed and issued the first credit

default swaps, and also any internal documents related to the initiation and development of AIG’s credit default swap and route of activity, from its inception?

Mr. LIDDY. Congresswoman, what was the year, I’m sorry? The

year was?

Ms. KAPTUR. When it started. You referenced the year 1998?

Mr. LIDDY. Oh, AIG FP started in 1987.

Ms. KAPTUR. All right. When did the credit default swap piece of

it get started?

Mr. LIDDY. Well, I’ll have to get you the exact date. I understand

your request, so whenever they started——

Ms. KAPTUR. I want the historical development of that division.

It appears to be very important. When you appeared before Congress a couple of weeks ago, you said only 20 people worked for

that division. Is that possible?

Mr. LIDDY. No. There were 400 people in that division. The folks

that worked in the credit default swap area, there were probably

20 of them. But there were only three or four who designed the

multi-sector credit default swaps that caused us the difficulty that

we’re in.

Ms. KAPTUR. Well, I think it’s important for us to unwind back

to the beginning of what happened. So we would look for the information about that inside of AIG. And if goes back to 1987, then

let’s see when it morphed, and when it became something other

than what it was originally, and who actually did that.

I understand, did that occur in England, or in this country, the

actual creation of the idea to do that?

Mr. LIDDY. I think Mr. Greenberg started it in 1987 and then it

got ramped up to a greater extent in the late 1990’s and early

2000’s, and it would have been simultaneously in Connecticut and

London.

Ms. KAPTUR. I think it’s very important for us to understand

what happened. And I think seeing who worked for that instrumentality inside of AIG from inception through the morphing that

66

happened after Glass Steagall’s upturning by these Congress would

be most interesting.

Also to provide for the record all materials your firm possesses on the $2.2 billion diverted to Dresdner Kleinwort in Germany, and

particularly the financial assessments made to justify their receipt

of funds, how does Dresdner Kleinwort get involved in all this, particularly since they have been in deep trouble in Germany, and are

being acquired by Commerce Bank and by Allianz Insurance Group

in Germany?

I’m very interested in how you got involved in Dresdner

Kleinwort. Do you wish to comment for the record on that at this

point?

Mr. LIDDY. No. That was all before my time. I don’t have any

sense of it at all.

Ms. KAPTUR. All right. It’s my understanding that Dresdner

Kleinwort, through some process I would like to unravel, became

the possessor of a great deal of subprime housing paper from this

country. I would like to know how it was transferred to them?

Through which firms and what years? And what caused them to

collapse?

Mr. LIDDY. Yeah. I just don’t know that we have any information

on that whatsoever. To the extent we had a relationship with them,

we’ll provide you the material.

Ms. KAPTUR. Well, you’ve given them $2.2 billion.

Mr. LIDDY. Right——

Ms. KAPTUR. You must have some kind of relationship with

them.

Mr. LIDDY. But I would assume that will be satis—in some sort

of a credit default swap contract, or what have you. But all the

other information, you know, how much did they participate in

subprime lending, we wouldn’t have that information.

Chairman TOWNS. The gentlewoman’s time is expired.

Ms. KAPTUR. Were you ordered to give them the $2.2 billion by

the Federal Reserve?

Mr. LIDDY. The Federal Reserve, when we set up Maiden Lane

3, took responsibility for the settlement of all of those credit default

swap contracts.

Ms. KAPTUR. Thank you.

Chairman TOWNS. Yes. Thank you very much.

Mr. ISSA. Thank you, Mr. Liddy.

Boy, I’ve got a couple of ones that I know are sort of like you’ve

heard before. But what I wanted to say first was, please consider

taking this $400-plus million in bonuses, breaking it down, not necessarily just for one member, but for the public, into those people

who were generating EBIT in sections of the company that are providing positive cash-flow and positive EBIT.

And let people understand that these are performers who are delivering real value, who should be rewarded because you need that

profit as part of your going concern.

And then whatever’s left, we can argue about. But I’m hoping for

the sake of all of us on the—and for the public, we make it very

clear that even in a company that’s having bad times, even when

a car dealership is only selling 12 cars, you still pay a commission

to the guy that sold 11 of them.

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OK. You pay a bonus to the guy that sold 11 out of the 12 cars.

Mr. LIDDY. Mm-hmm.

Mr. ISSA. So to the extent that you have those individuals, whatever dollars, I think those performers—maybe not by name, but by

category, should be identified so the American people don’t see a

big number and assume that this was all just a giveaway.

I spent too long in business to not understand your problem of

keeping good people that can keep the ship afloat, particularly the

ones that are producing in divisions that are producing.

I want to get to one closing set of questions, though. Your predecessor, I guess two ago, Mr. Greenberg, when he came to us, he not

only told us that you should have filed bankruptcy, but he basically

led me to believe that you had an obligation to file bankruptcy. The

Treasury had an obligation. Everyone had an obligation.

When you had a going concern opinion, you stop working for the

stockholders and you start working for the secured creditors. That’s

just a reality of your board, that as viable going concern, you maximize shareholder value. As soon as you are not a going concern,

you have to look to your in-order preferred creditors, secured creditors, and you have an obligation to them.

Mr. Greenberg led us to believe—and I’ve checked with bankruptcy experts, and it appears he’s right—that tens of billions of

dollars were paid out that had your firm filed bankruptcy, would

not have been paid, because the corpus that was bankrupt was

firewalled from other parts of the company; therefore, yes, FP

would have gone bankrupt. It would have delivered whatever assets it had. Other claims against the company to the extent they

existed, would have been cleared in bankruptcy.

But huge parts, some of the very companies you’re talking about

that have large value, would have been fire-walled from that.

How do you respond to that?

Mr. LIDDY. I think the regulators in those 130 countries that we

do business would have grabbed those insurance assets and would

have held onto them and wouldn’t have released them to anybody.

And there would have been a very substantial debate internationally about who owned and who controlled those assets.

Mr. ISSA. So what you’re saying is you couldn’t count on the rule

of law, so that’s why the Treasury ordered you to pay moneys to

people like Goldman Sachs, who you paid with dollars that were

put into the corpus and paid out of the corpus in excess of any kind

of value that it had, but are burdened to the parent company

around what otherwise what would have been a firewall?

Mr. LIDDY. Well, once a decision was made not to declare bankruptcy, that sets in motion a whole series of events. You have to

honor the contracts. The Federal Reserve decided that we should

pay 100 cents on the dollar. That 100 cents on the dollar should

be paid in the settlement of those various——

Mr. ISSA. Yeah, but these were credit default swaps that I could

have bought for a fraction of that on an open market to the extent

that somebody was floating them at the time, right?

So we paid more than their current value at the time we paid

them off.

Mr. LIDDY. I believe that’s what the Federal Reserve decided was

in the best interests of the financial system.

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Mr. ISSA. OK. So the Federal Reserve paid a premium. I just

want to make sure we have it, because we have three trustees

we’re entrusting with our money, going forward.

The Federal Reserve paid a known premium, and they paid it not

to FP—so that we’re all talking about FP—they paid it to the parent company and caused you to take onto your balance sheet and

your stockholders to be diluted, based on a decision the Treasury

made for you not to file bankruptcy, and in fact for you to go down

there way.

And as you said, they made the decision. You got your instructions from the Fed and Treasury. That’s what you’ve said here,

right?

Mr. LIDDY. Well, the Federal Reserve, it’s not just getting instructions. The Federal Reserve handled those discussions and negotiations to settle those counterpart——

Mr. ISSA. Right. So the question I’m going to be asking the trustees, going forward—because they’re in a similar situation, but a little different than you—your board and you had an independent responsibility to your stockholders, now 20 percent, used to be 100

percent, and to other creditors, that when the decision was made

outside of your company not to go into bankruptcy, and the decision was made to take all of the assets otherwise not encumbered

in a normal firewalled situation, and put them in, your company

today, whatever it’s worth, owes this money to the Treasury, to the

American people, but it owes it based on decisions that were made,

that were not prudent on their face for your company.

May have been prudent for the world, may have been prudent for

the financial markets, but they weren’t prudent for your company

in the ordinary course of you get to make the decision.

Mr. LIDDY. Well, Congressman, it could turn out that they were

very prudent. It’s all a matter of whether, at the end of this whole

situation, we’re able to pay back the American public all the money

that’s been either loaned to or invested in AIG.

Mr. ISSA. But I just asked you what your enterprise value is

worth in the last round.

Mr. LIDDY. Right.

Mr. ISSA. And I asked you so you’d have an opportunity to take

the $35 billion here, the $40 billion here, and say ‘‘These enterprises, after we get into a good situation, are worth X amount—’’

Mr. LIDDY. Mm-hmm——

Mr. ISSA. Offsetting, you know, 100 percent of the debt potentially, and returning—because a year ago, a year and a half ago,

you could have been worth $100 billion for your stock price—I

agree that our investment of $40 to $70 billion at the height of

your stock in the last 2 years would have been whole.

My question to you, though, was—and I’d like you answer for the

record—is: Break down what you believe the enterprise value is

today. Mr. Kashkari, when he was before this committee, told us

he didn’t know what he paid for things and he didn’t know what

they were worth, and he couldn’t answer it, but he’d give us a report in 30 days. He resigned in roughly 29 days, apparently, so he’s

not back.

Mr. LIDDY. Mm-hmm.

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Mr. ISSA. Please do not think that you’re not going to be back before us, if you can’t answer what you believe today the enterprise

value is, so that given a static economy—not pie in the sky and not

future earnings, but the real value of your enterprise, what it’s

worth. What have the American people bought for $190 billion?

Mr. LIDDY. Mm-hmm. The assets minus the liabilities, including

all the money that we owe, either to the Federal Reserve or to

TARP, that number is what’s left over, and that’s what represented

in that 2.7 billion shares at $1.85 or so a share. But that’s after

you settle all of the obligations.

Mr. ISSA. So your answer today is: We’re completely solvent,

other than our $40 billion has become 70 percent of $4 billion?

That’s where we are. That’s that answer you’re giving me here

today when you answer that way, is that assets and liabilities balance in the enterprise value. What’s left is the hypothetical market,

that the market is saying, which is $4 billion. And that’s $40 billion of our money and the rest is the shareholders’.

So that says we have a loss, in your statement, of that delta, call

it $38 billion.

If that’s what you believe, fine——

Mr. LIDDY. No, no——

Mr. ISSA. But that’s what the market is marking your stock for.

What I asked you for was your real belief of your enterprises, individual enterprises value.

You know, you can normalize them for multiples of EBIT—what

their PEs would be in an orderly market, what their PEs would be

on a separate company basis. You know all the ways to value it.

I just think this committee should have an understanding of

today what you believe the enterprise, which you’re running and

the trustees are overseeing, is worth, in a way that we can have

some understanding of why you think you’ll pay us back over and

above what you gave us here today.

And I appreciate the fact that the stock is whatever it is on a

given day. What I want to know—and I think the chairman and

I both want to know—is just how you value these assets normalized.

We understand you may not realize them for 2 years; but we

have been asking for those kinds of numbers since the previous

president and previous everybody in this cycle.

Mr. LIDDY. Mm-hmm. And I’ll just take one more crack at it.

Those assets, if you take the assets that I just talked about earlier

and added them all up, they’ll add up to, whatever $80 or $90 million. I can’t do the math that fast. And that should be enough to

satisfy the $83 billion that we actually owe to either the Federal

Reserve or the U.S. Treasury now.

To the extent we have to use more of the $30 billion, we hope

that we’ll be able to get, recover that value by having even higher

asset values, because we plug an asset hole, or what have you.

So the asset values should be sufficient to satisfy what all of the

obligations of the company are, and keep the taxpayer whole. If the

marketplace stays strong. That leaves only the stub residual value,

which right now is that $5 or $6 billion. And hopefully this all

works out well, and that’s worth more and more.

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Chairman TOWNS. I thank you very much, Mr. Liddy. Thank you.

Thank you very much for your testimony, and you can see, based

on the questions here, that we are frustrated. And people—gentlewoman? Yes. Just a moment. I was getting ready to let you go, but

we have Congresswoman Maloney.

Mrs. MALONEY. Well, first of all, I want to thank you for your

public service and for coming in to help out.

Why did AIG meet the criteria of systemic risk while Lehman

Brothers did not?

Mr. LIDDY. Congresswoman, you’d have to ask the Treasury Secretary and the Federal Reserve, the New York Federal Reserve individual that made that decision at the time.

Mrs. MALONEY. Mm-hmm. They made determinations that municipalities and foreign governments were of systemic importance

to the U.S. banking system. Do you share that belief?

Mr. LIDDY. I think the totality of AIG represented systemic risk,

not just to counterparties, but the guaranteed investment contracts, and all of the policyholders that we have, I think had that

failed, I think it would have created a real problem.

Mrs. MALONEY. What proportion of the AIG counterparties would

have faced bankruptcy, without Federal bailout of AIG?

Mr. LIDDY. I do not know.

Mrs. MALONEY. And have you seen or could you provide the committee with any analysis of the impact of the ownership of the residential mortgage-backed securities by AIG’s life insurance companies, including whether problems in AIG’s life insurance business,

as a result of their purchase of these played a role in the decision

to provide the bailout?

Basically, I have heard that the life insurance portion of AIG was

regulated and was solvent. Is that true or not, that the life insurance portion did not receive, nor did it need bailout, that it was

properly managed?

Mr. LIDDY. It was regulated and it was solvent. But as values of

the residential mortgage-backed securities went down—because

that was part of the investment that they had, it created a hole,

and that hole has been, we’ve plugged some of that hole with

money from the Federal Reserve.

Mrs. MALONEY. So Federal Reserve money has gone into that?

Mr. LIDDY. Yes.

Mrs. MALONEY. And AIG argued that the bailout was necessary

because of potential problems in the life insurance business. And

you believe that is true.

Mr. LIDDY. I do.

Mrs. MALONEY. How much went into the life insurance division,

roughly?

Mr. LIDDY. It was somewhere between $17 and $20 billion——

Mrs. MALONEY. Really——

Mr. LIDDY. To make up for the loss in asset values.

Mrs. MALONEY. Really?

And going forward—I read in the paper that AIG does not need

another infusion of public money. Do you foresee that in the future

you will not need any public money, additional public money?

Mr. LIDDY. Congresswoman, I certainly hope so, as I’ve said

many times. We think what we have, we have a good plan that will

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enable us to repay the American taxpayer. But it’s very dependent

upon what happens with the economy and what happens with global financial markets. If they were to go south, the way they did in

the fourth quarter, that could change. If they remain stable or improved, the way they appear to be doing, that would be good news

for our efforts.

Mrs. MALONEY. Well, let’s hope they remain moving in the right

direction.

Again, I want to thank you for coming in as public service to help

restructure one of America’s great businesses.

And finally, some employees of AIG are questioning the breakup

of the company. They’re saying that this is really not good for the

future of a competitive business in America. And could you comment on the breakup and the selling off of assets at AIG?

Mr. LIDDY. I think in many of those companies that are going to

receive separate identities and will be spun off company, those people are excited about that prospect. So in an AIA or an ALICO,

there’s great excitement about those businesses.

With respect to our property casualty business, where we’ll sell

at least a minority interest in it and will separate from the AIG

name, there’s great excitement there.

Mrs. MALONEY. Mm-hmm.

Mr. LIDDY. If you work maybe in a technology area or an operations area, in the corporate core, you might have a different

thought about it, because your job could be eliminated or you could

get picked up by one of those companies as they get spun off.

Mrs. MALONEY. And finally, the insurance division was regulated, but also the risky products division was regulated under the

Office of Thrift Supervision, the regulator that AIG selected because they had a small portion of their company that was an S&L.

Could you comment on the quality of regulation coming out of

the Office of Thrift Supervision, on the so-called risky products AIG

financial products?

Mr. LIDDY. Congresswoman, I can’t. Although the last time I was

before Congress, there was an individual from the OTS, who if I

remember his testimony, said, you know, they just didn’t have the

wherewithal to be able to regulate something as massive and complicated as AIG Financial Products.

Mrs. MALONEY. Again, thank you for your public service and we

appreciate it. Thank you.

Chairman TOWNS. Thank you very much, Congresswoman. And

I also thank you, Mr. Liddy, for your time. And of course we appreciate you coming. And thank you so much for the information that

you’ve given us.

But as you can see on this side, there’s a tremendous amount of

frustration, and that we’re trying to answer questions that are

being raised, and at the same time, we also are trying to protect

the American people’s tax dollars, which is also very important.

So we thank you very, very much for coming today.

Mr. LIDDY. Thank you.

Chairman TOWNS. Now I’d like to welcome the second panel. But

let me say it’s a longstanding tradition here that we swear our witnesses in first. So, if you would please stand and raise your right

hands.

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[Witnesses sworn.]

Chairman TOWNS. Thank you. You may be seated. Let the record

reflect that the witnesses all answered in the affirmative.

Let me suggest an order. Why don’t we go in this order: Mr.

Feldberg will go first, and then of course Ms. Considine, and then

Mr. Foshee would be next. And then Professor Verret.

So why don’t we just proceed right down the line.

Mr. ISSA. If you could pull the mic up and turn it on, please?

Thank you.

Chairman TOWNS. Let me just——

Mr. FELDBERG. How about——

Chairman TOWNS. Just yield for a second. I guess I need to probably talk about your background a little bit for the members of the

committee.

Ms. Jill Considine, who currently serves as chairwoman of the

Board of Fulcrum Group, a fund administrator for the hedge fund

industry. In 2004 Ms. Considine ended her 6-year term as a member of the Board of the Federal Reserve Bank of New York, where

she served as chairwoman of the Audit and Operational Risk Committee.

We also have Mr. Chester Feldberg. Mr. Feldberg served for 9

years as Senior Official at the Federal Reserve Bank of New York.

He served as chairman of Barclays America from 2000 to 2008.

Mr. Douglas Foshee is currently CEO of El Paso Corp., a natural

gas producer. Mr. Foshee served as executive vice president chief

operating officer for Halliburton Corp. prior to joining El Paso in

2003. Mr. Foshee also serves as chairman of the Federal Reserve

Bank of Dallas, Houston Branch.

Our final witness is Professor J.W. Verret, a senior scholar at the

Mercatus Center at George Mason University. Professor Verret will

share his concerns about the AIG trust agreement.

So with that, we can move forward. Mr. Feldberg.

STATEMENTS OF CHESTER B. FELDBERG, TRUSTEE, AIG

CREDIT FACILITY TRUST; JILL M. CONSIDINE, TRUSTEE, AIG

CREDIT FACILITY TRUST; DOUGLAS L. FOSHEE, TRUSTEE,

AIG CREDIT FACILITY TRUST; AND PROFESSOR J.W.

VERRET, GEORGE MASON UNIVERSITY SCHOOL OF LAW

STATEMENT OF CHESTER B. FELDBERG

Mr. FELDBERG. Chairman Towns, Ranking Member Issa and

members of the committee. My name is Chet Feldberg, and I’m a

trustee of the AIG Credit Facility Trust. I’m appearing today with

Jill Considine and Doug Foshee, my fellow trustees, at the request

of the committee, in connection with its hearing on the collapse and

Federal rescue of AIG.

We’ve submitted a joint written statement, which speaks for all

of us. As trustees, we operate collectively. While each of us will

make brief oral statements addressing different aspects of our

work, I would stress the collaborative nature of our efforts and of

our decisionmaking process.

I was going to comment next on my background and experience,

but the chairman has covered that, so I will move forward. The

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chairman’s letter to each of us posed the question, ‘‘Is the U.S. taxpayer investment in AIG being properly protected?’’

This is the critical question. It motivates all of our deliberations,

and all of our actions.

Let me now turn to the background of the trust arrangement.

The trust was established by the New York Fed for the purpose of

acquiring, holding, and ultimately disposing of approximately 77.9

percent of the voting stock of AIG. Under the terms of the trust

agreement, we the trustees are charged with exercising the voting

rights of the AIG shares held in the trust in the best interests of

the U.S. Treasury, and with a view toward maximizing the value

of that stock.

As we understand it, the rationale for establishing a trust arrangement administered by independent trustees was concern by

the Fed and the Treasury regarding potential conflicts of interest

if the controlling interest was held by either governmental entity.

Each of us was contacted last fall by representatives of the New

York Fed and asked to serve as a trustee of the proposed trust.

After much reflection, each of us ultimately decided to accept this

challenge and responsibility.

On January 16, 2009, we were appointed as trustees by the New

York Fed and entered into the trust agreement, which we are attaching as part of our written testimony.

We immediately began organizational work in educating ourselves about the task that lay ahead. But it was not until March

4th that AIG issued stock to the trust, and we commenced our formal responsibilities as trustees.

Since then we’ve been impressed with the extraordinary challenges we face in exercising our responsibilities. In fact, many of

the factors relevant to whether the value of the taxpayer’s stock

can be—maximized are not within our control.

Such factors include what the market and the economy will look

like when company assets are sold or restructured, what decisions

the Federal Reserve or the Treasury will make concerning ongoing

financial assistance to the company, what constraints will be imposed by new legislation or regulation on the company’s ability or

obtain the people needed to keep the company running and effectively implement the restructuring plan; and finally whether continuing adverse publicity will affect the company’s ability to maintain the value of its businesses.

Each of these factors individually or in combination will have

great influence on the ultimate value of the enterprise. And no one

can confidently predict the final outcome at this time.

The trustees are committed to seeing through the next chapter

in the company’s history in the best interests of the Treasury and

the taxpayers of this nation.

We’re under no illusions that our task will be easy. Indeed, it

may be the most challenging task any of us has undertaken in our

professional careers.

In carrying out our role, we will be guided by our independent

assessment and judgment as to what course of action will best protect the interests of the beneficial owners of the trust, the U.S.

Treasury, and the U.S. taxpayer.

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We know that to be successful, we will need the ongoing support

of the Congressman, the administration, and the Federal Reserve.

In the end, we are all working toward the same goal.

I appreciate the opportunity to appear before this committee. My

colleague, Jill Considine, will not explain our duties and limitations

under the trust agreement in more detail.

Thank you.

[The prepared statement of Mr. Feldberg, Mr. Foshee and Ms.

Considine follows:]

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Chairman TOWNS. OK.

Ms. Considine, you’re recognized for 5 minutes.

STATEMENT OF JILL CONSIDINE

Ms CONSIDINE. Mr. Chairman, ranking member, my name is Jill

Considine, and I want to thank you for this opportunity to testify

and share information pertaining to the responsibilities as a trustee of the AIG Credit Facility Trust.

I’d like to begin by describing a little bit my experience in both

government and in the financial services industry. I served as a

banker, a banking regulator and as the chief executive officer of

systemically important financial institutions. Each of these experiences has proven invaluable as I participate with the other trustees

to execute our responsibilities and maximize the government’s investment in AIG, and most importantly, protect the interests of the

American taxpayer.

I previously served as CEO of the First Women’s Bank, was the

New York State Banking Superintendent, and served as president

of the New York Clearinghouse Association. In addition, I was the

chairman of the CEO of the Depository Trust and Clearing Corp.,

and as was mentioned, was a member of the board of the Federal

Reserve Bank of New York.

I agreed to serve as a trustee, understanding the importance and

urgency of the mission we were being asked to undertake, and with

a sense of duty to the taxpayers, whose interest to shareholders in

AIG we were asked to represent. Now with respect to the particular role we had been assigned, we know that we’re in uncharted

waters. There is no history, no precedent to which we can look for

guidance. Our anchor is the trust agreement itself, which describes

our roles, our responsibilities and also our limitations.

The primary responsibility on the trust agreement is to vote the

stock that we hold at all meetings of the stockholders, and most

importantly in connection with the election of directors of AIG; to

develop and execute a plan to sell or otherwise dispose of the trust

stock in a value-maximizing manner, and of course to work with

senior management and the board of directors of AIG to ensure

that corporate governance procedures are satisfactory to us.

However, equally important, the trust agreement says what we

should not do, and we cannot directly or indirectly become directors

of AIG or be responsible for managing the day-to-day operations of

AIG or any of its subsidiaries. Explicitly, by the terms of the trust,

we must leave the day-to-day direction and management of AIG to

the senior officers of the company and its board of directors.

Now there’s been a lot of conversation today and in the past

about the congressional and public concern over bonuses paid, and

we share these concerns about the payments of large bonuses at

the time when AIG was failing and being rescued by the taxpayers.

However, we are committed to ensuring that issues of compensation at AIG going forward are addressed in a thoughtful, prudent

and fair manner. It is essential that the board of directors focus on

compensation because a fair and effective compensation system is

truly necessary to ensure the successful restructuring of AIG and

the recovery of the taxpayers’ investment. In our view, compensation should be designed to be performance-based, to reward longVerDate 11-MAY-2000 15:00 Feb 01, 2010 Jkt 000000 PO 00000 Frm 00121 Fmt 6633 Sfmt 6633 U:\DOCS\53019.TXT KATIE PsN: KATIE
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term, sustainable value creation, and align employees’ compensation with those of the shareholder over the long term. It should not

be structured to encourage and reward undue risk taking or shortterm results.

To these ends, we’ve asked Mr. Liddy, together with senior management at AIG, the board and the appropriate committees, to undertake a broad review of the compensation programs currently in

place throughout AIG and to develop a comprehensive compensation program that applies to AIG as a whole. I’m honored to serve

with my colleagues, Mr. Feldberg and Mr. Foshee in this important

role. Mr. Foshee will now describe other aspects of our work, particularly with respect to the board of directors.

Mr. CLAY [presiding]. Mr. Foshee, you’re recognized for 5 minutes.

STATEMENT OF DOUGLAS L. FOSHEE

Mr. FOSHEE. Ranking Member Issa and members of the committee, I’m Doug Foshee. I’ll begin my testimony by providing you with

some brief information on my background and experience. I’ve

spent 27 years in business. I was a banker in Texas for almost a

decade, have been employed by two global companies and have

served in leadership roles in so-called turnaround situations. I

serve on the boards of two Fortune 500 companies, and as mentioned, serve as chair of the Houston branch of the Dallas Federal

Reserve Bank.

Perhaps my most relevant experience as it relates to AIG,

though, is my current full-time job as chairman and CEO of El

Paso Corp. I came to El Paso in the wake of a tumultuous time for

the company. Stock prices falling precipitously, employees indicted

and convicted, credit downgrades leading to cash collateral calls,

and a trading company that included over 40,000 trades, inadequate risk management systems, more than one restated financial

statement, rumored bankruptcy, a highly publicized proxy fight

that forced a replacement of management, and substantial change

in the board, innumerable government investigations, and tragically, the loss of morale of its long-time committed employees,

most of whom had nothing to do with the decisions that led to the

near demise of this great 80-year-old company.

I joined El Paso in 2003 to try, along with a very committed and

talented group of employees to turn all this around. Since then, the

team has divested over $17.5 billion in assets, reduced debt by half,

returned our pipelines investment grade rating, and the company

has been recognized by Fortune magazine as one of its most admired companies in 2008. The statistic we’re most proud of,

though, is that in our 2008 biennial employee survey, 91 percent

of our employees said they’re proud to work for our company as relates to 40 percent in 2004.

I’m serving as a trustee simply because I believe that to whom

much is given, much is expected. I feel a deep sense of obligation

to the U.S. taxpayers to act as a good steward of the investment

that has been made in AIG, and I’m honored to serve in this capacity with my two co-trustees.

One of our most important responsibilities as trustees is to ensure that AIG has an effective, independent and capable board, and

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that this board is focused on recruiting and maintaining a strong

and effective management team dedicated to prosecuting the company’s long-term plan. This allocation of responsibility between us

on the one hand and the board and management on the other, in

addition to being set forth explicitly in the trust agreement, replicates what is the accepted standard for good corporate governance

for public companies in America.

For these reasons, we’ve spent considerable effort focused on

AIG’s board of directors, how it functions, what skills the board

members have, and how those skills fit with the needs of a company in AIG’s extraordinary circumstances. We’ve come to the conclusion that if AIG is to succeed it needs a fresh start, a reset if

you will, a reset in the eyes of Congress, the American public and

other important constituencies.

We’ve recommended five new highly competent, highly capable,

independent candidates to the board. We expect that the board will

approve those candidates soon, that their names will appear in the

proxy statement that the company will be issuing within a week,

and that they will be elected at the upcoming shareholders meeting. These five additions plus Mr. Dammerman, Ms. Nora Johnson

and Mr. Liddy, and another new director proposed by the company,

will give the company effectively nine new board members. We believe that this action is wholly consistent with our overriding objective as trustees to maximize the long-term value of the equity held

by the AIG trust, and we look forward to supporting the newly constituted board as it carries out its tasks.

In closing, let me say that as trustees, we recognize there are

many, many constituencies that have a perspective on, in many

cases a stake in, the outcome of AIG. Most of them wish it to succeed. Some do not. In the end, though, our focus is on maximizing

the long-term value of the equity that the AIG trust holds. It is

through this lens that we see two constituencies to be of significant

underappreciated importance—the customers of AIG and the employees of AIG. If we all as taxpayers wish to recover our investment in AIG, then everything begins with them. They watch TV

and they read the newspapers. Every day, AIG’s employees have a

choice about where to work, and every day AIG’s customers have

a choice about where they buy their insurance and other financial

products. If they don’t choose AIG, then it is a mathematical certainty that the value of this asset, that we now all own collectively

a piece of, will go down. We need to keep these constituencies in

mind when the rest of us, the trustees, and respectfully, the Treasury Department, the New York Fed, and the Congress decide how

best to proceed.

Thank you, Mr. Chairman.

Mr. CLAY. Thank you.

And Mr. Verret, you’re recognized for 5 minutes.

STATEMENT OF PROFESSOR J.W. VERRET

Mr. VERRET. Chairman Towns, Ranking Member Issa and other

distinguished members of the committee, I want to thank you for

the opportunity to testify today. My name is J.W. Verret. I am an

assistant professor of law at George Mason Law School and also a

senior scholar at the Mercatus Center Financial Markets Working

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Group. I also serve as the lead investigator for the Corporate Federalism Initiative, a network of scholars dedicated to studying the

intersection of State and Federal authority in corporate governance.

My focus today will be the trust document set up by the New

York Federal Reserve Bank to manage the U.S. taxpayers’ investment in AIG. Make no mistake, this document represents a grave

risk to the American taxpayers’ $180 billion investment in AIG. I’m

also concerned by the AIG trust because of the precedent it sets.

Secretary Geithner has announced his intention to create another

trust to manage the Treasury’s investment in Citigroup as well as

other TARP participants. If the AIG trust, crafted during the Secretary’s tenure as president of the New York Fed, is used as a

model for these new entities, the risk to taxpayers will be multiplied many times over.

My concerns are structural and in no way directed at the trustees themselves. By all accounts, they are professionals of the highest caliber, and their nation owes them a debt of gratitude for their

generous service in this time of economic crisis. Today my focus

will be the three most troubling provisions of the AIG trust. One

requires the trustees to manage the trust in the best interest of the

Treasury rather than the U.S. taxpayer specifically. Another offers

generous protection against liability for the trustees, and a third

permits the trustees to invest personally in investment opportunities that may otherwise belong to AIG.

The first dangerous provision is Section 3.03(a). That section defines the fiduciary duty of the trustees as being to manage the investment in AIG, ‘‘in or not opposed to the best interests of the

Treasury.’’ In other financial entities tasked with managing wealth

on behalf of others, the fiduciaries must manage that wealth to

maximize value for their beneficiaries. This is true for mutual fund

trustees, ERISA retirement plan trustees, and boards of directors

of publicly traded companies. This provision threatens the entire

purpose of the trust itself, which is to create an independent buffer

between the short-term political interests of an administration and

the long-term health of the nation’s financial system. Maintaining

this buffer between short-term political interests and long-term financial soundness is critical.

The economic evidence from around the globe is overwhelmingly

clear. Political ownership in private banks and financial companies

results in lower GDP growth, increased need for subsequent government bailout, and politicized lending practices. For instance, in

Italy, banks with government ownership lend at lower rates in the

south since that area is politically important to the ruling coalition

in parliament. I am concerned about the temptation that we may

someday see TARP banks and other financial companies encouraged to subsidize lending, for instance, in battleground States. This

is why requiring the trustees to manage the trust in the best interest of the Treasury and not the U.S. taxpayer is so very dangerous.

A second provision in the trust that I find troubling is the corporate opportunity provision located in Section 3.05(b). Typically,

fiduciaries are prohibited from stealing investment opportunities

that they learn about through their performance as a fiduciary or

trustee and using those opportunities for themselves. The AIG

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trust permits the AIG trustees to potentially secretly invest personally in investment opportunities they learn about through their

performance as trustees without the necessity to even inform or

seek permission from AIG or the Treasury or the Federal Reserve.

This strikes me as unnecessary and particularly dangerous given

the potential for the AIG trust to serve as a model for other similar

documents.

A third threat to the American taxpayer located in this trust document are the indemnity and immunity provisions of Sections

3.03(a) and 3.03(d). These stand out as the most generous liability

protections I have ever seen offered to managers of wealth and represent significant deviations from standard and best practice in

corporate governance.

Under no circumstances are public companies permitted to indemnify directors for bad faith actions or actions not in the best interests of their beneficiaries. The AIG trust has no such limitation

on trustee indemnification. I am aware of no ERISA or mutual

fund trustee or director of a public company granted such a generous immunity from liability to their beneficiaries as the AIG trustees are in fact afforded. And I can see no good reason why those

best practices should not apply here.

In short, a trust in which the trustees cannot be held accountable

by their beneficiaries isn’t much of a trust at all. It is vital that

when an organization manages wealth on behalf of others, the

ship’s compass always point in the right direction, no matter who

stands at the helm. For this reason, I am recommending that the

flaws in this document be revised and at the very least not repeated in future trusts set up by the Treasury. I thank you for the

opportunity to testify, and I look forward to answering your questions.

[The prepared statement of Mr. Verret follows:]

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Mr. ISSA. You finished exactly at 5 minutes on the button. Thank

you so much, Professor. Let me start this round of questions. Can

I ask you, when is your next shareholders’ meeting? Mr. Foshee.

Mr. FOSHEE. The shareholders meeting hasn’t been set. It’s expected that the company will file its preliminary proxy within

about the next week, and following that I believe within about 10

days, a final proxy, and then following that, a shareholders’ meeting which I think we would expect would be toward the end of

June.

Mr. CLAY. Are some of the items that will be discussed at this

meeting include your executive compensation proposal and revamping the composition of the board?

Mr. FOSHEE. Certainly the five independent directors that we’ve

recommended to the board and the one new director that the company has recommended to the board will be the subject of a subsequent vote by the board of AIG, and we expect their names to be

included in the preliminary proxy filed within about a week.

Mr. CLAY. How about the executive compensation proposal?

Ms. CONSIDINE. If I may address that. The executive compensation, the letter that we sent requested the board and management

and the relevant board committees to come up with a well defined

compensation program. That does not go before the shareholders.

But in it we would want pay for performance, we would want to

have an overarching compensation philosophy, reward of long-term,

focus on eliminating short-term risk that is rewarded, and also

benchmarking the compensation packages that are going to be recommended to other companies that are in similar circumstances,

size and complexity and ask for periodic updates to the trustees so

that we can track to make certain that we have a comprehensive,

well architected compensation program from all of AIG.

Mr. CLAY. Out of curiosity, what is the compensation of current

or former board members? And is that in line with other corporations?

Ms. CONSIDINE. Well, let me remark on that. Initially the board

members were paid in board fees, retainer and also in shares, and

I would say prior to the financial crisis were making between

$200,000 and $300,000 a year per director. This year the directors

voted to decrease their compensation to $75,000.

Mr. CLAY. I see. Thank you for that.

Mr. FOSHEE. I just would add, which is substantially less, probably less by more than half, than the average Fortune 50 company,

public company.

Mr. CLAY. Let me ask the three of you, how do you plan on voting on these matters? And are other issues up for a vote? I mean

on the item of revamping the compensation or revamping the composition of the board, how do you—Mr. Feldberg.

Mr. FELDBERG. Essentially, that proposal is our proposal. I mean,

we’ve been working very hard for the last month or two to put together this package of five new exceptional directors for the company, so we will be enthusiastically supporting that at the shareholders meeting.

Mr. CLAY. In your opinion, is AIG too big to fail?

Mr. FELDBERG. If you go back to when the decision was made by

the Federal Reserve and the Treasury that it was too big to fail,

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I don’t have all the information today that they had when they

were making that decision. But if you ask me my best judgment

as to what the situation was then, I would have said yes, it was

too big to fail.

Mr. CLAY. OK.

Mr. FELDBERG. Now whether it should have gotten to that point,

you know, is a totally different issue. But where things sat at the

point that they felt they had to act, if I had still been in that seat,

I think I would have been arguing the same case.

Mr. CLAY. As far as the trustee model that you all operate under,

and this is the first time that we can find that this model has been

put in place by the U.S. Government, what is your opinion of the

trustee model? Is it a well-oiled machine or one that needs to be

thoroughly revamped and revisited, and if so, how?

Mr. FELDBERG. I think these are early days and I would emphasize that. I would also say that we didn’t have anything to do with

the decision by the Fed and the Treasury to develop the trustee

model. So, you know, it wasn’t invented here. I understand the

problem that the Treasury and the Federal Reserve had that gave

rise to their looking for a mechanism that would permit the stock

to be voted in the best interests of the government but without the

potential for conflict of interest. And I think this is a reasonable

model to do it.

We’ve been working together as a team since the end of January,

and intensely since we got the stock. I think the three-trustee

model and the way the trust authorizes the three trustees to proceed has so far been an exceptional model. It expects us to act

through a consensus, and to the maximum extent possible to act

in unanimity. It does provide a mechanism so that if we cannot

agree, two of the three trustees could go forward. To this point, I

think I can say without hesitation that we have been able to talk

things out and operate on every decision we’ve made, and there

haven’t been all that many, but every decision has been——

Mr. CLAY. I hate to cut you off. Any other panelists?

Ms. CONSIDINE. Yeah. Let me just take up on that because, you

know, we were involved in crafting the mission as it was reflected

by the trust agreement. You know, we didn’t set up the structure

initially, but we really believe that it can work. We’ve been working with it. We’ve been working under it, and we sometimes ask

ourselves what else, what’s the alternative? And perhaps if you

looked at it, the only alternative would have been direct government control, and that would have been nationalization, and that

was not the intent of this.

So we serve as the trustees. We’re maximizing the value for the

taxpayer, and we believe that it has functioned well, and we’re

pleased with it so far.

Mr. CLAY. Thank you.

Mr. FOSHEE. I just—I feel some obligation to——

Mr. CLAY. You aren’t compelled to answer, Mr. Foshee. If you

want to, you can.

Mr. FOSHEE. I just feel like we probably need to rebut some of

the things that were said by my colleague to the left, because we

disagree with him. The beneficiary of the trust is in fact not the

U.S. Treasury Department. It is in fact the U.S. Treasury. Now I’m

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not a lawyer, but as a lay person, I can tell you what I believe, and

I believe that is the U.S. taxpayer.

Second, with regard to some ability to secretly take a business

opportunity, there is in fact a provision in the trust that says that

we cannot take a business opportunity away from AIG, but the fact

is we all have other jobs, and if I have an opportunity for El Paso

Corp., what the trust says is I don’t have to share that business

opportunity from El Paso with AIG, which I would think most people would think would be pretty reasonable.

And last, we would just respectfully disagree that the indemnification agreement provided in the trust is inappropriate, and in

fact it complies with Delaware law and many other States and

we’re, as trustees, more than happy to put our reputational risk in

front of this committee and act on behalf of the U.S. taxpayers. We

feel responsible to each other in addition to the taxpayers, and to

all of you. And we thought and still believe that the indemnification provided was appropriate.

Mr. CLAY. Thank you for that.

Mr. VERRET. Mr. Chairman, if I may——

Mr. CLAY. Mr. Verret, I’m going to let you have some brief comments, so you may proceed.

Mr. VERRET. Thank you, Mr. Chairman. First, with respect to the

definition of what treasury means in this document, unfortunately

it’s particularly unclear. Treasury Department is a defined term

which in corporate legal drafting is something we do to make sure

that every time we use a term in a document, the definition is consistent. So we put it in bold, we put it in parentheses, we highlight

it as much as possible. So Treasury Department is defined as the

U.S. Department of the Treasury. Treasury, though, as mentioned

in the applicable standard of care section is not a defined term. It’s

not in bold, and it’s very vague about its definition.

Now I think it is perfectly consistent to understand that might

mean the Treasury Department. That might also mean treasury, as

in the general fund, in which case it still doesn’t necessarily mean

the same thing as maximizing shareholder value. Anything that

might be good for the general fund, for treasury’s expenses, maybe

they want to do something discretionary but they can get AIG to

fund it instead as a subsidy on AIG’s books, could be in the best

interests of the treasury, in the general fund, but not in the best

interest of maximizing the taxpayers’ investment.

Second, with respect to the corporate opportunity provision, I

would offer only quickly that it would permit them to take opportunities that would otherwise belong to AIG. It’s crafted specifically

that way. And third, just with respect to indemnification, as a

former clerk for the Delaware Court of Chancery, I can offer my

professional opinion with respect to Delaware law that this indemnification in here is not legal under Delaware law. It’s not permitted by the Delaware general corporation.

Mr. CLAY. All right. Thank you for that. And we are going to go

to Mr. Kucinich. We’re going to be a little lopsided for a minute.

Mr. KUCINICH. Thank you very much, Mr. Chairman. Mr.

Feldberg, how often do trustees meet? And could you speak into the

mic, please?

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Mr. FELDBERG. Yes. We have decided as a matter of discipline

that we will meet at least once a week, and at least one of those

meetings a month will be in person. So the absolute minimum has

been a meeting a week.

Mr. KUCINICH. So you meet telephonically then at least——

Mr. FELDBERG. At least a telephonic meeting a week and one inperson meeting a month. However, that’s the minimum. Without

having numbers, hard numbers I can give you, I would say that we

probably met in person at least twice a month since we’ve been operating.

Mr. KUCINICH. Are minutes kept of your meetings?

Mr. FELDBERG. Yes.

Mr. KUCINICH. Can you make available to this committee the

minutes of your meetings?

Mr. FELDBERG. Those minutes, under the terms of the trust

agreement I believe, are provided to the Federal Reserve Bank in

New York and I think are their property. I suspect that you’d have

to go to the Federal Reserve Bank in New York to get them.

Mr. KUCINICH. So the minutes of your meetings are not your

property, they’re the property of the Federal Reserve Bank of New

York?

Mr. FELDBERG. That may be a little strong.

Mr. KUCINICH. Well, that’s what you just said.

Mr. FELDBERG. I know, and I may have been a little strong in

saying that. But it is my understanding that the minutes belong

to the Federal Reserve. I could probably use the advice of counsel

to be sure I’ve got it right, because I don’t want to mislead you.

Mr. KUCINICH. Mr. Chairman, I think that in order to be able to

evaluate the work of these trustees, I think it’s imperative that this

committee get the minutes of their meetings and get their phone

logs so we can know what they talk about.

Now, Mr. Feldberg, when did you become a trustee?

Mr. FELDBERG. When the trust agreement was first signed in——

Mr. KUCINICH. What was the date?

Mr. FELDBERG [continuing]. In January. The specific date? January 16th of this year.

Mr. KUCINICH. So you never had any discussions, then, with any- body at the New York Fed regarding the $8.5 billion in payments

to Barclays as a counterparty?

Mr. FELDBERG. Absolutely none, Mr. Congressman.

Mr. KUCINICH. And do you—so your decisions really are not

transparent then? We really don’t know what you do as a trustee

if we don’t get—if you can’t produce minutes.

Mr. FELDBERG. Well, I didn’t say we can’t produce minutes, sir.

I said that I think we need to check with the Federal Reserve Bank

of New York before committing to something.

Mr. KUCINICH. Well, you worked for the Federal Reserve Bank

of New York. Is that correct?

Mr. FELDBERG. I did, yes.

Mr. KUCINICH. And how long did you work for them?

Mr. FELDBERG. Thirty-six years.

Mr. KUCINICH. OK. And were you asked by officials of the Federal Reserve Bank of New York to be a trustee?

Mr. FELDBERG. Yes I was.

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Mr. KUCINICH. OK. And Ms. Considine, you worked for the—you

were a member of the board of the Federal Reserve Bank of New

York. Is that correct?

Ms. CONSIDINE. That’s correct.

Mr. KUCINICH. And were you asked by the Federal Reserve Bank

of New York to be a trustee?

Ms. CONSIDINE. Yes I was.

Mr. KUCINICH. And who made that request of you?

Ms. CONSIDINE. Tom Baxter, who is the general counsel.

Mr. KUCINICH. And Mr. Feldberg.

Mr. FELDBERG. The same, Tom Baxter.

Mr. KUCINICH. And do you report to the Federal Reserve Bank

of New York on a regular basis?

Mr. FELDBERG. I would say that we have conversations with the

Federal Reserve Bank of New York on——

Mr. KUCINICH. On a regular basis?

Mr. FELDBERG [continuing]. On a regular basis. I would not characterize it as our reporting to them. It is really a vehicle for us to

exchange views and information and analysis. It’s very much a

two-way street.

Mr. KUCINICH. Isn’t it true that Section 4.01 of the trust agreement calls for the trustees to provide the New York Fed with

monthly custodial reports, quarterly summary of significant actions, quarterly report summarizing the efforts and activities to effect a sale or distribution of trust stock or other trust asset, minutes of any meeting, divestiture plan as amended time to time by

the trustees? Isn’t that true?

Mr. FELDBERG. Yes.

Mr. KUCINICH. So would it be fair to assume that the Federal Reserve Bank of New York has a significant role in monitoring the

work of the trustees?

Mr. FELDBERG. Yeah. I would say that they have a significant interest in the work of the trustees.

Mr. KUCINICH. Are you trustees on behalf of the Federal Reserve

Bank or are you trustees on behalf of the U.S. Treasury?

Mr. FOSHEE. We’re trustees on behalf of the trust that holds the

79 percent equity on behalf of the U.S. Treasury.

Mr. KUCINICH. And then can you explain to this committee then

why do you respond to the Fed, why is this trust agreement structured so that your accountability is to the Fed?

Ms. CONSIDINE. I don’t think that’s the reading that I would give

to it, because No. 1, in terms of visibility of our responsibility, our

responsibility is to act as the shareholder, and that is to vote the

shares. Now when the annual meeting occurs of AIG, we will be

voting for the directors, we’ll vote the trust for the directors, we

will vote for the auditors and we will vote for any other proposals

that are coming before the shareholders. That will be absolutely

open and public. As part of the agreement, yes, we are to provide

minutes and of course expenses back to the Fed. But we were selected to be totally independent trustees, and I believe that’s the

way we function.

Mr. KUCINICH. Mr. Chairman, my time has expired. I’m going to

need to ask questions along these lines if I may as a followup.

Thank you, Mr. Chairman.

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Chairman TOWNS. I’d be delighted. Recognize the gentleman

from California, Mr. Issa.

Mr. ISSA. I want to thank you all for being here and I want to

thank you for your service. And I said to most of you, or two of you

beforehand, this committee is not questioning your honesty and

your effort to live under the trust agreement you’ve been given,

which, Mr. Feldberg, you made very clear, you didn’t draw it up.

You know, this is sort of the job you got hired for, and the conditions of the job were already set.

And I think it’s important that the public understand that if

there were mistakes made or if we are sending you in the wrong

direction, it is not because you made that determination. And since

your contract was signed, the trust was created on January 16th,

then the previous president was still in place and the previous secretary of the treasury was still in place, so we’ll accept for a moment that this is a two-administration decision.

I’m going to go to Mr. Verret first. And specifically about the new

administration, President Obama has said that he believes that we

should actually have the Iraq and Afghan wars on the books. He

thinks that should be part of the national debt. The various TARP

injections and particularly the guarantees totally trillions of dollars, what would be the effect if we—should we put those onto the

national debt since they are obligations of the Federal Government,

and what would be the effect?

Mr. VERRET. Well, I can tell you the effect of when the United

Kingdom took—bailed out its two largest banks, when it bailed out

the Royal Bank of Scotland and Lloyd’s. They put that $2.1 trillion

of debt on those banks’ private bank budget onto the national budget, and I think this was a consistent decision by Chancellor Darling

that under the accounting rules, government accounting or private

accounting, when you control an entity and you back up an entity,

you’re responsible for their debt, so you need to consolidate their

debt onto your books.

So when Chancellor Darling consolidated the debt of those two

banks onto the U.K.’s national debt, the U.K.’s national debt doubled. It literally doubled overnight. And if we were to put

Citigroup, for instance, debt onto the national debt, which I think

would be appropriate, because we now own a controlling stake, a

36 percent controlling stake in Citigroup, which even under the

Treasury Department’s own regulations about reviewing foreign investments in the United States is defined specifically as control—

they define it as control at 10 percent. We’ve got 36 percent under

Delaware corporate law, that’s control. Under the securities laws,

that’s control. So we, I think, to be consistent should put

Citigroup’s national debt—Citigroup’s private bank debt—onto our

national debt. That would, I think, increase—by back-of-the-envelope calculation—it would increase our national debt by about 15

percent, just Citigroup alone. Other TARP participants, the national debt would increase by significantly more. So right now it’s

effectively sort of a shadow national debt that we have unrecognized.

Mr. ISSA. OK. Well, I appreciate that and I may send a reminder

to the President that he supported that. Ms. Considine, I’m going

to ask you, but the others are free to answer, my understanding

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is that you represent, you three are for all practical purposes the

stockholders for 79.9 percent of the company and you act as prudent stockholders should act in your day-to-day business. That’s

your charge, when we get past the legal contract. Is that right?

Ms. CONSIDINE. Correct. That’s correct.

Mr. ISSA. So regardless of whether it’s the Treasury or the treasurer or whoever, do you believe that your job is to maximize the

stockholder value on behalf of whoever the owner is?

Ms. CONSIDINE. Absolutely. Absolutely.

Mr. ISSA. You’re all saying yes?

Mr. FOSHEE. Yes.

Mr. FELDBERG. Yes. I thought I made that clear in my

opening——

Mr. ISSA. OK. And what’s important to me to go down this road

is, any—well, first of all, the New York Times has said that if they

don’t like what you’re doing, the Fed will fire you. Do you believe

you can be fired by the Fed even though you’re maximizing the

stockholder value?

Mr. FELDBERG. I think the Fed could remove us for cause, but

only——

Mr. ISSA. OK. Well, let’s go down that for a second. The Fed is

sitting there with tens of billions of dollars that it’s owed on the

other side of the ledger, but if as stockholders you want to maximize stockholder value, wouldn’t you consider doing through your

board, through the operational, through Mr. Liddy, consider doing

a lot of things that maximize value? For example, spinning off the

healthy companies into new public companies in which you would

have an 80 percent share, and that stock would trade unimpaired

and immediately rise to its fair value, and determine that the debt

that Treasury put on belongs to the corpus in London, not to the

corporation that you’re spinning off, and as a result, leave it where

it would be. Now wouldn’t that be a prudent thing for the board

to do on behalf of this money that Mr. Liddy admitted was injected

by the Treasury and given to other companies, including ones overseas, because of factors outside the best interest directly of the

company? So as stockholders, are you free to do that? Can you do

that even though, in fact, you probably would be increasing stockholder value here, and Treasury may not like it because they may

have to admit that what they did was—well the term is urinate I

guess—we don’t say the other word anymore—a whole bunch of the

taxpayers’ dollars into foreign banks and other corporations that

have slid right out of your company, one division of your company,

which you did not have an obligation to pay, but if they gave you

the money and you paid it out anyway? A complex question. Yes?

Mr. FOSHEE. Congressman Issa, if I could answer that question,

I think that you just articulated the primary reason that there is

a trust, because the Treasury and the Federal Reserve Bank of

New York couldn’t be effectively lender——

Mr. ISSA. It couldn’t be both fiduciaries.

Mr. FOSHEE [continuing]. Lender, regulator and equity holder.

And so the very thing that you’re talking about, which is a lender

wanting the company to take an act which is not in the best interests of the shareholders, especially to the extent that act required

a shareholder vote, is exactly why the three of us are sitting here

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in front of you today, and our responsibility would be to act in the

long-term best interest of the shareholders.

Mr. ISSA. OK. Ms. Considine, I’ll let you all answer if the chairman will indulge me, but the other two parts of the question were,

are those other acts which would maximize the value, which are

available to you today at your disposal, and would all of those acts

be outside what you could be fired for since they may very much

leave this corpus with a negative balance while in fact maximizing

stockholder value?

Ms. CONSIDINE. They would be outside of what we would be fired

for.

Mr. ISSA. So you could do that if it’s determined to maximize the

value for the company as stockholders, as—and working with your

board?

Ms. CONSIDINE. Well, I think there’s two issues. No. 1, the cause

for which we could be fired, and No. 2, what is the roles, responsibilities and limitations of the trust. And I think it’s something

that we’d have to think about, and as we said, this is unchartered

waters, because we need to respect corporate governance, we need

to respect the role of the board of directors, who are duly elected

by the shareholders. But that’s the balance that we have here.

You’ve got the debt holders on one side, the equity holders on the

other. Maximizing long-term value versus trying to get repaid for

loans that have been made. And that’s why I think this trust is

such a unique instrument but is probably perfectly tailored to the

situation in which we found ourselves.

Mr. ISSA. Yeah. And Mr. Verret wanted to answer briefly.

Mr. VERRET. I just want to briefly add just to cite Section 2.04(d),

if that’s useful to the discussion. It says clearly here that in exercising their discretion with respect to the trust, the trustees are advised that it is the Federal Reserve Bank of New York’s view that,

‘‘the company being managed in a manner that would not disrupt

financial market conditions is consistent with maximizing the

value of the stock,’’ even though maybe technically that might not

be the case. So it seems like they are afforded the discretion, at

least as I read the trust, to do things consistent with helping general market conditions even though it might not maximize the

value of the stock.

Mr. FELDBERG. I believe that clause was put in by the Federal

Reserve to express their desire that issue be considered in the

course of the trustees’ deliberations. It was explicitly done in a way

that it does not direct the trustees to do anything.

Mr. ISSA. So none of you feel bound by that provision if in fact

you have to choose between stockholder value and——

Mr. FELDBERG. No.

Mr. ISSA [continuing]. And, ‘‘disruption of some market?’’

Mr. FOSHEE. We feel bound to consider that, but we don’t feel

bound to follow that, no.

Mr. ISSA. Thank you, Mr. Chairman.

Chairman TOWNS. Thank you very much. Let me just take my

round. First of all, let me thank you for being here.

Mr. FELDBERG. Yes.

Mr. FOSHEE. Just to be clear, we’re responsible for overseeing the

equity held by the shareholders, the shares held by the trust.

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Chairman TOWNS. Right. I would like to provide a copy, let me

put it this way, do you have a plan?

Ms. CONSIDINE. I think you’re probably discussing the plan, the

disposition plan that we’re responsible for putting together.

Chairman TOWNS. Yes. Are you the project, are you involved in

Project Destiny?

Ms. CONSIDINE. Oh, no, no.

Chairman TOWNS. You’re not involved in that at all?

Ms. CONSIDINE. We’ve looked at Project Destiny, we’ve discussed

it with the senior staff at AIG, we’ve given some comments. We’ve

seen it on the high level in terms of the plan.

Chairman TOWNS. Right.

Mr. FELDBERG. If I might add, I think that plan is a good example of the intersections between management, the trustees and the

Treasury and the Fed. The plan, which Mr. Liddy talked about earlier today, is AIG’s plan. But in order to implement the plan, it will

require a buy in by the Treasury and the Federal Reserve and, you

know, could conceivably involve a change in, or an increase in the

financing provided by the Treasury and the Federal Reserve to

AIG.

Chairman TOWNS. Let me ask you, go ahead.

Mr. FELDBERG. The role of the trustees in connection with that

plan has been to provide our business judgment and experience in

reviewing the plan and telling the Treasury and the Fed where we

think the plan could be enhanced if we saw areas where that was

possible, and in fact, we have given them positive input in a number of areas in connection with the analysis and review of the plan.

But at the end of the day, it’s AIG’s plan and it will only go into

effect if the Federal Reserve and the Treasury buy into it. At least,

that’s my understanding.

Chairman TOWNS. Right. Let me ask you this, then. What is your

view of Project Destiny? What do you think of it?

Ms. CONSIDINE. Let me start off. I think it’s a workable plan.

There are issues that need to be addressed in terms of the timing

of the plan. And also, the timing has to do with many of the risks

that are out there in terms of the economy, the capital markets,

and the ability to dispose of or get financing for the disposition of

these assets.

Mr. FOSHEE. Yes, I think based on what we’ve seen, Mr. Chairman, the plan makes sense. I think one of the challenges that AIG

faces is, you don’t want, in this kind of a market to go take these

sort of crown jewel assets and sell them in a market where there

aren’t capital markets for buyers to pay full value. The other problem, of course, is that the AIG brand has been damaged and I

think the company views, and we would concur, that taking the

three, in particular, the three large insurance assets and making

those separate public entities does a number of things. The first

thing it does is, of course, get them out from under the negative

halo of the AIG brand. It also re-energizes the employees of those

companies because they now feel like they have a future with a

brand new, very large public company at some point. And then, I

think the third thing, as a practical matter, is to the extent there

are entities out there that would want to acquire an insurance

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company or something like that. It creates a certain amount of

valuation that is apparent by issuing it in the public market.

Chairman TOWNS. All right.

Ms. CONSIDINE. And I think, just to followup on that, that was

one of the reasons that we, as trustees, sent the letter in terms of

having a comprehensive compensation philosophy in place there.

Because if you’re going to be having different companies, you’re

going to need management out there, and they need the ability to

attract and retain people to come in and be able to manage these

and get them into the shape that they’re going to be able to maximize the value when they’re disposed of, either through sale or an

IPO.

Chairman TOWNS. AIG has received billions in tax dollars but

continues to post losses with the largest in history—over $60 billion was posted just 2 months ago. What can we do to turn this

around? Have you made suggestions or recommendations to them,

or are you just, saying, look, that’s the way it is and that’s what’s

going to happen. What is your role in trying to turn this around?

Or do you have a role in it?

Mr. FOSHEE. Well, I think one of the things, one of the most

prominent roles that I believe we can play as trustees, is ensuring

that AIG has the best, most qualified, independent board of directors that it can have, overseeing the management team and ensuring that there’s a management team there that is properly motivated and can execute the plan. So, I think in that, one of our primary tasks, we feel good about the successes we’ve had in being

able to attract those kind of people to come be the board members

of AIG. And it is that group, the board and the management team,

that have the responsibility for directing this company and getting

it through this mess. I think our input, I believe that it’s valued

by the company and by the Federal Reserve, to the extent we have

conversations with them. And so, I do believe we’re playing an active role in that.

Chairman TOWNS. Do you have a plan that you submitted to

AIG? I know you get together, you indicated that, but did you submit a plan as a group saying you think this is something that

should happen or this is something that we should move forward

and that maybe instead of 3 to 5 years, giving the taxpayers their

money back, we can do it in a shorter period of time? Do you have

a plan? Anything on paper that you can give us?

Mr. FOSHEE. No. In fact, the trust doesn’t charge us with creating a plan other than for the disposition, the ultimate disposition

of the shares of AIG that we are entrusted to be stewards of. And

we would expect, as we sit here today, that’s probably years away

in terms of maximizing the shareholder value.

Ms. CONSIDINE. And we can’t dispose of those shares until the

loan that was extended by the Federal Reserve Bank of New York

is repaid. Now, that doesn’t mean we’re going to wait until the ‘‘repayment’’ to come up with a plan. But, I think it’s a little premature to be working on a plan for disposition of the shares that

we hold at this time.

Mr. FOSHEE. And it really isn’t our role to create, nor could we,

the three of us, this, one of the largest companies in the world, create our own plan for what AIG should do with its business. What

135

we do do, though, is we talk to the company’s management team,

the company’s outside advisors, their outside auditor, the head of

internal audit, the Federal Reserve, and its outside advisors, and

develop our own business judgments so that we can react to plans

that are presented by the company.

Chairman TOWNS. You know, I’m just thinking that, if you, a

trustee of a company that has set a record in losses, it seems to

me that you should have something to say. Should put something

somewhere. I mean, if you’re not, you should feel extremely guilty.

You know, because the point of that, I mean, they’ve set a record,

posted in the last 2 months, in terms of their losses, and so, I

mean, seem to be that based on your background and you’re being

involved in business and, of course, that you should be able to say

to them, we need to move in a different direction, let’s try this. I

mean, I would like to see something on paper that you’ve given

them as a suggestion, a recommendation, knowing that it’s not

your final decision, but my God, I mean, this kind of loss, somebody

ought to say something and somebody ought to do something.

Mr. FOSHEE. Yeah, well, I’m sorry, go ahead.

Mr. FELDBERG. As I think has been said, there is a plan. In the

first instance, it was put forth by AIG. It’s a massive document. I

mean, the number of man-hours that have gone into its

preparation——

Chairman TOWNS. Are you referring to Project Destiny?

Mr. FOSHEE. Yes.

Mr. FELDBERG. I’m referring to Project Destiny. And that plan

has been submitted to the Federal Reserve and the Treasury for

their review and buy in. And the role we have played is to have

access to the plan and an opportunity to provide our input. And we

have done that informally in discussions with AIG and the Federal

Reserve and the Treasury. And those discussions are ongoing.

Chairman TOWNS. So, there’s no input in writing. You haven’t

written anything down.

Mr. FELDBERG. Mr. Chairman, at the moment, we are basically

a staff of three, the three trustees. We have opted not to hire our

own analytical resources, not to engage outside consultants, investment bankers, or whatever to assist us. There may be a point in

the future where we will decide to do that and certainly when we

get to the point of having to come up with a plan for the disposition

of the stock, we will do that. But at this point, we have a law firm

advising us to make sure that we comply with all the legal requirements of the trust and anything else that’s relevant. And we’ve got

somebody to help us deal with the press, but that basically is it

and there are the three of us. And what we are trying to do, is provide from the top down, our business judgment and experience in

reviewing the plans that have been prepared.

Ms. CONSIDINE. I think in this case leverage is good. We are trying to leverage the board, the management, the outside firms that

they are using, be they investment banks, auditors, internal auditors and all the resources, and bringing that together and then

coming in and offer, based on our collective business judgment,

feedback and comments.

Mr. FOSHEE. I think our business judgment is that, frankly, the

last thing AIG needs now is another set of outside advisors. The

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company has internal staff, it has external advisors, the Federal

Reserve Bank has internal staff, it has outside advisors. We’ve chosen, rather than to spend the taxpayers’ dollars on another set of

investment bankers at this point, not to do that and leverage what

already exists. But we have a, I think, we have had a significant

amount of input into the direction of the company and I would say,

not only are we not embarrassed, we’re proud that from a standing

start at the beginning of March, we’re able to announce to you

today that we’ve put forward five really capable, really independent

directors that we expect to be elected at the shareholders’ meeting

now close to a month away. Because we know, if AIG has the best

board it can get, and that board is directing the best management

team it could get, therefore, you’re going to end up with the best

outcome you can have for the U.S. taxpayer.

Chairman TOWNS. Thank you very much. I yield to Congressman

Tierney from Massachusetts.

Mr. TIERNEY. Thank you, Mr. Chairman. Do your minutes reflect

conversations you’ve had amongst yourselves about Project Destiny?

Mr. FOSHEE. To the extent it was during a trustee meeting, I

think the answer to that would be yes, though I haven’t gone back

and reviewed all of those.

Mr. TIERNEY. Are you having conversations amongst yourselves

about Project Destiny on occasions when you would not term it a

trustee meeting?

Ms. CONSIDINE. I think we’ve had the conversations on Project

Destiny when it’s been with the AIG management, with AIG management and the Fed, and AIG management, the Fed and Treasury.

Mr. TIERNEY. Do your minutes reflect those conversations and dialog with those individuals?

Ms. CONSIDINE. Well, they wouldn’t be the minutes of the trustees. They would have been the group conversation.

Mr. TIERNEY. Well, but there is no record, in other words, of the

trustees, of dialog that they’ve had with third parties on the issue

of Project Destiny?

Ms. CONSIDINE. Project Destiny.

Mr. TIERNEY. You don’t go back and make a report or keep any

record of what conversations you had or whatever?

Mr. FOSHEE. Probably not.

Ms. CONSIDINE. These are real working sessions.

Mr. TIERNEY. What is the value of the stocks that you hold right

now?

Ms. CONSIDINE. Well, if you——

Mr. TIERNEY. Best estimate.

Mr. FOSHEE. I don’t think a reasonable person could tell you the

answer to that question, given the nature of the complexities that

are in front of AIG. I think it is our business judgment that the

plan that’s been put forth offers up a very credible, very rational

way for the U.S. taxpayer to get its money back.

Mr. TIERNEY. You wouldn’t just take the number of shares you

have and multiply by the dollar per share cost of what’s on the

market?

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Ms. CONSIDINE. Well, I mean, that’s what I was going to say. If you want to say 80 percent of what the share price, between $5 and

$6 billion, so it’s $4.8 billion. I mean, if you’re looking for, whether

that’s real.

Mr. FOSHEE. Whether that’s the long term value of those shares

is another question.

Ms. CONSIDINE. That’s present value.

Mr. TIERNEY. Now, there’s conversation that this Project Destiny

really looks like a way of selling off bad assets, of restructuring and

selling profitable units, in an attempt to wind down the company.

There are some people that believe that’s what’s going on here.

And, is that your impression, and if it is, aren’t we just looking at

bankruptcy by another name?

Ms. CONSIDINE. Well, I would say that it’s looking to sell off good

assets. And there are some very, very valuable assets within the

AIG umbrella: the insurance assets. And I believe, as Mr. Liddy

talked about, ALICO, AIU, and AIA are three of, sort of, the gems

that are being looked at. Part of the plan is to, you know, continue

the wind down of the financial products division. So, I think what

you’d be left with would be a much smaller AIG, reconstituted,

which would probably be, in some respects, almost an investment

company that would be holding the shares in these other companies until they were finally disposed of, whether a total sale, an

IPO, or if only portions of it were sold.

Mr. TIERNEY. Couldn’t we have kept $185 billion in the Treasury

and just gone right to that by having a bankruptcy proceeding at

the very outset of this?

Mr. FELDBERG. You probably could have, but that gets into the

question of systemic risk and what would the implications of that

have been, more broadly.

Ms. CONSIDINE. You know, I was just on another panel last night

and when you think back on what was going on that weekend of

September 13th, this fall, where you had Merrill Lynch and you

had Lehman Brothers and then, you know, within 24 hours, you

had an end issue with AIG, I think the impact would have been

beyond what we could even imagine, even after what we’ve all

seen. So, I think, you know, maybe 20 years from now, academics

can look at it and really have some time and some distance. But

I think acting within that 48 hour time span, what was done was

probably the thing that had to be done, given the systemic consequences that were out there.

Mr. TIERNEY. You’re familiar with the Black Rock contract with

the Fed?

Ms. CONSIDINE. Not familiar with it, but aware of it, yeah.

Mr. TIERNEY. I’m sorry?

Mr. FELDBERG. We’re aware of it.

Ms. CONSIDINE. We’re aware of it.

Mr. TIERNEY. Does that impact your role at all? I mean, that

they’ve actually been, sort of, charged with the oversight and monitoring of what’s been, what’s going on within the company for a

bit. Does that, the impact, are you getting in touch with them at

all and sharing notes, or——

Mr. FOSHEE. We have not had conversations either with Black

Rock or, I believe, Black Stone, who is also an advisory to the comVerDate 11-MAY-2000 15:00 Feb 01, 2010 Jkt 000000 PO 00000 Frm 00141 Fmt 6633 Sfmt 6633 U:\DOCS\53019.TXT KATIE PsN: KATIE
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pany or to the Fed. I think our view is that so far as we know,

those are good things, not bad things, because as everyone knows,

the financial products group in particular, has been under a tremendous amount of stress, still represents a tremendous amount of

exposure to the company and having another set of eyes in there

to assist, we would view, on its face, as a good thing from the perspective of protecting the taxpayers’ interest.

Chairman TOWNS. Will the gentleman yield at this time? We

have a vote on and I’d like to move to Congresswoman Marcy Kaptur and then we will be able to conclude. Congresswoman Kaptur.

Ms. KAPTUR. Thank you, Mr. Chairman. Mr. Foshee, who is El

Paso Corp.’s chief banker?

Mr. FOSHEE. El Paso Corp.’s chief banker, we have relationships

with half a dozen of the top, of the largest financial institutions in

the world.

Ms. KAPTUR. And they would be?

Mr. FOSHEE. Bank of America, J.P. Morgan, Deutsche Bank,

Goldman Sachs, I’m going to get in trouble for leaving one out, by

them. Royal Bank of Scotland, a whole litany of banks around the

world that are service providers to El Paso.

Ms. KAPTUR. Many and also many of which, most of which, have

gotten counter-party funds through the AIG transactions through

the Fed. You would agree to that?

Mr. FOSHEE. You know, again, specifically, I’m sure that many

of them did, because we do business with many of the banks

around the world.

Ms. KAPTUR. Well, J.P. Morgan Chase got $1.6 billion, Bank of American got $12 billion, Citigroup got $2.3 billion. Interesting to

look down the list. Let me ask you, when you served as CEO of

Halliburton, were you a party to the no-bid contracts that were initiated at the beginning of the Iraq war for the oil security in Iraq?

Mr. FOSHEE. First of all, I was never CEO of Halliburton. I

worked for Halliburton for 24 months. I was hired on the heels of

the asbestos crisis as a Chief Financial Officer in what would have

been characterized as a turnaround mode when the stock went

from $56 to $6. Of the 24 months I was there, I spent most of that

time as the Chief Financial Officer, so I would not have had a role

in that.

Ms. KAPTUR. All right, this says chief operating officer, executive

vice president, so.

Mr. FOSHEE. And the last 6, yes, and the last 6 months I was

with the company, I was the Chief Operating Officer.

Ms. KAPTUR. All right. Through what years? Through 2003?

Mr. FOSHEE. That would have been, I believe I left in early to

middle 2003. So the last 6 months prior to that.

Ms. KAPTUR. All right. So, you would have been there at the beginning of the Iraq war?

Mr. FOSHEE. Yes.

Ms. KAPTUR. All right. Thank you very much. Mr. Feldberg and

Ms. Considine, when people wish to write you, in your position as

trustees, which address do they write you?

Ms. CONSIDINE. 399 Park Avenue, New York, NY, and the Zip is

10022.

Ms. KAPTUR. All right. And how do they address that?

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Ms. CONSIDINE. Care of Arnold and Porter. We have a trust office

at Arnold and Porter at 399 Park.

Ms. KAPTUR. All right. Mr. Feldberg, through 2008, you were

chairman of Barclays America, is that right?

Mr. FELDBERG. Yes.

Ms. KAPTUR. OK, do you own stock in that bank?

Mr. FELDBERG. Yes, I do.

Ms. KAPTUR. You do? What is the relationship between that and Barclay Capital, that was in receipt of $8.5 billion through the AIG

counter-party arrangement with the Fed?

Mr. FELDBERG. Barclays Capital is a business unit of Barclays

Bank and——

Ms. KAPTUR. So, they are related.

Mr. FELDBERG. They are related, yes.

Ms. KAPTUR. All right. And when you worked at the Fed, what

did you do? You were a senior official. What did you do?

Mr. FELDBERG. Well, I did a number of different things, but——

Ms. KAPTUR. What was your title?

Mr. FELDBERG. Executive vice president at the time I retired.

Ms. KAPTUR. All right.

Mr. FELDBERG. I spent about 10 years running the discount window, the Fed’s lending operation. And the last 9 years I was there,

I was executive vice president, responsible for bank supervision.

Ms. KAPTUR. Thank you. And where is Barclays that you worked

for, headquartered in our country? Where is it?

Mr. FELDBERG. In New York City.

Ms. KAPTUR. And what street?

Mr. FELDBERG. Well, it’s moved, but at the time, it was 200, well,

when I left it was 200 Park Avenue.

Ms. KAPTUR. Park Avenue. So, you’re close neighbors there. And

Ms. Considine, I wanted to ask you, Butterfield Fulcrum, it’s a

hedge fund management industry. Who are your major clients?

Ms. CONSIDINE. Mainly hedge funds, such as, well, very small

ones, they wouldn’t be on your radar screen, I mean.

Ms. KAPTUR. Could you provide those for the record, please? Just

pick one. Pick two. Pick three. You must know who your clients

are.

Ms. CONSIDINE. Yes, I am. The thing is, we are a private company and we usually don’t come out with our clients’ names, so I

would just have to check with it. The other thing is, it is not a U.S.

company, so I would just like to go and get clearance on that.

Ms. KAPTUR. Uh, Butterfield Fulcrum?

Ms. CONSIDINE. Butterfield Fulcrum.

Ms. KAPTUR. It is based in what country, then?

Ms. CONSIDINE. It’s a Bermuda company. It was founded 20

years ago in Bermuda. It was bought out about 2 years ago by a

UK company and then in the past year, we merged with the arm

of Butterfield Bank, which is a 150 year old Bermuda bank. So, it’s

a global company. It is incorporated in Bermuda. Its senior management is located in the UK.

Ms. KAPTUR. All right. I thank you for stating that. Mr. Chairman, my time is expired.

Chairman TOWNS. Thank you. We have a vote on, so, we have

three votes on, so I’d hope we’d be able to make it——

140

Ms. KAPTUR. Mr. Chairman, Mr. Chairman, may I just say, you

know, as I’ve listened today, I get more and more concerned when

I represent a part of our country that is being devastated by what

these New York institutions and New York headquarters institutions have done to America and have done to places like I represent. You have no conceivable idea of the damage you have done

and are doing. I could go into a lot of detail here and I know Mr.

Chairman will have followup hearings. The way this whole thing

is structured, it’s an inside deal from the beginning. Every single

witness we’ve had is headquartered in one place. You all know one

another, you work together all the time and I’ll tell you, what

you’ve done to middle America is a sacrilege. Thank you, Mr.

Chairman.

Mr. FOSHEE. For the record, I’m from Texas. Our headquarters

are in Texas.

Ms. KAPTUR. Oh, but your bankers aren’t. They follow right up

the street.

Chairman TOWNS. Let me, you know, it’s not clear, to me and

other Members here exactly what you do, in terms of the role that

you’re playing in this. So, if you’ll be kind enough to submit to the

committee, some minutes of your meetings, so that we can get a

feel for what you’re doing, because it’s not clear to us up here. And

we’ve been sort of like, whispering to ourselves and passing notes,

you know, to ourselves, about your real role.

And so, if you could help us with that, well, I’ll hold the record

open for some minutes to get a feel for what you’re doing and

maybe we’ll understand, why you’re doing that.

Thank you so much. We appreciate you coming today.

[Whereupon, at approximately 2 p.m., the committee was adjourned.]

[The prepared statement of Hon. Gerald E. Connolly and additional information submitted for the hearing record follow:]

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