william c dudley : oversight of the federal government's intervention at american international group testimony of mr william c dudley, president and chief executive officer of the federal reserve bank of new york, before the committee on financial services, us house of representatives, washington dc, 24 march 2009. * * * good morning, chairman frank, ranking member bachus, and other members of the committee. thank you for giving me the opportunity to appear before you today. as you know, on january 27, 2009, i became the president of the federal reserve bank of new york. before i assumed that position, i served as the head of the markets group at the new york fed. i appreciate having this opportunity to discuss the federal reserve bank of new york's involvement with american international group, inc. ( aig ). role of the federal reserve bank of new york at the outset, it is important to note that before the new york fed became involved with aig as a lender on september 16, 2008, the federal reserve lacked any kind of authority to oversee aig. the lack of effective consolidated supervision over aig was a critical contributing factor to the debacle that occurred at the company. the federal reserve made its decision to lend based on a judgment that a failure of aig would cause dramatically negative consequences for the financial system and the economy – consequences worse than what occurred in the aftermath of the failure of lehman brothers. we stand by that judgment today. in the case of lehman, some of the most severe repercussions related to the difficulties in coordinating cross - border insolvency regimes and in coordinating the insolvency regimes among different types of institutions within the organization's corporate structure. in light of aig's unparalleled global footprint – operating in more than 130 countries around the globe – and the multiplicity of different types of financial services entities within its structure – including insurance providers, foreign banks, consumer lending companies and otc derivatives affiliates – the factors that proved unmanageable in the lehman insolvency threatened to be much more severe in aig's case. the fact that no effective emergency resolution procedures exist under u. s. law to reconcile these difficulties heightened the need for quick, effective action by the federal reserve, in consultation with and supported by the u. s. treasury. from the outset, the new york fed has been sharply focused on addressing two overarching goals with respect to aig : ( 1 )

tarp - related compensation matters rests with the treasury department, the new york fed has played a role since september in reviewing the adequacy of aig's corporate governance procedures. this review has helped to identify longstanding deficiencies with respect to compensation committee governance, compensation benchmarking and lack of centralized control over compensation policy. we will continue to work with our colleagues at treasury and the independent trustees to ensure that aig's management properly addresses these deficiencies. ongoing involvement with aig the total package of assistance that the federal reserve and treasury department have committed to aig has established a more durable capital structure for the company that gives aig greater time and flexibility to execute its asset disposition plan to repay government funds. notably, we have recently agreed in principle to accept preferred interests in two of aig's large foreign life insurance subsidiaries, aia and alico, in order to make repayment of our loan less dependent on forced divestitures into a depressed acquisition market. although it will take time, we still expect that the proceeds from asset sales should enable aig to repay the new york fed in full. in all that we have done, we have been motivated by two goals : to preserve the stability of the u. s. economy and to protect the u. s. taxpayer. the threat of a major systemic risk event has been averted by honoring all of aig's contractual obligations around the globe – from insurance policy obligations owed to individuals, municipalities and businesses across the u. s., to the posting of collateral under credit default swap arrangements with the full range of counterparties recently disclosed. as unattractive as certain aspects of this treatment may be, these negative aspects have followed unavoidably from the decision to avert a systemically destructive bankruptcy. i look forward to your questions today and, in the longer term, to working with you and your staffs on the broader public policy questions – such as formulation of a resolution regime for institutions like aig and consideration of the appropriate supervisory structure for otc derivatives – that are posed by the events at aig. thank you.