[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
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
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
53-019 PDF WASHINGTON : 2009
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts MARK E. SOUDER, Indiana
WM. LACY CLAY, Missouri TODD RUSSELL PLATTS, Pennsylvania
DIANE E. WATSON, California JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio
JIM COOPER, Tennessee LYNN A. WESTMORELAND, Georgia
GERALD E. CONNOLLY, Virginia PATRICK T. McHENRY, North Carolina
MIKE QUIGLEY, Illinois BRIAN P. BILBRAY, California
MARCY KAPTUR, Ohio JIM JORDAN, Ohio
ELEANOR HOLMES NORTON, District of JEFF FLAKE, Arizona
Columbia JEFF FORTENBERRY, Nebraska
PATRICK J. KENNEDY, Rhode Island JASON CHAFFETZ, Utah
DANNY K. DAVIS, Illinois AARON SCHOCK, 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
------ ------
Ron Stroman, Staff Director
Michael McCarthy, Deputy Staff Director
Carla Hultberg, Chief Clerk
Larry Brady, Minority Staff Director
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
AIG: WHERE IS THE TAXPAYERS' MONEY GOING?
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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.
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 long-range 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 multi-year 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 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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
bail-outs 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, 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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 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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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 Federal 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?
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 other branch of government currently has on
your government-owned 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 3\1/2\, 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.
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?
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 brush-stroke 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.
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?
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
criticism. 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 problem 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
performance-based 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 revise 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 components 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
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.
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. 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
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 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 long-dated 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 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.
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 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 results 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
committee 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 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.
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.
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
advanced 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
addition 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----
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----
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 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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
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 5\1/2\
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.
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 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 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.
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 Congress for 6\1/2\ 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.
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 triple-A 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 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 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, 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 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
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.
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 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.
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.
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.
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.
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 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.
[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 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.
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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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 long-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
short-term 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 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 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 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:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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, 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 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?
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
in-person 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
anybody 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.
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.
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 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 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.
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
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 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 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?
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
company 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?
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----
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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