[Senate Hearing 111-809]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-809
 
              TARP AND OTHER GOVERNMENT ASSISTANCE FOR AIG 

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                              MAY 26, 2010

                               ----------                              

        Printed for the use of the Congressional Oversight Panel























              TARP AND OTHER GOVERNMENT ASSISTANCE FOR AIG

















                                                        S. Hrg. 111-809

              TARP AND OTHER GOVERNMENT ASSISTANCE FOR AIG 

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 26, 2010

                               __________

        Printed for the use of the Congressional Oversight Panel



                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                           J. Mark McWatters
                             Kenneth Troske
                           Richard H. Neiman
                             Damon Silvers

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                            C O N T E N T S

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                                                                   Page

Statement of Elizabeth Warren, Chair, Congressional Oversight 
  Panel..........................................................     1
J. Mark McWatters, Member, Congressional Oversight Panel.........     5
Damon Silvers, Member, Congressional Oversight Panel.............    10
Kenneth Troske, Member, Congressional Oversight Panel............    14
Scott G. Alvarez, General Counsel, Federal Reserve Board.........    18
Thomas C. Baxter, Jr., General Counsel and Executive Vice 
  President of the Legal Group, Federal Reserve Bank of New York.    40
Sarah Dahlgren, Executive Vice President, Special Investments 
  Management and AIG Monitoring, Federal Reserve Bank of New York    41
Michael E. Finn, Northeast Regional Director, Office of Thrift 
  Supervision....................................................    58
Robert Willumstad, Former Chairman and Chief Executive Officer, 
  American International Group, Inc..............................    76
Martin Bienenstock, Partner and Chair of Business Solutions and 
  Government Department, Dewey & LeBoeuf.........................   113
Statement of Rodney Clark, Managing Director, Insurance Ratings, 
  Standard & Poor's..............................................   120
Michael Moriarty, Deputy Superintendent for Property and Capital 
  Markets, New York State Insurance Department...................   132
Clifford Gallant, Managing Director, Property & Casualty 
  Insurance Research, Keefe, Bruyette & Woods....................   155
Robert Benmosche, President and Chief Executive Officer, American 
  International Group, Inc.......................................   164
Jim Millstein, Chief Restructuring Officer, U.S. Department of 
  the Treasury...................................................   196
Keith M. Buckley, CFA, Group Managing Director, Global Insurance, 
  Fitch Ratings..................................................   231


        HEARING ON TARP AND OTHER GOVERNMENT ASSISTANCE FOR AIG

                              ----------                              


                        WEDNESDAY, MAY 26, 2010

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to notice, at 10:00 a.m., in room 
SD-342, Dirksen Senate Office Building, Washington, DC, 
Elizabeth Warren, (chair of the panel) presiding.
    Present: Ms. Elizabeth Warren (presiding), Mr. Damon 
Silvers, Mr. J. Mark McWatters, and Dr. Kenneth Troske.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Chair Warren. I call this hearing to order.
    Good morning. My name is Elizabeth Warren. This is the 20th 
public hearing of the Congressional Oversight Panel for the 
Troubled Asset Relief Program.
    Before we begin, I'd like to note the presence of our 
newest panel member, Professor Kenneth Troske. Welcome. We are 
glad to have you join us and we look forward to your 
contributions on this panel.
    So I'm here today as the chair of the Congressional 
Oversight Panel but that is not my only job. I am also a law 
professor and in that role I've taught bankruptcy for nearly 30 
years now.
    Bankruptcy's an enormously complicated field with enough 
subtleties to fill thousands of pages, but the essentials could 
fit on the back of a napkin. In short, there are times when 
businesses fail and when they do someone has to pick up the 
pieces. When a company digs itself in so deeply in debt that it 
cannot escape, then our legal system provides a set of strict 
and simple rules to force the business to bear as much of the 
cost of that failure as possible and to minimize the impact on 
others.
    Of these rules, two are paramount. When there's not enough 
money to go around, the shareholders are wiped out and, second, 
the business creditors lose money and, depending on how deep 
that hole is, they may lose a great deal of money. The rules 
may seem harsh but they are fundamental to the functioning of a 
free market. After all, the parties that gain the most when a 
business succeeds should be the parties who lose the most when 
a business fails.
    As I open today's hearing, I list the rules of bankruptcy 
because we are about to examine a bankruptcy that broke all the 
rules. In fact, the rescue of AIG was so extraordinary that it 
bypassed the entire process of bankruptcy. In saving AIG, the 
Government invented a new process out of whole cloth, a 
parallel set of rules devised and executed for the benefit of 
only one company.
    By the time the Federal Government intervened in late 2008, 
AIG's stock price had plummeted 79 percent in two weeks. The 
sharp decline in mortgage-linked asset prices and the failure 
of Lehman Brothers had led to staggering collateral calls from 
AIG's counterparties and AIG simply did not have enough cash to 
pay everyone in full.
    The next steps ordinarily would have been straightforward. 
Under the rules that apply to everyone else in America, AIG 
shareholders should have lost everything and its creditors 
should have taken substantial losses. Yet, even today, AIG 
continues to trade on the New York Stock Exchange and no 
creditor lost a penny on its dealings with the company.
    Put another way, under the rules that apply to everyone 
else in America, the cost of AIG's mistakes should have been 
borne by AIG and its creditors, but under this new ad hoc set 
of rules, the cost of AIG's mistakes were borne by the rest of 
us, the American taxpayers.
    To be clear, I do not mean to suggest that traditional 
bankruptcy would have been the best or most appropriate choice 
for AIG. The company was a corporate Frankenstein, a 
conglomeration of banking and insurance and investment 
interests that defy regulatory oversight and that would not 
have fit easily into the existing bankruptcy structure. Its 
complexity, its systemic significance, and the fragile state of 
the economy may all arguably have been reasons for unique 
treatment, but no matter the justification, the fact remains 
that AIG's rescue broke all the rules and each rule that was 
broken poses a question that must be answered.
    Today's hearing is an effort to find those answers as well 
as to determine how taxpayer money was spent and how it might 
one day be repaid. This hearing is the culmination of months of 
preparatory work on the part of the panel and our staff and it 
will serve as the foundation for our forthcoming June Oversight 
Report.
    We will begin this hearing by having testimony from 
officials who, during the crisis of 2008, made the fateful 
decision that set the course for the Government's future 
involvement in AIG. We will then hear about the aftermath of 
those choices and about AIG's prospects of continuing 
operations and repayment for the American taxpayer.
    I want to express our sincere gratitude to our witnesses 
for their willingness to share their knowledge and their 
perspectives.
    [The prepared statement of Chair Warren follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Before we proceed with the testimony, I'd 
like to offer my colleagues on the panel an opportunity to make 
their own opening remarks.
    Mr. McWatters.

STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. McWatters. Thank you, Professor Warren. I very much 
appreciate the attendance of the witnesses and I look forward 
to hearing their testimony.
    The rescue of AIG has required the allocation of more 
taxpayer-funded resources than any other bailout undertaken by 
the Government since the inception of the current economic 
crisis.
    The Congressional Budget Office has estimated that the TARP 
investment in AIG will cost the taxpayers $36 billion out of 
$70 billion committed or disbursed, and the Office of 
Management and Budget has projected that the investment will 
cost the taxpayers $50 billion.
    Since our national resources are limited, the bailout of 
AIG will unfortunately require the Government to reduce the 
expenditures, increase tax revenue, or both. The American 
taxpayers were told in the last quarter of 2008 that they had 
no choice but to bail out AIG because, absent such action, the 
world financial system might very well collapse due to the 
systemic risk presented by and the financial interconnectedness 
of AIG.
    That may indeed have been an accurate assessment, but it's 
critical to note that the world financial system does not 
consist of a single monolithic institution but, instead, is 
comprised of an array of too-big-to-fail financial 
institutions, many of which, interestingly, were also 
counterparties on AIG credit default swaps and securities 
lending transactions.
    In other words, the concept of a world financial system is 
really just another term for the biggest of the big financial 
institutions and there remains little doubt to me that the 
principal purpose in bailing out AIG was to save these 
institutions as well as AIG's insurance business from 
bankruptcy or liquidation.
    It is ironic that although the bailout of AIG may have 
rescued many of its counterparties, none of these institutions 
are willing to share the pain of the bailout with the taxpayers 
and accept a discount on the termination payments.
    Instead, they left the American taxpayers with the full 
burden of the bailout. It is likewise intriguing that these 
too-big-to-fail institutions were paid at par, that is, 100 
cents on the dollar, at the same time the average American's 
401(k) and IRA accounts were in free fall, unemployment rates 
were skyrocketing, and home values were plummeting.
    It is also critical to recall at this time that many of the 
AIG counterparties were most likely experiencing their own 
severe liquidity and insolvency challenges and were under 
attack from short sellers and purchasers of credit default 
swaps over their debt instruments. By receiving payment at par, 
some of the counterparties were able to convert illiquid and 
perhaps mismarked CDOs and other securities into cash during 
the worst liquidity crisis in generations.
    In addition, by avoiding the inherent risk in an AIG 
bankruptcy and the issues regarding debtor-in-possession 
financing, some of the counterparties were also able to 
accelerate the conversion of their AIG contracts into cash and 
in late 2008 cash was king. Although some counterparties may 
argue that they held contractual rights to receive payment at 
par and were the beneficiaries of favorable provisions of the 
Bankruptcy Code, such rights and benefits would have been of 
diminished assistance since, in late 2008, AIG was out of cash.
    It also appears problematic that AIG would have been able 
to obtain sufficient post-petition financing following the 
implosion of the financial system that, according to the wisdom 
of the day, would have followed the bankruptcy of AIG.
    Thus, without the taxpayer-funded bailout, AIG would have 
held insufficient cash to honor in full its contractual 
obligations, notwithstanding the special rights and benefits 
afforded the counterparties.
    In light of this reality, it does not appear inappropriate 
for the taxpayers to expect a discount to par upon the 
termination of AIG's contracts with those counterparties who 
held the referenced securities but were not otherwise fully 
hedged against AIG-related risk with posted cash collateral.
    I appreciate that senior management and counsel of some of 
the AIG counterparties may cite standards of fiduciary duty as 
a defense to their unwillingness to accept a discount to par. 
It is quite possible, however, that these officers owed a 
higher fiduciary duty which was to save their institution from 
the very real threat of bankruptcy or liquidation that existed 
in the final quarter of 2008.
    After all, who can forget the photograph of the $2 bill 
taped to the door of Bear Stearns' New York office? That image, 
like Charles Dickens' ``Ghost of Christmas Future,'' told the 
story of what would come to pass for other financial 
institutions, such as AIG and its counterparties, absent the 
intercession of the American taxpayers.
    In the dark days of late 2008, when AIG faltered, the 
American taxpayers, not the New York Fed, not Treasury, stood 
as the last safe harbor for many of these financial 
Institutions and much of today's Main Street versus Wall Street 
debate would have never arisen if Wall Street had properly 
acknowledged the American taxpayers as its sole benefactor.
    As such, after the bailouts, it has become exceedingly 
difficult for many Americans to accept that what's good for 
Wall Street is necessarily good for Main Street.
    Thank you for joining us today, and I look forward to our 
discussion.
    [The prepared statement of Mr. McWatters follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Mr. McWatters. Deputy Chair 
Silvers.

  STATEMENT OF DAMON SILVERS, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Silvers. Thank you, Chair Warren. Good morning.
    This is the third hearing that our panel has held on 
assistance provided to a particular firm. Before I discuss the 
firm itself, I want to note, together with my fellow panelists, 
our gratitude to both this panel and the panels that follow for 
being with us today. I think we have an extraordinarily 
comprehensive set of witnesses in relation to the events we are 
interested in.
    I want to particularly note that this panel is comprised of 
individuals whom have spent a tremendous amount of time with 
our oversight panel in helping us understand these events and 
lest I be misunderstood in what I'm going to say following 
these remarks, I want to be clear that I believe that the 
United States owes a great debt of gratitude to the individuals 
before us who have dedicated their careers, for decades in some 
cases, to serving the public in the context of the financial 
sector where, obviously, great rewards await those who serve 
themselves only. And these individuals were faced in this 
matter of AIG with a profound crisis outside of their 
experience and outside of really the experience of the 
institutions they were helping to lead.
    And in the course of our oversight work, I think it's very 
important that nothing that we say or I say be understood to be 
in any sense anything other than our doing our job in the 
context we're doing it. There's no doubt that these 
individuals, and I note here that these are individuals whose 
names are not famous and who do a lot of work that doesn't 
often get a lot of credit, that these individuals have served 
their country admirably and it gives me great pleasure to have 
the opportunity to say that.
    Now, there are a lot of good reasons for us to focus on 
AIG. AIG received more TARP funds, as my colleague Mr. 
McWatters notes, AIG received more TARP funds than any other 
beneficiary and is the largest continuing holder of TARP funds 
in the financial system, but it's not really the size of the 
AIG bailout that has, I think, driven the continuing 
controversy associated with it.
    That controversy is really driven by several factors. One 
is the complexity and opacity associated with the collapse and 
bailout of AIG, and the way in which AIG was at the center of--
and I think Mr. McWatters talked about this in a very 
compelling way--at the center of a web of relationships among 
large financial institutions, including, notably, the firm of 
Goldman Sachs and a group of French banks.
    Another reason that the AIG bailout looms large over the 
TARP are the implications of the bailout in terms of the degree 
that the public turns out to have been guaranteeing the shadow 
banking system, an outcome that I think ex ante, sort of before 
the fact, would appear to be completely inappropriate.
    I think we've heard about how the central facts in the 
collapse of AIG were AIG's collateral obligations under credit 
default swaps, a kind of unregulated bond insurance, and AIG's 
obligations under some securities lending transactions.
    The public made good on these obligations, arguably 
signaling that these completely unregulated markets had a 
better quality government guarantee than an FDIC-insured bank 
account which, after all, has a relatively low limit of 
insurance, or a PBGC-insured pension, again which has a very 
low limit, not running into the billions of dollars.
    These are two of the most heavily-regulated financial 
obligations in our system. They're only partially guaranteed. 
It turns out that a credit default swap, at least in the AIG 
context, turned out to be a 100 percent guarantee.
    Now, I have a further interest, and I think the Congress 
and the public ought to have a further interest in AIG for a 
completely different and sort of ironically opposed reason, and 
that is that the AIG bailout represented a model for how to at 
least significantly impair equity, if not, as our chair has 
pointed out, wipe it out, in that the Government, in exchange 
for rescuing AIG, took 80 percent of the equity of the firm 
upfront.
    It has been a continuing puzzlement to me in my capacity in 
this oversight panel that that was not the model for dealing 
with, shall we say, systemically-significant failing 
institutions going forward.
    Now, so I think there are four questions that need to be 
addressed in our work here and in doing so, I want to make 
clear that I just do not agree with and think it is 
inconsistent with any meaningful oversight to accept the 
proposition that in this matter, or any other matter, the 
choices facing the Government were to do exactly what the 
Government actually did or do nothing. I do not believe that is 
an adequate way to think about either AIG or any other matter 
in which our Government takes action.
    So I'll run through the four questions quickly. The first 
question is, why did it turn out not to occur? Why did a 
private bailout of AIG not occur under the leadership of the 
New York Fed?
    Two, and this has been discussed by my fellow panelists, 
why did it turn out not to occur that there was any haircut 
asked of those parties who were substantially rescued by the 
public?
    Third, and this question we may be in the midst of being 
answered today, third, where are the legal documents and why 
has the public not had access to the legal documents embodying 
the transactions that the public bailed out?
    I understand that we are in the process, the Panel is in 
the process, of receiving these documents from AIG today. I 
hope that turns out to be true and complete.
    Fourth, and I mentioned this earlier, why was the AIG model 
in relation to the equity taken, not the model for other failed 
institutions?
    And finally, obviously, we need to address, and we will 
address, what course of action from here going forward is 
likely to produce the best risk-adjusted return to the public 
for our funds we have invested in AIG, and to what extent does 
AIG remain a threat to the financial system?
    We have set aside an entire day for this hearing which 
hopefully will allow us to explore these questions in some 
depth, and I look forward to hearing from our witnesses.
    Thank you.
    [The prepared statement of Mr. Silvers follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you. And now we will hear from our 
fourth panelist, Professor Troske.

 STATEMENT OF KENNETH TROSKE, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Dr. Troske. Thank you, Professor Warren. As Professor 
Warren mentioned, my name is Ken Troske.
    As many of you know, I am the newest member of the 
Congressional Oversight Panel, having been appointed to the 
Panel all of last Thursday by Senator Mitch McConnell to fill 
the vacancy left by Paul Atkins' departure.
    As a way of introduction, I am also the William B. Sturgill 
Professor and the Chairman of the Economics Department at the 
University of Kentucky.
    Since this is my first hearing and since I have been 
preparing for it since Thursday, I am going to keep my opening 
remarks brief and fairly general.
    Let me start out by saying how honored I am at being 
appointed to the Panel. This panel has been given very 
challenging tasks, including monitoring how the money from the 
Troubled Asset Relief Program has been or is being spent and to 
determine whether these actions are in the best interests of 
the American economy and its people.
    I know the Panel has already done an enormous amount of 
work in the past 19 months to carry out this charge. Hopefully 
I will be able to provide some additional insight and energy as 
the Panel continues and hopefully completes these tasks over 
the coming year.
    I would like to thank Senator McConnell for appointing me 
to this panel. I would like to recognize Paul Atkins for his 
service on the Panel prior to me and thank him for helping 
familiarize me with the work the Panel has done in the past.
    I'm very grateful to my fellow panel members, especially 
Chair Elizabeth Warren and Mark McWatters, for helping me 
understand some of the issues that we'll discuss today.
    Finally, and perhaps most importantly, I would like to 
thank the Panel staff for their help in navigating all of the 
myriad of details involved in getting me on the Panel and 
actually getting me here today on short notice.
    I want to make clear that I strongly support what I 
understand is one of the main goals of this panel: increasing 
the transparency and the public's understanding of the TARP. 
Given the size of this program, the speed with which it was 
approved, and the way the program has evolved over time, it is 
not surprising that many people remain confused and deeply 
suspicious of the TARP.
    I view this panel as an important vehicle through which the 
American people can gain assurances that this program was 
necessary and is being conducted in a manner that enhances the 
welfare of all citizens and not just a chosen few.
    I also believe it is important for the Panel to ensure that 
officials involved in the TARP learn from what happened so that 
we are not doomed to repeat this process in the future. I think 
all of us would agree that we want to avoid having the 
Government purchase insolvent private firms because of the fear 
that the economy will collapse if the firms fail.
    While I am not naive enough to believe that the Government 
or any organization, for that matter, can prevent future 
recessions, I do believe that by learning from the past 
mistakes we can be better prepared to deal with future crises.
    Let me conclude by thanking the witnesses who are joining 
us today. I appreciate you taking your time to come and help us 
better understand the events surrounding the Government's 
decision to provide financial assistance to AIG.
    [The prepared statement of Dr. Troske follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Professor. So we will start with 
our first panel. I'm going to introduce everyone.
    Scott Alvarez is general counsel of the Board of Governors 
of the Federal Reserve. Tom Baxter is general counsel and 
executive vice president of the Legal Group of the Federal 
Reserve Bank of New York. Sarah Dahlgren is executive vice 
president and head of Special Investments Management and the 
AIG Monitoring Group of the Federal Reserve Bank of New York. 
Michael Finn is the northeast regional director of the Office 
of Thrift Supervision. Robert Willumstad served as CEO of AIG 
from June 2008 until September 2008.
    Thank you all for being here with us today. I'm going to 
ask each of you to make opening remarks and I'm going to ask 
you to hold them to five minutes. I'm going to be fairly rigid 
on that just so that we can get all the way through the panel 
and have time for questions and for the panels that follow.
    So thank you all for being here. Mr. Alvarez, would you 
like to start?

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, FEDERAL RESERVE 
                       BOARD OF GOVERNORS

    Mr. Alvarez. Thank you, Chair Warren and distinguished 
members of the Panel, for the opportunity to discuss the 
authority and role of the Federal Reserve with regard to AIG.
    Section 13(3) of the Federal Reserve Act empowers the Board 
to authorize a Federal Reserve bank to extend credit to any 
individual, partnership, or corporation. Section 13(3) requires 
that, first, the Board find that unusual and exigent 
circumstances exist, (2) that the loan be authorized by an 
affirmative vote of not less than five members of the Board, 
(3) that the loan be secured to the satisfaction of the Reserve 
Bank, (4) that the Reserve Bank obtain evidence that the 
borrower is unable to obtain adequate credit accommodations 
from other banking institutions, and, finally, that the 
interest rate be determined by the Reserve Bank and approved by 
the Board.
    This authority was granted by Congress during the Great 
Depression in 1932 precisely to allow the Federal Reserve to 
lend to individuals and non-banking entities to relieve 
financial pressures that might otherwise lead to financial 
disaster. This type of lending authority is common among 
central banks worldwide and is considered an essential tool of 
central banks for providing liquidity during times of economic 
and financial stress in order to mitigate the effects of 
illiquidity and failure on broader markets and the economy.
    Each of the conditions established by Section 13(3) was met 
in the case of the loans extended by the Federal Reserve to AIG 
and to the two related Maiden Lane facilities. In particular, 
the economic conditions at the time of the lending were unusual 
and required expedited action.
    During the summer and fall of 2008, the U.S. economy and 
financial system were confronting substantial challenges. Labor 
markets were weakening and stresses in financial markets were 
high and intensifying significantly. Falling home prices and 
rising mortgage delinquencies had led to major losses at many 
financial institutions, strained conditions in financial 
markets and the slowdown of the broader economy. Equity prices 
dropped sharply. The cost of short-term credit where it was 
available spiked upwards, and liquidity dried up in many 
markets. Tight credit conditions, the ongoing housing 
contraction, and elevated energy prices were seen as likely to 
weigh on economic growth for the foreseeable future.
    In early September 2008, Fannie Mae and Freddie Mac were 
placed into conservatorship. A little over a week later, Lehman 
Brothers, one of the largest investment banking firms in the 
United States, collapsed. The failure of Lehman ended any 
chance of securing a private sector solution for AIG within the 
time needed to address its critical funding needs.
    So on September 16th, one day after the collapse of Lehman 
and during this period of tremendous economic instability and 
financial turmoil, the Federal Reserve, in coordination with 
the Treasury Department, made a secured loan to AIG in order to 
avoid the potentially devastating and destabilizing effects on 
the economy and the financial system that would have attended 
the collapse of AIG.
    In the Board's judgment and given the fragile economic 
conditions at the time, an AIG default during this period would 
have posed unacceptable risks for our economy as well as to the 
millions of individuals and businesses that were counterparties 
to AIG, including individuals who were insurance policyholders, 
state and local governments, workers with 401(k) plans, money 
market mutual fund holders, and commercial paper investors, as 
well as banks and investment banks in the United States and 
worldwide.
    With the financial system already teetering on the brink of 
collapse, the disorderly failure of AIG, the world's largest 
insurance company, would have undoubtedly led to even greater 
financial chaos, further contractions in the flow of credit to 
businesses and consumers, and a far deeper economic slump than 
the very severe one we are experiencing today.
    As detailed in my written testimony, the other conditions 
required by Section 13(3) were also met for the revolving line 
of credit and for the loans to the two Maiden Lane facilities.
    In particular, the credits were each fully secured at the 
time they were made. Importantly, the loans are being repaid as 
AIG winds down and sells its businesses in an orderly fashion. 
Currently, the revolving line of credit has been reduced from a 
maximum of $85 billion to $35 billion. The outstanding balance 
on the loan to Maiden Lane II has been reduced from $19.5 
billion to $14.5 billion, and the outstanding balance on the 
loan to Maiden Lane III has been reduced from $24 billion to 
about $16 billion.
    We expect the Federal Reserve will be fully repaid on each 
extension of credit involving AIG.
    While the conditions for use of Section 13(3) were met, a 
better option in our view, but an option that was not available 
to the U.S. Government at the time, would have been for the 
U.S. Government to have the authority to unwind systemically 
important non-bank financial firms.
    [The prepared statement of Mr. Alvarez follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Mr. Alvarez, I'm going to have to stop you 
there, but your entire statement will be made part of the 
record.
    Mr. Alvarez. Thank you very much.
    Ms. Warren Thank you very much. I made a mistake. Before we 
go to Mr. Baxter, I should have paused to note the absence of 
Panel Member Richard Neiman.
    All of us who serve on this panel do so in addition to our 
other responsibilities and for Mr. Neiman those 
responsibilities include serving as the Superintendent of Banks 
for the State of New York.
    Mr. Neiman felt that it would not be appropriate for him to 
be involved in our Oversight Report on AIG because this report 
will include an examination of AIG's relationship with its 
financial counterparties and a number of those counterparties 
are regulated by the State of New York Banking Department.
    We miss his good counsel, but we understand that he is 
working to protect the integrity of the process.
    So my apologies for not mentioning that at the end of our 
last statement. We miss Mr. Neiman and will be glad when he can 
rejoin us on subsequent reports.
    With that, Mr. Baxter, could I ask you to give your opening 
remarks?

    STATEMENT OF THOMAS C. BAXTER, JR., GENERAL COUNSEL AND 
 EXECUTIVE VICE PRESIDENT OF THE LEGAL GROUP, FEDERAL RESERVE 
                        BANK OF NEW YORK

    Mr. Baxter. Chair Warren and Members of the Panel, thank 
you for the opportunity to testify about the role of the 
Federal Reserve Bank of New York with respect to American 
International Group or AIG.
    Since September of 2008, the Federal Reserve has provided 
liquidity assistance to AIG in the form of an $85 billion 
revolving credit facility. Then, as market and economic 
circumstances changed and as we developed a deeper 
understanding of AIG's unique and complex problems, we 
restructured that facility in a number of ways.
    Throughout this process, our goals have remained the same: 
to protect the financial system by stabilizing AIG and to 
prevent a loss to the taxpayer.
    Today, we are positioned to begin thinking of the day, 
hopefully not too far from now, when we will be fully repaid 
principal and interest and have no further role as a creditor 
of AIG.
    Many Federal Reserve and Treasury officials have testified 
about this general subject matter, including me. Today, I will 
focus on the crisis management decision faced by policymakers 
on September 16th, 2008. In my nearly 30 years as a Federal 
Reserve lawyer, I have been privileged to work on a number of 
different crises, including the Iranian Hostage Crisis, the 
Thrift Crisis, the so-called 1987 Market Break, the failure of 
the Bank of Credit and Commerce International, the near 
bankruptcy of Solomon Brothers, the private sector rescue of 
Long-Term Capital Management, and the terrorist attacks of 
September 11th, which stand in a category all their own.
    My experience across three decades gives me a perspective 
on the context in which Federal Reserve policymakers needed to 
make their decision concerning AIG. You cannot understand the 
decision without an appreciation of the crisis context.
    AIG came before Federal Reserve policymakers in the midst 
of the greatest financial crisis we have experienced since our 
Great Depression. In testimony on January 27th, 2010, before 
the House Committee on Government Oversight, Secretary Geithner 
described the policy choice as ``whether to rescue AIG by 
putting billions of taxpayer dollars at risk or to let AIG fail 
and accept potentially catastrophic damage to the economy.''
    On the morning of September 16th, 2008, there were no other 
realistic options. Congress had provided the Federal Reserve 
with the ability to lend to a non-bank in exigent and unusual 
circumstances, provided the putative borrower had no other 
credit resources.
    If ever there was a situation where the circumstances were 
exigent and unusual, this was it, and the evidence that AIG had 
no alternative source of private sector credit was simply 
indisputable.
    Secretary Geithner also outlined some of the key crisis 
management features. He said that ``action was required. The 
world was watching and the Government did not have the luxury 
of time.'' He spoke metaphorically of the Federal Reserve as a 
kind of fire station and the decision was to put out the fire 
before it spread.
    On September 16th, 2008, to pick up the Secretary's fire 
station metaphor, we had several major fires burning. The 
flames ignited in the U.S. financial system with the 
conservatorships of Fannie and Freddie, were burning fiercely 
when the Lehman fire ball exploded. When AIG came for a 
decision the day after Lehman's bankruptcy, as Mr. Alvarez has 
pointed out, many neighborhoods were on fire and burning embers 
filled the air.
    This is the principal reason why the Federal Reserve needed 
to take action with AIG. In the unique time and context of 
September of 2008, it would have been unconscionable to allow 
another major blaze when you had a reasonable alternative. Our 
alternative was the revolving credit facility.
    Had the problems of AIG unfolded more slowly and apart from 
a broad market crisis, policymakers might have pursued 
additional information and solutions. They could have asked for 
more granular information about AIG creditors. They could have 
dispatched the Federal Reserve's lawyers to explore a 
prepackaged bankruptcy or perhaps even asked us to begin 
contacting the largest creditors to see if they would consider 
some kind of voluntary restructuring of AIG debt, but these 
tasks would have consumed considerable time and, given the 
actual situation on September 16th, would have meant the 
immediate default of AIG and certain bankruptcy with all of its 
systemic consequences.
    Chair Warren. Mr. Baxter, I'm going to have to stop you 
there, but your entire remarks will be part of the record.
    Mr. Baxter. Thank you.
    Chair Warren. Thank you. Ms. Dahlgren.

STATEMENT OF SARAH DAHLGREN, EXECUTIVE VICE PRESIDENT, SPECIAL 
INVESTMENTS MANAGEMENT AND AIG MONITORING, FEDERAL RESERVE BANK 
                          OF NEW YORK

    Ms. Dahlgren. Good morning, Chair Warren and Members of the 
Panel. Thank you for inviting me to appear here today.
    As the executive vice president of the Federal Reserve Bank 
of New York responsible for the management of the Federal 
Reserve's work to stabilize AIG, I welcome the opportunity to 
share with you some thoughts on those efforts.
    As my friend and colleague Tom Baxter just explained, 
beginning on September 16th, 2008, policymakers made the 
courageous choice to provide AIG with the liquidity that 
enabled its survival.
    As a result of that decision and the actions taken by the 
Federal Reserve and Treasury, we avoided the catastrophic 
consequences of a trillion dollar conglomerate's bankruptcy.
    As the Congressional Budget Office noted in its May 2010 
report, ``If the Federal Reserve had not strategically provided 
credit and enhanced liquidity, the financial crisis probably 
would have been deeper and more protracted and the damages to 
the rest of the economy more severe.''
    Going forward from September 16th, as we learned more about 
AIG and as Congress provided the Treasury and the Federal 
Reserve with additional tools to stabilize the company through 
the passage of EESA, we took steps to restructure AIG's debt so 
as to stop the increasing liquidity drain on the company. We 
altered the terms of our revolving credit facility and entered 
into the much-discussed and analyzed Maiden Lane II and Maiden 
Lane III transactions.
    We were motivated by two goals: financial stability and 
protecting the American taxpayers. Both of those goals required 
AIG to remain a going concern and AIG could not remain a going 
concern unless it retained an investment grade credit rating.
    Some have questioned our focus on AIG's credit rating, but 
that focus is easy to explain when you consider the nature of 
AIG's business. Financial firms like AIG are particularly 
dependent on the confidence of their customers. Customer 
confidence in an insurance company is based on reputation and 
credit ratings. Parents will not put their child's future at 
risk by purchasing a life insurance policy from a poorly-rated 
company. A municipality will not trust its teachers' retirement 
monies to a company with questionable credit, and a homeowner 
will not purchase a property insurance policy from a company 
unless the homeowner is confident the company will be able to 
pay a claim.
    No amount of liquidity can save an insurance company whose 
customers are fleeing. We needed to maintain AIG's credit 
rating so that it could retain its customers and the value of 
its businesses.
    Two of those businesses, AIA and Alico, are currently under 
contract for sale for $51 billion. The cash proceeds of that 
sale and the cash AIG generates as it monetizes the non-cash 
proceeds of that sale will go directly to paying down AIG's 
loans from the Federal Reserve. Those proceeds would not be 
available if we had not ensured that AIA and Alico remained 
going concerns.
    We fully expect to recover our principal and interest on 
the loans we made to the Maiden Lane II and III LLCs and on the 
revolving credit facility, and we are not alone in our 
expectations. The Congressional Budget Office estimates that 
the Federal Reserve will earn over $12 billion in interest over 
the life of the loans made to AIG under the revolving credit 
facility and that the losses on the facility will be negligible 
because the Federal Reserve is fully collateralized.
    The CBO also estimates that the Fed will gain two billion 
each from its investments in the Maiden Lane II and III LLCs 
and notes that it expects positive returns because the Federal 
Reserve bought the Maiden Lane II and III assets at fair value. 
To date, the Maiden Lane II and III LLCs have repaid 
approximately 13.1 billion of the loans made to them by the 
Federal Reserve.
    What we set out to do on September 16th, 2008, stabilize 
AIG and protect the American taxpayer, we are doing. We are 
accomplishing our goals.
    I thank you again for inviting me to appear here today, and 
I look forward to answering your questions.
    [The joint prepared statement of Mr. Baxter and Ms. 
Dahlgren follows:]

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    Chair Warren. Thank you, Ms. Dahlgren. Mr. Finn.

  STATEMENT OF MICHAEL E. FINN, NORTHEAST REGIONAL DIRECTOR, 
                  OFFICE OF THRIFT SUPERVISION

    Mr. Finn. Chair Warren, Members of the Congressional 
Oversight Panel, thank you for the opportunity to testify today 
about the OTS Supervision of AIG.
    I am Michael Finn, regional director for the OTS Northeast 
Region.
    From January 2004 to August 2004, I served as OTS assistant 
managing director in Washington, D.C., for the newly-formed 
unit called Complex and International Organizations. This unit 
had responsibility for developing programs to coordinate the 
supervision of internationally active OTS-regulated holding 
companies, including AIG, that were subject to the European 
Union's Conglomerate Directive.
    After my departure from Washington in August of 2004, the 
OTS continued to manage and supervise AIG from Washington until 
July of 2008 when the responsibility was transferred to the OTS 
Northeast Region where I reside today.
    My responsibility for AIG supervision ended two months 
later, in September of 2008, when the Federal Government made 
its ownership investment in AIG. Although the OTS no longer 
supervises the AIG parent company, the agency continues to 
supervise AIG's thrift subsidiary, AIG Federal Savings Bank, 
which operates with $1.1 billion in assets today.
    My testimony includes details about the legislative history 
of OTS supervision of savings and loan holding companies, OTS 
supervision of AIG specifically, and OTS's recommendations for 
holding company regulation in the future.
    In the time I have this morning, I'd like to just touch on 
a few points about AIG and its collapse. First, the legal 
framework for OTS authority to regulate holding companies was 
designed to ensure the safety and soundness of the underlying 
thrift institution, not primarily to protect holding companies 
from their problems.
    Although the consensus has developed that the United States 
needs a systemic risk regulator, the OTS never had that 
authority. To measure OTS's performance as a systemic risk 
regulator would be to apply a yardstick that never existed.
    The supervision--that supervisory authority will not exist 
unless Congress establishes it. The OTS strongly supports the 
proposals in Congress to establish a systemic risk regulator.
    AIG Financial Products is the second point. It was a 
subsidiary of AIG that originated the credit default swaps that 
were part of AIG's problems. It was operating long before OTS 
had any responsibility for AIG. AIG Financial Products began 
its operations in 1990. OTS became the regulator of AIG after 
the company applied for and received a federal savings bank 
charter in 1999. The bank, AIG Federal Savings Bank, opened for 
business in the year 2000.
    The third point is credit default swaps were and continue 
to be today unregulated products that lack transparency. As you 
know, Congress is considering proposals to require regulation 
of such derivative products and to improve transparency. The 
OTS strongly supports federal regulation of derivatives and a 
greater transparency across this market.
    A fourth point. AIG Financial Products never had any 
business dealings with the OTS-regulated AIG Federal Savings 
Bank and had no relation beyond sharing the same corporate 
parent. Despite AIG's near failure, the OTS-regulated savings 
bank today continues to operate as a well-capitalized thrift.
    The last point I would like to make today is that, based on 
our experiences with AIG, the OTS recommends the establishment 
of a federal insurance regulator for holding companies that are 
predominantly engaged in insurance activities, whether or not 
they be deemed systemic. We think it is prudent to align 
regulatory oversight with each holding company enterprise's 
primary activities and to ensure clear authority to supervise 
risk across the consolidated insurance entity.
    Thank you again for having me here today, and I'm happy to 
respond to questions.
    [The prepared statement of Mr. Finn follows:] 

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    Chair Warren. Thank you, Mr. Finn. Mr. Willumstad is the 
only non-government official on this panel. We appreciate your 
being here because you have something important to say about 
that very same time period that we're focused on.
    Your opening remarks, sir.

   STATEMENT OF ROBERT WILLUMSTAD, FORMER CHAIRMAN AND CHIEF 
     EXECUTIVE OFFICER, AMERICAN INTERNATIONAL GROUP, INC.

    Mr. Willumstad. Thank you. Chair Warren and Members of the 
Congressional Oversight Panel, thank you for the opportunity to 
meet with you this morning.
    My name is Robert Willumstad, and from June 16 through 
September 16, 2008, I served as Chief Executive Officer of 
American International Group.
    In June 2008, when the Board asked me to replace Martin 
Sullivan as CEO, I was initially reluctant to do so. However, 
the Board ultimately persuaded me to accept this responsibility 
and I felt that my experience in the financial services 
industry, including my time as president and chief operating 
officer of Citigroup, put me in the position to successfully 
lead AIG in a difficult period.
    On my first day as CEO, I publicly announced I would 
present my long-term strategic plan for AIG in 90 days. This 
was an ambitious time frame for a strategic review of a company 
that in 2007 had one trillion in assets, a 110 billion in 
revenue, and which employed more than a 100,000 people in more 
than 100 countries and included a diverse array of businesses 
operating under scores of different regulatory regimes.
    To meet that schedule, the AIG team worked tirelessly and 
the plan began to come together. While we were formulating the 
plan, I took immediate actions. The markets declined further 
and it became apparent that if the decline continued and AIG 
were again downgraded by the rating agencies, AIG could 
potentially face a liquidity problem.
    The week after I became CEO, I retained a preeminent 
financial services firm, Blackrock, to provide an outsider's 
view of AIG's financial products exposure to mortgage-backed 
securities. I met with the rating agencies in July and they 
told me they would not review AIG's ratings until after I 
announced our strategic plan which was then scheduled for 
September 25th.
    Even so, to be prudent, we immediately put in place a 
number of additional measures to protect AIG in the event of a 
liquidity problem. We worked through July and August to further 
strengthen AIG's balance sheet should a crisis arise. We 
identified non-strategic businesses, retained financial 
advisors, and began the process of selling those businesses to 
raise cash.
    To conserve cash, we stopped discussions relating to a 
number of acquisitions. We developed and implemented an 
aggressive plan to further reduce expenses. We were negotiating 
a transaction with Berkshire Hathaway that would have protected 
billions of dollars of AIG's liquidity. We were working with 
JPMorgan and other banks to obtain additional credit lines. 
These were precautionary steps.
    Through the first week of September we believed AIG could 
weather the difficulties in the financial markets and we 
believed we'd be able to announce and implement a new strategic 
plan on September 25th.
    In late July and again on September 9th, I met with the 
President of the Federal Reserve Bank of New York to apprise 
him of the situation and discuss ways in which AIG and the 
Federal Reserve might work together in the event that a 
liquidity problem did arise.
    With the market melting down during the week of September 
8th, the counterparties with whom we had been negotiating 
became unwilling to complete those deals. In addition, as the 
markets spiraled downward with Lehman and others under 
increasing pressure, the rating agencies indicated they would 
no longer wait to review AIG's ratings until the investor 
meeting on September 25th.
    AIG was caught in a vicious circle. The potential for 
downgrades from the rating agencies and the market fears caused 
AIG counterparties on a securities lending program and other 
transactions, not just those related to the credit default 
swaps, to require AIG to post additional collateral or demand 
the return of cash or investments, further increasing the need 
for liquidity.
    We worked around the clock during the week of September 8th 
to take measures that would provide AIG the liquidity needed to 
make it through the crisis. We worked with potential private 
investors and new lenders. With the assistance of the New York 
and Pennsylvania Departments of Insurance and the Governor of 
New York, we were able to make available as much as 20 billion 
of additional liquidity but the private markets, even with the 
help of New York and Pennsylvania, simply could not provide 
enough liquidity.
    On September 9th, I met again with Tim Geithner and during 
the rest of the week I stayed in contact with the Federal 
Reserve and the Treasury Department. On Tuesday, September 16, 
2008, AIG was preparing for the unthinkable: bankruptcy.
    That afternoon, we met again with representatives of the 
Federal Reserve Bank of New York and the Treasury Department. 
The regulators said they would provide the necessary liquidity 
because an AIG bankruptcy would have massive negative effects 
on the stability of the entire financial system.
    The terms of the offer were non-negotiable. After a long 
and detailed debate and with the advice of counsel and 
financial advisors, the AIG Board of Directors accepted the 
plan offered by the Federal Reserve and Treasury Department as 
the best available option. As part of that plan, I was informed 
by Secretary Paulson that I would be terminated as CEO. Though 
I would have liked to have continued to work for AIG and its 
shareholders, I complied with this requirement two days later.
    Due to my departure from the company, I do not have any 
knowledge of AIG's subsequent business activities or of the 
manner in which AIG utilized the funds provided by the 
Government.
    I'm happy to answer questions, any additional questions the 
Panel may have.
    [The prepared statement of Mr. Willumstad follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you, Mr. Willumstad. Thank you all 
again for being here.
    I'd like to start with my questions. Ms. Dahlgren, I've 
read the joint testimony that you and Mr. Baxter submitted and 
it starts with September 16 and the crisis that you faced with 
AIG, but what I'd like to do is--I note in your testimony you 
say you knew precious little about AIG on September 16. I think 
those are the words in the testimony.
    When did the Federal Reserve Bank of New York understand 
that AIG posed some kind of threat to the economy? When did 
that occur?
    Ms. Dahlgren. Going into the weekend of Lehman Brothers, on 
that Friday before the weekend----
    Chair Warren. I'm sorry. Let me just back up because I want 
to make sure, maybe my question's not clear.
    Was there no sense that AIG posed a threat before the 
weekend of Lehman Brothers, before September 14?
    Ms. Dahlgren. We understood--my position prior to taking on 
responsibility for the AIG Monitoring Team was in the Bank 
Supervision Group. We had, through discussions, been looking at 
the exposures to a broad set of counterparties of the 
institutions that, at that time, we supervised.
    We had a sense that there were things going on with AIG 
through those discussions but for the institutions that we 
supervised, AIG was not one of the top 10 exposures for those--
--
    Chair Warren. So you didn't even think AIG was on the top 
10 list of those that might be in serious financial trouble as 
of two days before it collapsed or faced imminent collapse?
    Ms. Dahlgren. As it related to the institutions that we 
were supervising at the time, it was not the threat that you're 
describing.
    Chair Warren. All right. So there were--and you hadn't 
heard--you collectively, the Federal Reserve Bank of New York 
had not heard from Mr. Willumstad at that point about any 
challenges facing AIG?
    Ms. Dahlgren. I personally was not involved in that 
conversation.
    Chair Warren. Well, do you know if others at the Federal 
Reserve Bank of New York were? Mr. Baxter, feel free to join 
in.
    Mr. Baxter. During Lehman weekend, which began----
    Chair Warren. I'm still trying to get back before Lehman 
weekend. I want to find out whether or not--what kind of 
assessment of a problem there was before the 14th of September.
    Mr. Baxter. Well, as Mr. Willumstad said, it began the week 
of September 8th which was the week that led up to what we at 
the Fed and the Treasury refer to as Lehman weekend.
    Chair Warren. So the first inkling you had that AIG might 
pose a serious problem was a week before it faced collapse?
    Mr. Baxter. Well, with respect to your question, you asked 
what you had, and I'll answer from my own personal 
participation in this matter. My awareness of AIG's problems 
began on or about September 12th.
    Chair Warren. Okay. On or about September 12th.
    Mr. Baxter. Which when----
    Chair Warren. Do you know----
    Mr. Baxter [continuing]. Lehman weekend began.
    Chair Warren. Do you know about the awareness of others, 
such as the president of the Federal Reserve Bank of New York 
or others within the organization?
    Mr. Baxter. I know that President Geithner was also 
concerned on September 12th because he had asked some of the 
staff to begin----
    Chair Warren. But you don't know about----
    Mr. Baxter [continuing]. Looking at the AIG situation.
    Chair Warren [continuing]. The concerns prior to September 
12th?
    Mr. Baxter. I'm not aware of any concerns.
    Chair Warren. You're not aware of any phone calls that Mr. 
Willumstad made or others made?
    Mr. Baxter. I'm aware that Mr. Willumstad testified today 
and in his prior appearance that there was a meeting in July 
which I was not present for and that he also had contact with 
President Geithner earlier in the week of Lehman.
    Chair Warren. But you never verified any of that----
    Mr. Baxter. I did not.
    Chair Warren [continuing]. Through the Federal Reserve 
Board? Okay. You've described this binary choice, either it 
must be bankruptcy and collapse, as you describe it, or a 100 
percent bailout.
    Mr. Willumstad said they were preparing papers for 
bankruptcy. When did you consult bankruptcy counsel to discuss 
alternatives for AIG? Either one of you.
    Mr. Baxter. And I'm the one who should answer that 
question. If I can back up because you need to have some 
context for an understanding of the answer to that question?
    Over the course of Lehman weekend, we were working 
aggressively at the Fed in New York and also in Washington to 
try to find a solution for Lehman Brothers and, over the course 
of that weekend, we had called together a number of large 
financial institutions. Some of those financial institutions 
were involved in providing what was to be a private sector 
solution to AIG's liquidity problems.
    Chair Warren. Okay. So AIG, at least from the point of view 
of the Fed, the Fed now knew that there was a serious problem 
with AIG, but believed there was going to be a private bailout.
    Was the Fed a party to the negotiations over this private 
bailout?
    Mr. Baxter. In the course of the discussions about Lehman 
Brothers, several of the senior officers of the so-called 
private sector consortium had said when Lehman came up--when 
AIG came up, that they were working on a solution to AIG's 
liquidity problems. So those who were in the room at the time 
and heard those words, and I was one of those people, were 
mindful that there was a solution being fashioned for AIG's 
liquidity problems.
    Chair Warren. So let me just--you switched that to the 
passive voice. My question was the active voice.
    Was the Federal Reserve Bank involved in those negotiations 
for a private solution?
    Mr. Baxter. We were not involved in the negotiations. We 
were mindful that they were going on----
    Chair Warren. All right. So your----
    Mr. Baxter [continuing]. Because there were conversations 
in our presence about those negotiations.
    Chair Warren. So your plan was that the private--the 
creditors, others, would take care of AIG, and did you have a 
Plan B in place in case that failed?
    Mr. Baxter. Let me add to that, in addition, we had been 
informed by the insurance departments in New York and 
Pennsylvania, as well as by representatives of the Office of 
Thrift Supervision, that the private sector solution to AIG's 
liquidity problems was not only underway but there was 
confidence that it would come to pass.
    Chair Warren. So I take it that means there was no Plan B?
    Mr. Baxter. Well, some would say that the Federal Reserve 
became the Plan B.
    Chair Warren. I've got that part.
    Mr. Baxter. Now, you asked me, Chair Warren, and I want to 
be responsive to your question----
    Chair Warren. Sure.
    Mr. Baxter [continuing]. About when we involved bankruptcy 
counsel. Bankruptcy counsel, and I'm speaking about Davis Polk, 
had been engaged by the private sector consortium, along with 
Morgan Stanley, to work on the terms of that private sector 
solution.
    Chair Warren. I'm sorry. Were they engaged as bankruptcy 
counsel?
    Mr. Baxter. They were engaged to--not as bankruptcy counsel 
but engaged to----
    Chair Warren. They were engaged by creditors, is that 
right? Lenders to AIG?
    Mr. Baxter. By JPMorgan Chase----
    Chair Warren. Right. And wouldn't the last----
    Mr. Baxter [continuing]. Specifically.
    Chair Warren [continuing]. Thing they would have wanted 
would have been bankruptcy?
    Mr. Baxter. Well, I'm trying again to be responsive to your 
question. Davis Polk was working on the private sector 
solution. Davis Polk is a firm not only with banking expertise 
but also bankruptcy expertise.
    Chair Warren. Did you ask them for bankruptcy advice?
    Mr. Baxter. And at a later point, when we had engaged Davis 
Polk to take over and to work with the Fed on coming up with 
the revolving credit facility, among the professionals from 
Davis Polk who served us were not only banking experts and 
lending experts in the form of Brad Smith but also a bankruptcy 
expert who is Marshall Huebner.
    Chair Warren. So let me make sure I understand this. So 
there were creditors, about to be creditors of AIG and, so far 
as you know, potential counterparties or counterparties to the 
counterparties who were trying to negotiate an arrangement with 
AIG and when that failed, and you used their lawyer in order to 
advise the Federal Reserve on what path to take forward?
    Mr. Baxter. Well, the way I would answer that is, first, 
there were multiple creditors, 100,000 employees, and 106 
million American policyholders who would be impacted if AIG 
should file for bankruptcy. So we were mindful of those 
situations.
    When we turned to Davis Polk, we had a matter of hours to 
deal with this decision of either lend to AIG to resolve its 
liquidity problems, avoid the catastrophic systemic 
consequences and the implications for literally hundreds of 
millions of Americans, that was one choice, or the alternative 
was AIG was going to file for bankruptcy.
    Chair Warren. So let me ask just one more and then I will 
stop on this about bankruptcy, but Mr. Willumstad said that 
obviously AIG was talking with attorneys about the possibility 
of bankruptcy.
    Did you talk with the attorneys that AIG was talking with 
about the advice they were receiving on bankruptcy and as an 
alternative?
    Mr. Baxter. We were talking to lawyers representing AIG at 
Sullivan and Cromwell, at Weil Gotshal. We were also talking to 
the lawyers we had newly retained at Davis Polk to get our own 
advice.
    Chair Warren. So the answer is yes, you did, you talked 
with AIG's bankruptcy lawyers to seek their views on whether 
bankruptcy or a negotiated arrangement was possible?
    Mr. Baxter. I wouldn't limit it, Chair Warren, to 
bankruptcy. I mean, we were in open dialogue with the lawyers.
    Chair Warren. Fair enough. On many fronts.
    Mr. Baxter. On many fronts.
    Chair Warren. Bankruptcy was certainly one of the things 
you discussed with AIG's lawyers?
    Mr. Baxter. We understood that AIG's Board had been 
assembled on September 16 and that Board was going to consider 
the options as they appeared on the----
    Chair Warren. I'm sorry, Mr. Baxter. That wasn't my 
question. My question was did you speak with AIG's lawyers 
about their advice about the possibility of bankruptcy or a 
negotiated settlement?
    Mr. Baxter. And I personally spoke to lawyers at Sullivan 
and Cromwell about the board meeting that AIG was going to have 
and the decisions taken at that board meeting.
    Now one of those potential decisions, Chair Warren, could 
have been to file for bankruptcy. So to be clear, I had 
conversations with Sullivan and Cromwell lawyers about the 
board meeting and what might happen at that board meeting, 
including this prospect of a bankruptcy filing.
    Chair Warren. All right. Thank you. Mr. McWatters.
    Mr. McWatters. Thank you. Let me follow up on that a bit.
    Mr. Willumstad, when did you first advise the President of 
the New York Fed or someone else at the New York Fed regarding 
the problems at AIG?
    There's a book by Andrew Ross Sorkin, ``Too Big to Fail,'' 
that says that President Geithner received an early warning.
    Mr. Willumstad. I want to put in context my conversations 
with Mr. Geithner. When I took over in the middle of June, I 
started in terms of preparation for a solution to the company's 
problems. They were basically to deleverage and de-risk the 
company and as I kind of dug into a lot of the financial issues 
related to doing that, the securities lending program actually 
concerned me.
    The securities lending program, if there were a failure of 
confidence in AIG and AIG had had significant losses in the 
three previous quarters, I felt that we were really facing 
potentially a liquidity crisis and I went to see him on the 
basis of just good risk management and planning. I didn't 
anticipate that we would have to use it, but I knew when and if 
a real crisis came about, it would be very hard in a short 
period of time for a very complex company like AIG, with the 
losses it was having, to raise capital in the private markets.
    So on July 29th, I went to see Tim Geithner and I explained 
to him what I had been doing at AIG and gave him a sense that I 
was just doing good risk management planning and that since the 
Fed had made the Fed window available to--after Bear Stearns to 
Lehman and Goldman Sachs and Morgan Stanley, institutions that 
they traditionally had not regulated, would it be possible, if 
need be, could the Fed make its Fed window available in a time 
of crisis to AIG.
    We had a meaningful conversation. We talked a lot about 
issues and concerns. He indicated to me that he thought if 
there were a formal allowance by the Fed to allow AIG to go to 
the Fed window that it would in fact exacerbate what I was 
trying to avoid, which would have been the prospective run on 
the bank which is what the securities lending program 
effectively would have been if all of the lenders wanted their 
cash back.
    So I took that under advisement. He asked me to keep him 
apprised of how things were going and I left. So that was my 
first encounter with him on AIG's issues.
    Mr. McWatters. You know, I assume that the CEO of a 
publicly-traded company does not have a discussion with the 
President of the New York Fed unless something fairly serious 
is happening.
    So is it fair to say that on July 29th, 2008, that the 
President of the New York Fed knew that AIG had serious issues?
    Mr. Willumstad. Again, I want to position this properly. I 
would not have described to him that AIG was facing serious 
issues. I tried to explain to him that a series of events--and 
again AIG's credit default spreads were widening. We had, as I 
said, suffered multi-billion dollar losses for several 
quarters. It's not unreasonable to be concerned about what the 
longer-term prospects of AIG would be in terms of the 
environment that we were operating in and we certainly 
anticipated that we would have further losses.
    Mr. McWatters. Okay. Mr. Alvarez, Mr. Baxter, in the view 
of the Federal Reserve Bank, in the view of the Federal Reserve 
Bank of New York, is AIG today a solvent entity?
    Mr. Alvarez. So AIG does not have negative net worth.
    It has a positive cash capital. It is meeting the demand 
for loans as they come due.
    Mr. McWatters. Okay.
    Mr. Alvarez. So it does meet the traditional definition of 
solvency. It is repaying the Federal Reserve from the 
liquidation of assets in the Maiden Lane II and III facilities 
and also from the sale of its companies to repay the revolving 
line of credit.
    Mr. McWatters. Okay. So may I assume from that, and please 
correct me if I'm wrong, that AIG will not need any additional 
TARP funds?
    Mr. Alvarez. So the question you're asking there is whether 
we can predict in the future what might happen there. I'm not 
able to do that.
    Mr. McWatters. Just what you think.
    Mr. Alvarez. I think right now they are on a path of 
sustainability, a path of repayment. That is the goal of the 
management of AIG. They're working very hard in that direction 
and they are accomplishing the goals that we've set out for 
repayment of the facilities to the Federal Reserve.
    Mr. McWatters. Okay. So I gather your answer is you're not 
sure, it might, but hopefully will not?
    Mr. Alvarez. No, I have no expectation that they will need 
additional funds. They certainly have not requested additional 
funds from the Federal Reserve. Our line of credit is set right 
now at a maximum amount of $35 billion.
    They have not drawn that full amount and, as I mentioned, 
they're repaying the loan.
    Mr. McWatters. Okay, okay. I think my time is up.
    Chair Warren. Thank you. Mr. Silvers.
    Mr. Silvers. Mr. Baxter, is it correct in your judgment 
that the critical--that in light of what I think many have 
commented is the critical sort of characteristic of successful 
central banking and bank regulation, that there should be 
consistency over time, is it correct then to view the critical 
decisions in relation to the structuring of the rescue of AIG 
to have been those decisions that we were discussing a few 
moments ago, the decisions made over what you referred to as 
Lehman weekend and the few days that followed?
    Mr. Baxter. First, Mr. Silvers, I would rather be right 
than consistent, and let me embellish on this.
    We made, as I pointed out in my opening statement, 
decisions in the context of an incredible crisis to provide 
liquidity assistance to AIG, and in furtherance of that 
decision to provide liquidity assistance to AIG in order to 
avoid the systemic consequences of failure to the American 
people, we would do it through a revolving credit facility 
along the lines of a term sheet that had been fashioned by the 
private sector consortium that was going to do that loan until 
Lehman failed on September 15th.
    When we got to know AIG better and while we got to 
experience the deepening crisis through the last two weeks of 
September and into October and, of course, everyone here will 
remember another significant development in early October was 
the enactment by the Congress of the Emergency Economic 
Stabilization Act, as we faced additional problems in our 
economy and as we got to know AIG, an institution that we never 
supervised, but as we got to know AIG, we started to think 
about ways that we could structure our credit assistance to AIG 
to better accomplish our objectives, which were to foster 
financial stability by stabilizing AIG and protect the 
taxpayers, and that led to Maiden Lane II and Maiden Lane III 
in November and it led to the additional transactions with AIA 
and Alico in March of 2009, as Ms. Dahlgren has pointed out.
    Mr. Silvers. What I was getting at really was not that you 
didn't make some changes in the structure of the rescue going 
forward but, rather, that--because there's been some criticism 
about not going back and re-examining the fundamental decision 
to ensure that the counterparties were paid 100 percent.
    There's been some criticism of that not going back later in 
November and, you know, this panel has heard in the course of 
our work leading up to this hearing the assertion that really--
that there's a consistency that's a fundamental value in these 
processes. Obviously getting it right is, as well, and that as 
a result, you kind of locked in on things, on fundamental 
decisions in September.
    Now this is--I just want to confirm that that's the right 
way to think about this because it's central to how we as a 
panel look at what decisions mattered and I think, in a sense, 
either that question of the 100 percent making whole is either 
opened later or it's not and if it's not opened later, then we 
have to look at the context it was made in September. Do you 
disagree?
    Mr. Baxter. Well, I think you have to evaluate the 
decisions made on September 16 in light of the time available 
and the context made.
    Mr. Silvers. Absolutely.
    Mr. Baxter. Then if we go to later points in time and let's 
take November 10th of 2008 as an example, when we restructured 
Maiden Lane III and we acquired into the vehicle at fair value 
the CDOs from a number of counter-parties, if you look at that 
decision today, and there's information in the joint statement 
by Ms. Dahlgren and I on this very issue, the CDOs are now 
worth between six and seven billion more than the loan balance.
    Mr. Silvers. Mr. Baxter, can I stop you right there?
    I want to look----
    Mr. Baxter. That's a savings to the American taxpayer.
    Mr. Silvers. I want to look then--I want to take your point 
and go back to September, to those circumstances, and the 
morning of September 16, all right, and by the morning, I don't 
mean what most of us think of as the morning but I mean about 
two o'clock in the morning. All right.
    It's my understanding that that is when the Federal Reserve 
Bank of New York learned that the private consortium was not 
prepared to fund, is that correct?
    Mr. Baxter. I have to tell you that I did not arrive at the 
New York Fed until seven in the morning. I had been at the New 
York Fed through the weekend and went home to sleep Monday 
night. I arrived at seven in the morning. I don't know of my 
own knowledge what happened at two.
    My belief, as I sit here before you, is that----
    Mr. Silvers. Yes.
    Mr. Baxter [continuing]. The final confirmation with the 
private sector consortium, that they would not lend, they would 
not go forward with their term sheet--that occurred around that 
time, seven in the morning, on September 16.
    Mr. Silvers. All right. You or Ms. Dahlgren or Mr. Alvarez, 
you may not know the answer to this question, based on what you 
just said, but exactly who delivered that information and to 
whom?
    Mr. Alvarez. I do not know the answer to that question.
    Mr. Baxter. I know because I was at a conference call that 
took place at eight in the morning and by eight in the morning 
on September 16, 2008, we knew that the private sector 
consortium was not going to go forward.
    Mr. Silvers. But it seemed--but you do not--you're saying 
you do not know who delivered that information and to whom?
    Mr. Baxter. I believe the information was delivered by Mr. 
Huebner.
    Mr. Silvers. And who is that?
    Mr. Baxter. Mr. Huebner is the Davis Polk lawyer that I 
mentioned earlier in an answer to the chair's question.
    Mr. Silvers. And this was a lawyer whom at that moment was 
representing the private sector lending consortium, correct?
    Mr. Baxter. Yes, and was in the process of being reassigned 
to work on a new consortium.
    Mr. Silvers. A lawyer with clients with potentially 
conflicting interests at that moment.
    Mr. Baxter. And the conflicts were all waived, Mr. Silvers.
    Mr. Silvers. Who were the two--am I correct in 
understanding that the leaders of this private sector lending 
consortium were JPMorgan Chase and Goldman Sachs?
    Mr. Baxter. That's correct.
    Mr. Silvers. And who were the other participants?
    Mr. Baxter. I don't think they had gotten far enough to 
figure out who they were going to syndicate the loan to, but 
there was certainly going to be a syndicate given the size, $75 
billion.
    Mr. Silvers. So when you talk about a private sector 
lending group, during this period over the weekend when, as I 
think has been said several times this morning, there was a 
belief that such a lending consortium was coming together, it 
was a consortium of two? I mean, who else did you think was 
going to be in on something that you appeared to be counting 
on?
    Mr. Baxter. My understanding was there would be others. I 
don't know who Goldman Sachs and JPMorgan Chase intended to 
reach out to. The belief that this consortium was going to go 
forward was based in my mind on words that I heard from the 
chief executive officers of both of those institutions, on 
information coming to us by the state insurance departments, 
and the OTS, and confirmation from our own people that due 
diligence was being done by private sector representatives of 
this consortium on this liquidity facility.
    Mr. Silvers. The chair has been kind enough to not 
interrupt me. I want to ask one more question.
    When Mr. Huebner contacted the Federal Reserve Bank of New 
York on behalf of JPMorgan Chase and Goldman Sachs and said, 
sorry, fellows, no money from us, was there any further 
communication with those institutions about that decision?
    Mr. Baxter. And I can only speak for myself. I had no 
communication with those institutions about that decision.
    Mr. Silvers. To your knowledge, Mr. Baxter or Mr. Alvarez, 
Ms. Dahlgren, did anyone else?
    Ms. Dahlgren. Not to my knowledge.
    Mr. Alvarez. Not to my knowledge.
    Mr. Silvers. Mr. Baxter, you talked about your long 
experience in dealing with the number of financial crises on 
behalf of the Federal Reserve Bank of New York and in a certain 
sense on behalf of the public.
    In your experience in those contexts, is--when you're 
trying to--when you're pulling together the private sector to 
solve a problem that they've created of the type that AIG 
represented, is it typical to accept no as an answer?
    Mr. Baxter. Well, I started out by saying there was nothing 
typical about the crisis----
    Mr. Silvers. Understood.
    Mr. Baxter [continuing]. We were experiencing in September 
of 2008.
    Mr. Silvers. But still, you have a lot of history with 
failing financial institutions that represent systemic risks. 
You gave a long list of them.
    Is accepting no what the Fed does?
    Mr. Baxter. What is typical of a crisis situation in my 
experience, and I should always add that my experience has 
always been as a lawyer, so I always had the easy job in crisis 
situations of advising on the law, not having to make the 
substantive policy call, but let me say that the difficult 
decision in a crisis is to act on the basis of imperfect 
information and to act in sufficient time as to remedy the 
problem before you because you can always find a reason to 
wait. You can always find some basis to get more information, 
but the best crisis decision-makers are the ones who can act 
quickly.
    Mr. Silvers. I wasn't suggesting waiting.
    Mr. Alvarez. Could I add?
    Chair Warren. We are very much over but 15 seconds, Mr. 
Alvarez.
    Mr. Alvarez. Thank you. I think it should not be 
understated how at the time folks were hoarding their cash, 
moving away from investments. The Federal Reserve has often 
been able to talk people into understanding risks and have them 
move forward. This was an unusual time. There was very strong 
pressure against what we were saying.
    We had no legal authority to force anyone to take actions 
they did not want to take and at this time in this economic 
circumstance, they did not want to provide assistance to a 
struggling firm. So there was nothing more that we could do, 
other than use the statutory authority Congress had already 
given to us.
    Mr. Silvers. You all have been very kind and responsive to 
my questions. Thank you.
    Chair Warren. Professor Troske.
    Dr. Troske. Thank you. I guess I have a question for Mr. 
Baxter or Ms. Dahlgren.
    You made the statement that--Mr. Alvarez, you made the 
statement that it appears that the Maiden Lane vehicles are 
going to in the end--GAO expects you to turn a profit from 
this, is that correct?
    Mr. Alvarez. I think it would be----
    Dr. Troske. A substantial profit, a fairly----
    Ms. Dahlgren. Yes, and again that was the Congressional 
Budget Office.
    Dr. Troske. Okay. Excuse me. CBO. So then is it--presumably 
had the private sector created this vehicle themselves, they 
themselves would be sitting on a profit right now.
    So to the extent that they're profit-maximizing enterprises 
and would like to make profit whenever possible, can we 
conclude that they made a mistake?
    Mr. Alvarez. So, of course, they made an assessment at the 
time about what was more important to them, having cash then, 
going into a very difficult and troubled time where they 
weren't sure what the value of the assets would be, or selling 
the assets to the Maiden Lane facilities.
    The Federal Reserve has the luxury of being able to provide 
credit over an extended period of time to bridge from the 
difficult times to a better time and allow the asset value to 
come back. So they made an estimation. Whether it's a mistake 
or not is----
    Dr. Troske. So I guess my question is ex post. After the 
fact, would they have been better off using the money to fund 
this? Because in one of your testimonies you indicate that, you 
know, with Long-Term Capital Management you had to pull them in 
kicking and screaming, but in the end, they came out the other 
side better off and there's--I mean, the Federal Reserve was 
actually founded as a result of private sector individuals 
intervening, JP Morgan intervening in a financial crisis, and I 
guess one of the things I'm struggling with throughout this is 
these private sector individuals are supposed to be 
sophisticated investors who I recognize were under a lot of 
pressure and there's a lot of uncertainty. There's no question 
about that. There was a lot of uncertainty and perhaps the Fed 
was better able to deal with that uncertainty.
    But it seems like in the past dealings, they had succeeded 
when they listened to you.
    Mr. Alvarez. And at this time they valued cash and reducing 
their exposure to AIG more than they valued the CDOs that they 
sold to us.
    Dr. Troske. I guess, Mr. Baxter, you mentioned that, you 
know, you didn't have the luxury of time. What would you have 
done if you had the luxury of time?
    Mr. Baxter. Time and tools. First, with respect to time, 
had we known of the liquidity problems being experienced by AIG 
at an earlier point and let's say we had effective systemic 
risk supervision which hopefully we will have if the 
congressional legislation passes that's before the Congress 
right now, but let's say we had that kind of vision and we 
could see the problems emerging at AIG in, say, a year in 
advance, then you could have taken steps to provide for 
liquidity for AIG at that earlier point in time.
    So that's one thing you could do, if you had the vision of 
the systemic risk off the bow at sufficient time so that you 
could steer the ship in a way that would avoid hitting the 
proverbial iceberg. That's one thing.
    Another thing would be to have a special resolution regime, 
such as also before the Congress right now, that would enable 
us to effect an orderly wind-down of a systemically significant 
financial institution like AIG.
    So another thing is to have additional tools in the toolbox 
so that you could bring those tools to bear on a systemically-
significant organization like AIG and deal with some of the 
fundamental problems that we had and we saw on September 16, 
addressing problems that we saw in AIG Financial Products and 
the linkage to the parent through the parent guarantee.
    If you had powers to deal with that, and hopefully in the 
new special resolution regime we will have those powers, then 
you could have additional choices. We didn't have them on 
September 16.
    Dr. Troske. And so if tomorrow an AIG arises, tomorrow or 
two days from now, three days from now, would you do anything 
differently? Do you have the ability to do anything differently 
if another AIG--I mean, have you put in--given the current 
state of the world, has the Fed changed processes, something 
along those lines, that if another AIG arose very quickly, you 
would do the same thing, something different? Do you know how 
you'd handle it if that occurred?
    Mr. Baxter. Well, the difficulty today is, and I'll come 
back to the point I made earlier, that the Federal Reserve did 
not supervise AIG in any way. So it is possible tomorrow for an 
institution that we don't supervise to also present a problem 
similar to the problem presented by AIG.
    Hopefully, though, whoever the supervisor is for that 
institution, as a result of some of the lessons learned during 
this financial crisis, has been focused on capital, focused on 
liquidity, focused on risk management, and is taking the steps 
needed to identify problems like we found in AIG in sufficient 
time to resolve them.
    Dr. Troske. I think I'm out of time.
    Chair Warren. Mr. Finn, when did the OTS first understand 
that AIG was in some serious difficulty?
    Mr. Finn. AIG had been experiencing an adverse market 
reaction probably from back in the December time frame when 
they----
    Chair Warren. December of 2007?
    Mr. Finn. December of 2007. I believe it was that time 
frame when they reported that there were material deficiencies 
in their valuation of credit default swaps and there became 
increasing market concern about their practices.
    Chair Warren. So that was the first clue that the OTS had 
that there was something wrong, was December of 2007?
    Mr. Finn. That was, I think, the first time that the 
market----
    Chair Warren. No. I'm asking the OTS. I can read the 
market. I want to know about the OTS.
    Mr. Finn. Yes. Well, that heightened the concern because we 
had done work throughout the course of that year looking at 
AIGFP, the financial products division, valuation practices. We 
became concerned that they were not where they needed to be 
with regard to the market values.
    Part of that is counterparties were seeking collateral 
based on their own valuation analysis of the collateral that 
backed those positions.
    Chair Warren. So you thought there were at least signs that 
there was significant trouble with AIG throughout or some large 
part of 2007?
    Mr. Finn. So the troubles, I guess I'm alluding to here, 
are in the valuation practices in assessing the values of the 
underlying assets.
    Chair Warren. Right.
    Mr. Finn. The CDOs behind the credit default swaps.
    Chair Warren. Right.
    Mr. Finn. The liquidity concerns grew much more later into 
2008 and really the focus there became more not so much on the 
value of the CDOs, that was part of it, but more the focus on 
the stability of AIG as a group. They did a capital raise in 
the May time frame, raising roughly $20 billion to satisfy the 
market concerns and for a time that was satisfying in terms of 
reducing the likelihood of a downgrade, but the events of the 
summer continued to progress and the market concerns continued 
to grow at AIG as well as many other firms.
    Chair Warren. So you had valuation concerns and then 
liquidity concerns as we start moving into the spring/summer of 
2008?
    Mr. Finn. I would say the liquidity was much more in the 
summer.
    Chair Warren. In the summer of 2008?
    Mr. Finn. Yes.
    Chair Warren. Okay. And what did the OTS do about it?
    Mr. Finn. At that time we had people onsite looking at 
their contingency planning. As part of our supervisory work 
from the latter end of the year that I had mentioned, we issued 
a supervisory letter to the parent company that downgraded the 
firm to a less than satisfactory rating, is the way that we 
describe it in our holding company supervision, and we directed 
them to undertake a series of corrective actions.
    Chair Warren. So I just want to ask you. Now is this only 
for the financial--for the thrift, not for the larger----
    Mr. Finn. No. This is directly to the AIG parent. So again, 
March of 2008 we downgraded the institution, the holding 
company, and issued a series of corrective actions that 
required them to work on those issues that we had identified 
later in 2007.
    Chair Warren. Right. Now you say in your written testimony, 
I've gone through your written testimony, you talk about not 
having the regulatory tools that you needed during this time 
period, is that right? That you didn't have large enough 
supervisory powers, is that right?
    Mr. Finn. There are, I would say, two aspects here. The 
supervision framework for thrift holding companies, as well as 
bank holding company regulation, is governed by GLBA which 
requires a respect for functional supervision.
    So we did not have the authority to go in and examine 
insurance companies that were regulated by other regulators. We 
did not have the authority to directly supervise the activities 
that were unregulated, like credit default swaps.
    Chair Warren. So then let me understand because actually 
our staff pulled out the OTS, your, Holding Company Handbook 
and it directs your examiners to conduct, and I'm quoting here, 
``comprehensive assessment from the perspective of the 
consolidated regulator at the parent top tier organization 
within the conglomerate.''
    Now, I presume that means you do this on a regular basis 
and if I'm understanding your written testimony correctly, 
you're saying the reason you couldn't do this in the case of 
AIG is because it was primarily an insurance company, is that--
am I understanding this correctly?
    Mr. Finn. I guess I'm trying to describe the difference. If 
it was purely a banking firm that was owned by a thrift holding 
company, we would regulate both--we would regulate the entire 
entity on a consolidated basis.
    In an organization----
    Chair Warren. And that's what this language would refer to?
    Mr. Finn. Correct. Well, no. It does require the OTS taking 
a view as a consolidated supervisor from the top down, but when 
there are diversified financial services companies, there are a 
multitude of regulators.
    In a situation like AIG, those regulators are both domestic 
and foreign. We would not have the ability to go examine the 
individual regulated entities that are underneath that. So we 
would rely on information coming from the respective insurers.
    Chair Warren. So knowing that there were some difficulties, 
knowing that you did not have the capacity to see into AIG the 
way you could see into a bank holding company, when did you 
sound the alarm about what you knew you couldn't see?
    Mr. Finn. Discussions were going on with the firm again 
throughout the----
    Chair Warren. Publicly or with other regulators. When did 
you make it clear that there was a problem here, that there was 
no one regulating this behemoth company?
    Mr. Finn. We at staff level, OTS staff that had done work 
on AIG had conversations during the--I guess it was the July/
August time frame.
    Chair Warren. July/August of 2008?
    Mr. Finn. July/August of 2008.
    Chair Warren. With whom? With the Treasury?
    Mr. Finn. No, not with the Treasury.
    Chair Warren. With the Federal Reserve Bank of New
    York?
    Mr. Finn. With the Federal Reserve at the staff level.
    Chair Warren. So you were telling the Federal Reserve Bank 
of New York about this problem in July?
    Mr. Finn. There was an inquiry by an individual, I think it 
was an examining officer, that, you know, has relationships 
with other counterparties of AIG as to what was happening at 
AIG with regard to the credit default swaps.
    We arranged for a meeting in August, the early part of 
August, August 11th.
    Chair Warren. This is a meeting with the Federal Reserve 
Bank of New York?
    Mr. Finn. On the staff to staff level, yes.
    Chair Warren. In August of 2008?
    Mr. Finn. August of 2008.
    Chair Warren. To raise your concerns about AIG and what it 
was that you could not see?
    Mr. Finn. What we shared with them were our views with 
regard to the liquidity situation and the capital situation at 
AIG because again the market across--the whole market at that 
time was becoming increasingly stressed.
    Chair Warren. Right. And if you'll permit me just one more 
so I can just wrap this up?
    Mr. Finn. Sure.
    Chair Warren. And that is, were you or anyone at OTS a 
party to the negotiations of this private bailout that was 
being arranged through JPMorgan Chase and Goldman Sachs?
    Mr. Finn. We had no involvement.
    Chair Warren. Did you have any knowledge of it?
    Mr. Finn. We were informed at several points over the 
course of that weekend.
    Chair Warren. That weekend, meaning September 14 to 15?
    Mr. Finn. The Lehman weekend, yes.
    Chair Warren. Yes.
    Mr. Finn. So we knew that the Board was meeting with AIG 
over the weekend late through Sunday night to try to arrange a 
private transaction.
    Chair Warren. Okay. So you were the principal regulator, 
but you were not party to the discussions, you simply knew that 
they were occurring and believed there was going to be a 
private bailout?
    Mr. Finn. We--again, up through Sunday night, AIG was still 
working on a private solution. We got word late Sunday night 
that that fell through.
    Chair Warren. And from whom did you get--did you receive 
word?
    Mr. Finn. From the regulatory contact at AIG.
    Chair Warren. All right. So the--your contact at AIG called 
you and said that the deal's off. Do you remember when that 
was?
    Mr. Finn. It was probably around 11 p.m. that Sunday.
    Chair Warren. On Sunday night?
    Mr. Finn. Again, Lehman, I think, if not, announced--was 
preparing to announce right at that time.
    Chair Warren. Fair enough. And the call went to whom in 
your organization?
    Mr. Finn. That call came to me----
    Chair Warren. Came to you.
    Mr. Finn [continuing]. From the regulatory counsel.
    Chair Warren. Okay. Thank you very much. Mr. McWatters.
    Mr. McWatters. Thank you. Mr. Alvarez, Mr. Baxter, when the 
private sector bailout attempt broke down, was there any 
attempt to, let's say, get the Secretary of Treasury, the 
President of the New York Fed involved in this process, to 
actually walk into the room and say, okay, guys, you're at an 
impasse here, you must have two or three points, let's see if 
we can resolve those? Was that attempt made or did that happen?
    Mr. Baxter. First, with respect to Lehman weekend, which 
began at 6 p.m. on September 12, 2008--and that was a Friday 
evening--and it began with a meeting of a number of financial 
institutions, approximately 12, with the Secretary of the 
Treasury at the time, Hank Paulson, the Chairman of the SEC, 
and Tim Geithner, and those financial institution 
representatives, and they were represented at the highest level 
by their CEO in most cases, continued and stayed at the New 
York Fed through Saturday and Sunday. So that group was 
together. They were together for a specific purpose and that 
was to work on what was hoped to be the rescue of Lehman 
Brothers.
    Now in the course of those meetings, AIG did come up and in 
the course of those meetings, we had heard from two of the CEOs 
that a private sector solution was going to be done.
    Events changed dramatically when Lehman filed for 
bankruptcy shortly after midnight on Sunday, September 14, and 
when I say changed dramatically, I mean changed dramatically 
not only for Lehman Brothers, but the implications for the 
markets and for market participants were such that they were 
all protecting their balance sheets.
    Mr. McWatters. Okay.
    Mr. Baxter. But the sense was it was futile at that point 
to call them back in to talk about a potential deal they had 
already rejected.
    Mr. McWatters. Or how about a hybrid approach? What if the 
Secretary of Treasury walked in and said, look, let's split the 
difference, there will be some government money, there will be 
some private money? Were those attempts made?
    Mr. Baxter. Again, the problem as we saw it was a liquidity 
problem at AIG. We at the Fed had a specific tool, Section 
13(3) which----
    Mr. McWatters. Sure, sure.
    Mr. Baxter [continuing]. My friend and colleague has spoken 
about this morning----
    Mr. McWatters. I understand.
    Mr. Baxter [continuing]. To address that liquidity problem.
    Mr. McWatters. But there was no attempt to do a hybrid 
approach with the Government and the private sector, private/
public?
    Mr. Baxter. There was no time and there was--it was also 
felt that that could be counterproductive, given what we were 
seeing in the markets at the time.
    Mr. Alvarez. Mr. McWatters, if I could add quickly here?
    Mr. McWatters. Yes.
    Mr. Alvarez. You know, we didn't like being in this 
position any more than anybody else likes us having been in 
that position. We were not anxious. We were not interested. We 
were not looking to lend to AIG. In fact, that's one of the 
reasons that we've been calling for a new resolution authority.
    It would have changed the dynamic if we had had the kind of 
authority that is now being considered by the Congress. We 
could then have been more forceful. We could have taken over 
the company ourselves and then the--not us, the resolver, would 
have been able to structure the losses across the creditors and 
across the shareholders in a better way.
    Mr. McWatters. Well, what about a bridge loan, an $85 
billion bridge loan for a 180 days with a 180 days to work out 
a prepackage bankruptcy of AIG, plenty of time to work with all 
the insurance regulators, put a private sector deal together, 
but like you said, not let the world fall apart?
    Mr. Alvarez. We did in fact provide a bridge loan, a two-
year loan, for up to $85 billion, $60 billion of which was 
drawn down within the first two weeks. So it was not--they had 
a very severe liquidity need, not just a $5 billion or a $10 
billion liquidity need. They had an immediate need within 14 
days of roughly $60 billion.
    They still--our loan did not prevent the private sector 
from subsequently coming in and restructuring AIG, making 
another loan and taking us out of the position. That was always 
a possibility. Our loan did not remove that possibility.
    Mr. McWatters. But after September 16, did you then 
immediately shift and go into prepackaged bankruptcy mode, hire 
counsel, fire it up?
    Mr. Alvarez. That requires the creditors, of which there 
are thousands for AIG, to come to agreement and be willing to--
--
    Mr. McWatters. I know.
    Mr. Alvarez [continuing]. Do that and----
    Mr. McWatters. I know.
    Mr. Alvarez [continuing]. That's not an easy task, as you 
know.
    Mr. McWatters. It's not easy, but it's hardly impossible 
because it happens on a fairly frequent basis.
    Mr. Baxter. And if I may point out that after September 16, 
my colleagues and I were quite busy with respect to other 
facilities, market-wide facilities that we had to bring to bear 
to deal with other market problems, like the problems in the 
commercial paper market, the problems that we were seeing with 
money market mutual funds.
    So the experience we were having between September 16 and 
year-end was we were dealing with a panic, and in dealing with 
a panic we had to do a number of things with--roll out a number 
of programs in very short amounts of time to deal with the 
implications of what we were seeing in the American economy 
during that period, things like the TALF, the commercial paper 
funding facility.
    Mr. McWatters. Sure. I understand that.
    Mr. Baxter. Money market mutual funding facility. We were 
rolling them out as quickly as we could.
    Mr. McWatters. No. I also understand if you hire the right 
counsel, the right accounting firm, you turn them lose, 
interesting stuff can happen on a pre-pack. They might very 
well have been able to put one together.
    Let me shift a little bit to a question concerning the 
credit default swaps, and did the New York Fed press AIG not to 
release the names of the counterparties, Mr. Baxter?
    Mr. Baxter. We did not.
    Mr. McWatters. At all?
    Mr. Baxter. There was never an intention to disclose the 
names of AIG customers and that's what the counter-parties 
were.
    Mr. McWatters. Right.
    Mr. Baxter. These were customers of AIG. AIG never had an 
intention to disclose the names of those customers. What we 
were doing is we were commenting on AIG's securities 
disclosures. AIG continues to be a public company today. It was 
a public company then. It had its own disclosure obligations.
    So when we looked at AIG's draft disclosures on 
transactions we were doing with AIG, we had two purposes in 
mind. One was to assure accuracy, the other was to protect the 
taxpayer interest where we saw that interest at stake.
    Now, with respect to the counterparty names, there was 
never an intention to disclose those customer names and that 
was the starting position and so as we proceeded to deal with 
common thing on AIG securities disclosures, our perception was 
always--our perspective was always as I described it: assure 
accuracy, protect the taxpayer interest but not to conceal or 
hide.
    Mr. McWatters. That may have been your intent, but it's 
possible it was communicated in a way that was somewhat 
ambiguous and was construed and implemented in a different way.
    Mr. Baxter. And Panel Member McWatters, I agree with you 
and one of the things that I take away as a lesson learned for 
Tom Baxter here is that if we should go through this again, we 
need to be more mindful of how our actions can be perceived, 
that our actions were done for the reasons I described, but I 
understand that it can be perceived as if we're trying to hide 
and the lesson learned for me personally here is that we need 
to be mindful of that and perhaps change our behavior as a 
result of the perception, not the actuality.
    Mr. McWatters. Okay. I'm over my time. I have one other 
question.
    Would you release to this panel the copy of the minutes of 
the New York Fed which has to do with the recommendation by the 
New York Fed to the Federal Reserve Bank to extend $85 billion 
of credit?
    Mr. Baxter. If I can ask for a clarification? The way the 
law reads, and the law is Section 13(3) of the Federal Reserve 
Act, is the Federal Reserve Board provides authorization to the 
Federal Reserve Bank of New York to make the loan.
    So with respect, I think the issue is the minutes of the 
Board of Governors deliberation on authorizing the New York Fed 
to make that $85 billion credit facility available to AIG.
    Mr. McWatters. Well, let me ask you this. Was there a 
recommendation by the New York Fed to the Federal Reserve Board 
of Governors to extend the $85 billion loan? If there was a 
recommendation, who made that recommendation? Was it the 
President alone or was it the Board of the Federal Reserve Bank 
of New York? If it was the Board of the Federal Reserve Bank of 
New York, I would like to see the minutes. If it was the 
President alone, I question whether or not the President had 
the power to do that, but that's a different issue.
    Mr. Baxter. At eight o'clock on the morning of September 
16, 2008, in a conference call at which I was present, Tim 
Geithner, our President, in conversations with Chairman 
Bernanke and Secretary Paulson, recommended that the Board of 
Governors later in the day proceed to meet and authorize an $85 
billion credit facility along the lines that we actually did. 
That took place orally. It took place in my presence. It 
happened.
    But later in the day, for legal reasons, the Board of 
Governors needed to meet and they needed to authorize in a vote 
as described by my friend and colleague Mr. Alvarez.
    Mr. Alvarez. Two quick points here.
    Mr. McWatters. But as General Counsel of the New York Fed, 
does the President of the New York Fed have authority to make 
that recommendation alone?
    Mr. Baxter. Yes, there is a delegation from the Board of 
Directors to the President of the New York Fed enabling him to 
make discount window loans, so that the directors of the New 
York Fed do not get advance notice of particular lending 
decisions, and we can make available to you and to the Panel a 
copy of that delegation on which Mr. Geithner relied to make 
his oral recommendation to the Board of Governors on September 
16 of 2008.
    Mr. McWatters. Okay. Fair enough.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Mr. Baxter, I just want to follow that up and 
just get to the last step.
    All right. So then-New York Fed President Geithner makes a 
recommendation to the Board of Governors. The Board of 
Governors votes to authorize the loan. The terms of the loan 
and the actual entering into the loan through the discount 
window under 13(3), how were those decisions made as a legal 
matter?
    Mr. Baxter. As a legal matter, we had a term sheet and the 
term sheet was the one that was to be used by the private 
sector consortium. We took that term sheet and worked with it 
as the basic terms that we were going to request authorization 
on.
    One of them was changed and that is the amount of liquidity 
assistance went from $75 billion to $85 billion. Another issue 
for us in the course of the day of September 16 was the equity 
participation, the 79.9 percent equity stake in AIG. We had to 
talk through different avenues as to how we could take that.
    Mr. Silvers. Mr. Baxter, I had a much simpler question. 
What is the legal act that enters into that contract? Who--is 
that an authority that the President of the New York Fed had? 
Did the New York Fed's Board do it? Did the Board of Governors 
of the Federal Reserve System do it? Who had the authority to 
enter into the loan contract?
    Mr. Baxter. Well, the ultimate revolving credit facility 
was between the Federal Reserve Bank of New York and AIG, but 
the New York Fed could only do that, could only enter into a 
contract with a non-banking organization to make this kind of 
extraordinary loan if it had expressed authorization from the 
Board of Governors.
    Mr. Silvers. Did the Board of Governors authorize the 
details of the loan or did it authorize--did it give you a 
general authority to enter into a loan?
    Mr. Alvarez. The Board of Governors, and this is reflected 
in minutes that I believe----
    Mr. Silvers. Yes.
    Mr. Alvarez [continuing]. We provided to your staff, 
authorized an $85 billion revolving credit facility with 
certain terms that were enumerated in a term sheet that was 
provided to the Board.
    The actual contracts, though, the details about that are 
negotiated by the New York Reserve Bank and the document, the 
actual loan document is entered into between the New York 
Reserve Bank and----
    Mr. Silvers. And Mr. Alvarez or Mr. Baxter, who at the New 
York Reserve Bank has the authority to enter into that 
contract?
    Mr. Baxter. The president of the bank.
    Mr. Silvers. Okay. That's what I wanted to understand.
    Mr. Alvarez, just to move from the very small to the very 
large----
    Mr. Alvarez. Yes.
    Mr. Silvers [continuing]. In the view of the Federal 
Reserve, is it a bad thing that market participants perceive 
that OTC derivatives are essentially guaranteed by the Federal 
Government? Is that a bad thing? Let's hypothesize that people 
assume that after this sequence of events.
    Mr. Alvarez. Well, I think it's a little broad to say that 
we guarantee OTC derivatives. That's an entire market----
    Mr. Silvers. I'm not saying--I'm not saying that--I'm 
saying hypothesize that such a perception exists among some 
people. Is that a bad thing that such a perception exists?
    Mr. Alvarez. I do not want to disagree with you on the idea 
that too big to fail is a very bad idea. It is an idea that we 
at the Federal Reserve do not think is the right approach to 
have entering into a crisis and that's why we're trying very 
hard to get that changed.
    Mr. Silvers. Understood. But I'm asking in a sense not 
about an institution but about a market, the OTC derivative 
markets, and am I fair to extrapolate from your comment that 
you think that should a person--should market participants 
believe that an OTC derivative is essentially a safe or safer 
than, say, an insured bank account, that that's a bad thing, we 
don't want people thinking that?
    Mr. Alvarez. Well, we're not--nothing that we have done 
guaranteed OTC derivatives as a class. We did provide liquidity 
to AIG which was engaged in that.
    Mr. Silvers. So, Mr. Alvarez, you agree that that would be 
a bad idea to guarantee OTC derivatives----
    Mr. Alvarez. Yes.
    Mr. Silvers [continuing]. As a class?
    Mr. Alvarez. I think it would be a bad idea. I do think--if 
I could quickly? I do think that there are markets where we 
think liquidity should be provided to allow the markets to 
continue to function. For example, the commercial paper market 
and other markets, money market mutual fund market, things--
places where we have provided liquidity.
    Mr. Silvers. Right.
    Mr. Alvarez. They're different than guaranteeing the 
instrument.
    Mr. Silvers. Yeah. Well, perhaps it's different. I mean, 
but let's establish that that would be a problem. Not if.
    Mr. Baxter, Ms. Dahlgren, Mr. Alvarez, in each of your 
testimonies you talked about essentially the contagion effect 
from AIG's parent and AIG Financial Products to AIG 
subsidiaries whose obligations are in part guaranteed by state 
insurance funds.
    Does it--and the necessity of rescuing obligations of AIG's 
parent which include the collateral payment obligations under 
OTC derivatives contracts, the necessity of doing so to avoid 
essentially a potential run on or a disintermediation of these 
guaranteed subsidiaries with, as you pointed out, millions of 
policyholders and pension funds and the like.
    If you take these two statements together, are they not a 
powerful and profound argument for ensuring that nobody who has 
that type of guaranteed obligation--an insurance company, a 
bank, nobody--has a large unguaranteed derivatives business on 
top of them that would provoke this type of choice in the 
future?
    Mr. Alvarez. You are exactly describing the moral hazard 
that comes with providing credit to an institution like AIG, 
and it does send the impression that large institutions that 
are organized in this way are going to receive government 
assistance. That's something that we think should be--the 
government should be provided tools so that that does not 
happen again.
    Mr. Silvers. But, Mr. Alvarez, I'm not describing that. I'm 
describing the pairing of these large Federal Government-
guaranteed obligations, insurance contracts, you know, 
individual insurance contracts we all hold, bank accounts and 
the like, the pairing of those obligations with large OTC 
derivatives books. All right. This is a matter immediately in 
front of Congress and I just can't see any way of reading the 
story you all have told, other than as a powerful brief for 
disaggregating those two businesses as is provided in section 
716 of the bill in front of Congress.
    Mr. Alvarez. So I guess I don't see the connection that 
you're trying to draw. The connection----
    Mr. Silvers. Mr. Alvarez----
    Mr. Alvarez. [continuing]. Between AIG and----
    Mr. Silvers [continuing]. Do I need to quote your testimony 
back to you about the necessity of rescuing these financial--
the parties to the OTC contracts in order to save the insurance 
businesses?
    Mr. Alvarez. The difficulty I'm trying to connect is 
between your view of 716 and what happened in AIG. I don't 
think those two are connected. In AIG there was----
    Mr. Silvers. Should I disregard your testimony and the 
testimony of your colleagues from the New York Fed that a 
primary reason for your sense that you had to pay a 100 percent 
on those contracts was to avoid the collapse of the guaranteed 
insurance businesses? Is that part of your testimony to be 
disregarded?
    Mr. Alvarez. No, sir. But 716 stops insured institutions 
from engaging in swaps activities. That isn't what caused the 
contagion in AIG as it relates to its insurance subsidiaries. 
There were guarantees----
    Mr. Silvers. So you wouldn't have a problem----
    Mr. Alvarez [continuing]. Of AIG of obligations of the AIG 
insurance subsidiary.
    Mr. Silvers. So you wouldn't have a problem then----
    Mr. Alvarez. The swaps would have been prohibited by 716.
    Mr. Silvers. You wouldn't have a problem then with a 
measure that essentially disaggregated federally-insured 
financial activities from swaps activities on the scale that 
AIG was engaged in?
    Mr. Alvarez. So I think that swaps activities can safely 
and should be safely done within depository institutions. 
They----
    Mr. Silvers. Then how do we not end up back in this 
situation where we have to rescue swap participants and treat 
their obligations as though they were guaranteed, as though 
they were better than, you know, the average individuals' 
guaranteed bank account in order to avoid having an unraveling 
and thus a problem with an individual's guaranteed bank account 
or insurance policy?
    Why is it that we are not faced with that exact problem 
today should another firm be so foolish as to behave in the 
fashion that AIG did and should regulators choose to look the 
other way while they did so?
    Mr. Alvarez. Because swap activities can safely be done and 
are important as a hedging mechanism for depository 
institutions.
    Mr. Silvers. I don't see how that statement is at all 
consistent with your testimony or that of your colleagues.
    Mr. Alvarez. Perhaps----
    Chair Warren. Perhaps we should stop here. Thank you.
    Mr. Alvarez. I'm happy to talk with you further about this 
because this is a very important issue.
    Chair Warren. Thank you. Right. Dr. Troske.
    Dr. Troske. Thank you. So let me start along a related line 
and go back to the statement Mr. Baxter made about the 
importance of consistency.
    It has been the case that the Federal Government has 
stepped in and bailed out institutions, starting with 
Continental Illinois and Long-Term Capital Management and a 
variety of institutions.
    It's potentially the case that when Lehman Brothers was 
allowed to fail that was a surprise to the market and they 
priced that accordingly.
    Given that, that the market already figured out, okay, what 
the Government was doing previously has now ended and we can't 
expect to be bailed out any more, it's entirely--I want you to 
speculate on the possibility that had AIG then subsequently 
been allowed to enter bankruptcy, that the market wouldn't have 
been all that surprised because you had allowed Lehman Brothers 
to enter bankruptcy.
    What's your reaction to that sort of hypothesis? I'll call 
it that.
    Mr. Alvarez. Sure. And others, I'm sure, will have a view 
on this, but there's several significant differences between 
what happened with Lehman and what happened with AIG.
    One is Lehman--the market had a long time to prepare for 
Lehman. They knew Lehman was struggling and so there was a 
longer lead time than I think there was with AIG. Also, Lehman 
had pretty dramatic effects on the market. There were dramatic 
effects in the commercial paper market, in the money market 
mutual fund market, in state and local municipalities that held 
various kinds of Lehman instruments.
    A follow-on failure of AIG 48 hours after Lehman would have 
been, especially without time to prepare--without the markets 
being really in a position to understand what would have 
happened and prepare for that--would have been a tremendously 
jolting effect.
    So I think they were different situations. I don't think 
the market was as prepared for AIG, and I do think also with 
the failure of Lehman, things changed. People became more 
conscious about cash. They became more worried about their own 
financial condition and the condition of everyone else. There 
was a real possibility markets would have frozen up very 
dramatically with the second follow-on failure.
    Dr. Troske. Okay. Mr. Willumstad, you've sat over there so 
patiently. I thought----
    Mr. Willumstad. I don't have much choice, do I?
    Dr. Troske. Yeah. And I guess you're the financial expert 
and so in reading about this situation, there are a number of 
questions or things that confuse me as a lowly economist, one 
of which was in your testimony. You made the statement that the 
accounting necessity on mark-to-market caused AIG to experience 
losses, accounting losses without any fundamental change in the 
profit--in the long run value of the company.
    Now, again, we're in a market in which presumably we're 
dealing with traders that are reasonably sophisticated and 
reasonably bright people and should be able to see through 
accounting rules that force you to do something as accounting 
rules sometimes do. Sometimes they're valuable. Other times 
they're not, but occasionally they force you to do something 
that doesn't reflect the true underlying value of the company.
    So if the value of the company really hasn't changed any, 
why can a simple accounting rule cause a problem in the way the 
market treats the company? Help me try to understand that, 
drawing from your experience, not simply at AIG.
    Mr. Willumstad. Yeah. I'll try. The mark-to-market 
accounting, which I think is certainly a valid accounting 
process, the problem, of course, at the time, there was no 
market. So we really weren't marking to market. We were marking 
to some hypothetical formulaic approach and a number of 
different areas.
    Dr. Troske. But again, that's something that everybody 
knew. I mean, presumably anybody could--I could look at that 
and say, well, there's not really a market here. So they're 
just making it up.
    Mr. Willumstad. Right.
    Dr. Troske. Not to be too flip.
    Mr. Willumstad. No. But from an accounting point of view, 
we were required----
    Dr. Troske. Yes.
    Mr. Willumstad [continuing]. On that basis to take losses 
and they were substantial. They were unrealized. There was no 
sale of securities and in fact the securities at the time, 
throughout this whole period of time, were still rated AAA or 
AA and there were virtually no defaults. The securities were 
being paid and again I understand mark-to-market.
    The point I was trying to make is that in temporary market 
situations, these significant write-downs that the company had 
to take impaired its capital and on the basis that the 
securities actually over the long-term maturity of the 
securities would come back and that was obviously a judgment 
call, based on different individuals, was a belief that those 
securities had much more value than the market had given them 
in this mark to market process. That was my only point. I'm not 
sure I understand your question beyond that.
    Dr. Troske. Okay. There's a lot of discussion about lack of 
access to debt. Can you explain to me why AIG didn't try to 
raise capital through an equity market?
    Mr. Willumstad. It did. Going back in May of 2008, AIG 
raised $20 billion of capital which at the time I think was the 
largest capital raise ever done. The subsequent losses in the 
second quarter, which were announced in August, ate into a lot 
of that and again it wasn't so much an issue of pure capital. 
This was liquidity that was the crisis that came about and so 
at probably the recommendation of my lawyers not do this, I 
would say to clarify some of the things that happened, because 
I think there's a little mixture of capital-raising and 
liquidity issues that have gone on here, the private solution 
that was attempted on Friday, the 12th, the 13th, and the 14th, 
was an AIG private solution.
    The Fed had not entered into any of those discussions. I 
had reported to the Fed on Saturday evening that we had made 
some progress towards raising capital from both secured lending 
facilities as well as new equity investments from private 
equity participants and that's where the New York State 
Insurance Commissioner came into play.
    But the number we were looking for was getting bigger, 
mostly in anticipation of what would happen to the markets on 
the Monday after Lehman Brothers. We started looking for 20, we 
found 20. The number then escalated by Saturday evening to 40 
and I remember going to the Fed and explaining to both Tim 
Geithner and Secretary Paulson that we thought we could 
probably raise $30 billion this weekend, but the investors and 
New York State Insurance Commission would not go ahead unless 
they would be assured that the company would survive after 
receiving that money which was only, obviously, sound judgment.
    We continued to work all day Sunday with investors and, of 
course, the news kept getting worse about what was going to 
happen to the markets on Monday and by Sunday evening at five 
o'clock, I went back to the Fed and told them that we had 
essentially failed to raise any capital. The markets had 
withdrawn any effort and, oh, by the way, the number was 
getting bigger, as much as $60 billion.
    Dr. Troske. So let me--you seem to have just said that you 
had a deal for 20 and then you had a deal for 30.
    Mr. Willumstad. No.
    Dr. Troske. Okay. That's what I heard you say, so I wanted 
to make sure, because you seemed to indicate that you could 
have gotten 30 billion.
    Mr. Willumstad. We believe we could have. The New York 
State Insurance Commission had released $20 billion of 
securities which previous to that approval process was not 
available. Banks had indicated they would lend us $20 billion. 
These were government securities. So there was no real 
collateral risk. So we assumed that we could raise $20 billion 
based on what we got as collateral and from the banks.
    The private equity investors that were there Saturday had 
indicated they'd be willing to put up $10 billion on the 
assumption that this would be a viable company coming out the 
end. There was no way of doing that under the circumstances, 
knowing that the markets were going to be in very serious 
condition on Monday.
    I went to the Fed on Saturday and explained this to them 
and asked for both a bridge loan and/or a guarantee that I 
could take back to the lenders and the private equity investors 
that would give them some assurance that AIG would be viable 
after they put up this capital. I was told that was not going 
to happen. There would be no government solution for AIG, and 
we went back to work on Sunday trying to find more capital.
    On Sunday evening, by this time we concluded that we 
couldn't raise any capital because we couldn't guarantee----
    Dr. Troske. So I know I'm running over, but this seems to 
address some points that have been asked before.
    You seem to be suggesting from what you just said that when 
you went to the New York Fed you had the possibility to put 
together a partially private/partially public deal that would 
have allowed you to continue to exist, that you had $30 billion 
in promises from the private sector, conditional on the New 
York Fed guaranteeing the survival of the company or providing 
some additional support. So it didn't have to be all one, you 
believed you had a deal that would allow both a private and a 
public component to it, is that correct?
    Mr. Willumstad. I believe that we had a commitment, a 
verbal commitment, at least under the circumstances, for 
approximately $30 billion, but without some further guarantees 
of liquidity from someone, in this case the Fed, we were not 
going to be able to complete that deal.
    Dr. Troske. Thank you very much.
    Mr. Willumstad. If I could?
    Dr. Troske. Yes.
    Mr. Willumstad. Just one more point. It wasn't until Monday 
morning of the 15th when I received a call from Tim Geithner 
that the Fed was going to--he actually asked me for permission 
for JPMorgan and Goldman Sachs to represent or to attempt to 
work on a ``private'' solution with a syndicate of banks to 
provide the capital. That didn't start until 11 o'clock on 
Monday morning. We were all summoned over to the Fed at 11 
o'clock on Monday, the 15th, and that's when there was a 
discussion and Tim Geithner said at that meeting to everybody, 
and there were probably 40 people in the room, that there would 
be no government resources available to AIG and that was that 
Monday at 11 a.m. and, then, of course, there was no solution.
    Dr. Troske. Okay. Thank you.
    Chair Warren. I just want to make sure I'm following the 
timeline here. So the people you were working with, the 
creditors you were working with over the weekend, who was that? 
That was not JPMorgan Chase and Goldman Sachs?
    Mr. Willumstad. No, and again----
    Chair Warren. Over the weekend?
    Mr. Willumstad [continuing]. Apples and oranges.
    Chair Warren. I understand that. Who was it?
    Mr. Willumstad. Well, JPMorgan was our advisor to AIG over 
the weekend. They were acting as AIG's advisor in helping us 
raise capital. We had a number of private equity investors and 
we had the New York State Insurance Commission--that was a big 
help. So that was purely AIG-driven with our advisor, JPMorgan, 
and Citibank, by the way. Citigroup were also co-managers 
through that process.
    We were talking to large private equity firms and I had had 
conversation with Warren Buffett, as well, in terms of trying 
to raise capital. That was unrelated to what's been referred to 
as the JPMorgan/Goldman Sachs effort. That didn't start until 
Monday at 11 a.m.
    Chair Warren. I see, and so when Mr. Baxter is referring to 
the Lehman weekend, we keep hearing that AIG's going to be 
taken care of, they've got the money they need, there's going 
to be adequate funding, it's this private deal you were----
    Mr. Willumstad. That was our effort.
    Chair Warren [continuing]. Working on, that collapsed 
Sunday night at five o'clock.
    Mr. Willumstad. Well, I informed them that Sunday.
    Chair Warren. Who did you inform?
    Mr. Willumstad. Well, we were summoned back over to the 
Fed. There were a number of people there. Tim Geithner was 
there. My recollection is that Secretary Paulson was not in 
that meeting, but I could be wrong about that.
    Chair Warren. So that's Sunday at five o'clock. It's now 
clear that that effort has failed. A new effort starts at 11 
o'clock on Monday morning but is evidently gone----
    Mr. Willumstad. Well, just again to fill in some of the 
timeline, after Sunday evening a phone call was received from 
the Fed and JPMorgan was asked to go back to the Fed on Sunday 
evening.
    Chair Warren. But you were not?
    Mr. Willumstad. We were not. As a matter of fact, we were--
I specifically asked whether we could be there and we were told 
no, we were not invited, and so I can't tell you exactly what 
happened Sunday evening, but I did receive this call on Monday 
morning from Tim Geithner saying that both JPMorgan and Goldman 
would work on a syndicated private solution with my 
authorization. Of course, I gave it to them.
    Chair Warren. Yes, and that started at 11 o'clock on Monday 
and then----
    Mr. Willumstad. So that was a conversation that we had had. 
Everybody was summoned to the Fed----
    Chair Warren. That's right.
    Mr. Willumstad [continuing]. At 11 on Monday.
    Chair Warren. And that failed then at what time?
    Mr. Willumstad. Well, everybody's timeline is a little 
different. I had the suspicion Sunday evening--Monday evening 
that there was going to be no solution and that was just from 
some of the feedback from some of the people who had attended 
some of the meetings.
    On Tuesday morning, I called Tim Geithner because it was 
clear in the absence of a private solution on Tuesday we were 
going to have to file bankruptcy by Wednesday morning.
    Chair Warren. I see. Good. Of course. Please.
    Mr. McWatters. It sounds like you had a deal that was 
fairly close to being struck but it fell apart. What needed to 
be done or who needed to do what to keep that deal alive, the 
deal that you were working on over the weekend?
    Mr. Willumstad. Well, again, we had potential people--
potentially people willing to put in, in my estimation, as much 
as $30 billion into AIG, but as I said, no thoughtful person 
would put money in if they thought the company would file 
bankruptcy two or three days later, or a week later, even two 
weeks later.
    So they needed some form of guarantee that the company was 
viable going forward after they made their investment. It was 
my judgment that the only person who could give a guarantee 
like that that would be credible would be the Fed.
    Mr. McWatters. What if the Fed, instead of giving a 
guarantee, instead of making an $85 billion loan, made, let's 
say, a $30-40 billion loan? Do you think you could have had a 
deal on those terms?
    Mr. Willumstad. It certainly would have been much more 
attractive. It's hard to know whether at that time, especially 
given what was going on over the weekend, that a specific 
number would have satisfied it.
    Remember, all the lenders that were going to put capital in 
were going to take collateral from AIG. So they would have been 
secured in the event of some form of bankruptcy.
    Mr. McWatters. Right. And the Fed would have also, but 
since the Fed's loan was not 85, it was 30 or 40, presumably 
they would take less collateral and leave more collateral for 
your bank syndicate or your syndicate of lenders.
    Okay. Thanks.
    Chair Warren. And I just want to make sure I have this. 11 
a.m. Monday meeting, this was a meeting called by the Fed?
    Mr. Willumstad. Yes.
    Chair Warren. All right. And then President Geithner was 
there. You said you think Secretary Paulson was not, but you're 
not entirely sure?
    Mr. Willumstad. Secretary Paulson was clearly not there.
    Chair Warren. Clearly not there.
    Mr. Willumstad. I said I don't think he was there Sunday 
evening.
    Chair Warren. Got it. Okay. Anyone else you remember in 
this meeting on Monday morning?
    Mr. Willumstad. On----
    Chair Warren. Who was there on the Monday morning at 11 
o'clock?
    Mr. Willumstad. Representatives from JPMorgan, a large 
contingent from Goldman Sachs, including Lloyd Blankfein. There 
were representatives representing the Fed from Morgan Stanley 
and, of course, each one of these firms had its assumed number 
of lawyers with them. I think the lawyers outnumbered the 
bankers at the time.
    Chair Warren. Not probably for the first time. Okay. Good, 
good.
    Another one, Damon?
    Mr. Silvers. One clarifying thing about this. Did the--was 
there--and I don't know.
    Mr. Baxter, were you at this meeting?
    Mr. Baxter. Not to my recollection.
    Mr. Silvers. All right. So, Mr. Willumstad,--Ms. Dahlgren, 
were you there?
    Ms. Dahlgren. No, I was not.
    Mr. Silvers. Okay. Mr. Willumstad, did then President 
Geithner and his team remain for the entirety of the meeting? 
Were they sort of--were they running that meeting?
    Mr. Willumstad. Well, that's hard to answer. Mr. Geithner 
stayed, I'd say, for about 10 or 15 minutes. I remember his 
last words before leaving were that there would be no 
government assistance and that this had to be a private 
solution.
    The principal representative from Treasury was Dan Jester 
who was there. He and I actually left the meeting to go call 
the rating agencies. So I was actually out of the meeting 
probably for about an hour and by the time we were completed 
calling the rating agencies, the meeting had broken up and 
people were coming back to AIG to work on putting together the 
financial information necessary for a syndicated loan.
    Mr. Silvers. So what time did that meeting end, roughly?
    Mr. Willumstad. I would say about 12:30-1 o'clock, or 
something.
    Mr. Silvers. And you left that meeting believing that a 
syndicate was being put together?
    Mr. Willumstad. No, no. I've been in this business a long 
time. I'm not naive. I believe----
    Mr. Silvers. What did you believe when that meeting ended?
    Mr. Willumstad. No. I believed that JPMorgan and Goldman 
Sachs were charged with the effort to try and put together a 
syndicate to come up with X billions of dollars and that effort 
was undertaken.
    Mr. Silvers. Now, did you--were there any further meetings 
involving that effort that you were involved in or any phone 
calls after that meeting ended?
    Mr. Willumstad. No.
    Chair Warren. And, Mr. Baxter, just so I'm sure we have the 
record clear on this. Based on your earlier experiences, was 
the Fed in the room for the negotiations over Long-Term Capital 
Management?
    Mr. Baxter. The negotiations with the creditors of Long-
Term Capital Management, to enlighten them of their self-
interests in putting $3 billion in capital in, took place on 
the 10th Floor of our building at 33 Liberty Street.
    Chair Warren. So it's fair to say you were there?
    Mr. Baxter. We were there.
    Chair Warren. You were there. Solomon?
    Mr. Baxter. And Solomon, there were a whole series of 
discussions.
    Chair Warren. Were you there?
    Mr. Baxter. In some I was.
    Chair Warren. Okay. Or the point is the Fed was there----
    Mr. Baxter. Yes.
    Chair Warren [continuing]. In some form or another? And the 
sovereign debt crisis?
    Mr. Baxter. Sovereign debt crisis would have been a number 
of discussions among colleagues of mine at the Fed, yes.
    Chair Warren. So the Fed was there, and Bear Stearns?
    Mr. Baxter. Clearly, we were there for Bear Stearns.
    Chair Warren. Okay. Good. Just making sure we've got it all 
clear. I think that's it.
    Thank you all very much. Thank you for your patience and 
thank you for your help to the panel.
    This panel is excused, and I call the second panel and 
while they're coming, I will introduce them.
    Martin Bienenstock is Partner and Chair of the Business 
Solutions and Government Department at Dewey & LeBoeuf. Rodney 
Clark is the Managing Director of Insurance Ratings at Standard 
& Poor's Credit Rating Agency. Michael Moriarty is Deputy 
Superintendent for Property and Capital Markets at New York 
State Insurance Department.
    Gentlemen, I want to thank you, all three, for coming here 
today. We appreciate it, and I'm going to ask you if you would 
make opening statements, if you could hold your remarks to five 
minutes. As you can see, we are a lively panel with many 
questions, and flights back late tonight.
    So I'm going to ask to hold your remarks to five minutes, 
but your entire written remarks will be part of the record.
    Mr. Bienenstock, could I start with you, please?

   STATEMENT OF MARTIN BIENENSTOCK, PARTNER AND CHAIR OF THE 
 BUSINESS SOLUTIONS AND GOVERNMENT DEPARTMENT, DEWEY & LeBOEUF

    Mr. Bienenstock. Yes. Good morning, Chair Warren and Panel 
Members, Deputy Chair Silvers, Mr. McWatters, and Dr. Troske. 
Thank you for the opportunity to testify today.
    Since I've heard several times that testimony is 
automatically in the record, I thought at least in part I would 
try to supplement what I've written by crystallizing some of 
what I've heard this morning and tying it to the relevant 
portions of my written testimony.
    First, I have no issue with the emergency action taken by 
the Fed to provide the $85 billion facility on September 15, 
2008, and you have more information than I do, but all I can 
say is from what I have been able to read from a lay person in 
the public, based on the speed of the meltdown and the 
exigencies of the situation on the heels of the unrescued 
Lehman bankruptcy and collapse, I don't know of any 
alternative, whether there could have been some money from the 
private sector, I'm not sure at the end of the day would even 
make a big difference because the $85 billion facility was all 
secured. So the secured part will be paid back. Hopefully it's 
over-secured and the Government will get all its money back at 
a profit, but it was secured with everything AIG had of value, 
as far as I can tell.
    Where I might take issue with some of what has gone before, 
both this morning and in prior hearings, is the notion that 
everything was set in stone on September 15 and let me 
backtrack for just a moment.
    The speed and suddenness of the need for the $85 billion 
facility, while I can tell it's surprising to me, including 
some in this room, is not surprising to those of us who have 
been through crises involving trading companies before.
    I met with Enron the Friday after Thanksgiving in 2001 and 
the next week it filed Chapter 11. When you're dealing with a 
trading company, financial statements and balance sheets don't 
have much meaning because the next trade changes the assets and 
liabilities. It also changes the risk profile.
    When the market loses confidence in either the trader or 
there's a pervasive market shift in confidence in a class of 
securities, such as subprime, the values fall out of bed, the 
financial statements are worthless, and you're at what I 
suppose AIG considered one of the highly unlikely occurrences 
in their computer models.
    If there was a fault there, I think it was governance at 
AIG that didn't recognize the severity of the damage if the 
unlikely did occur and there was no preparation for that, but 
each of these are unique situations. It's only the speed of the 
death spiral that is the same and whatever legislation arises 
out of this, it's very hard to script the steps that should be 
taken.
    I think you'll find that the most important thing is to 
have the risks fully understood in advance so people are at 
least ready to deal with them when they do occur and each one 
is unique.
    Anyway, having advanced the $85 billion facility on 
September 15, the Maiden Lane II and III deals didn't occur for 
several months later. Meanwhile, the Fed had a lien on 
everything of value. AIG had over 30 million customers which 
were 30 million creditors and the creditors from which it 
really wanted concessions in the notion of fairness are the 
creditors who were trading in the businesses creating the harm, 
primarily the credit default swaps and perhaps the securities 
lending.
    Those came down to the bulk of the exposure being with 
eight counterparties, the vast bulk being with 16, according to 
other testimony I've read, including from Mr. Baxter a few 
months ago.
    So the bottom line is there were months to talk to the 
parties having the most exposure about what concessions they 
might grant if the Government and AIG would basically, in 
partnership, take them out.
    Now, what we know on the opposite end is the Government 
took the worst case. They already held $35 billion in 
securities and the Government paid the full value, the par 
value remaining. You can't do any worse than was done here. 
Hopefully the Government will be able to recover much and all 
of that. Apparently it's over-secured from what I've read in 
Mr. Millstein's testimony that you'll hear later today. It's 
currently over-secured.
    But at the time, we have to recognize that the tables 
changed and the essential message I want to give you is this is 
a process. You don't look at just the end games. Once the loan 
was made, once AIG was secured, 30 million customers were 
current as well as its other creditors. AIG wasn't going to 
file bankruptcy voluntarily and under those circumstances, no 
one could really file involuntarily because AIG was generally 
paying its debts as they matured.
    [The prepared statement of Mr. Bienenstock follows:]

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    Chair Warren. Thank you, Mr. Bienenstock. I'm going to stop 
you there, but that's very helpful. Thank you.
    Mr. Clark, I just want to say again how much I appreciate 
your being here and Standard & Poor's stepping forward to give 
us some insight into the credit rating process here.
    If you could give us your opening remarks.

    STATEMENT OF RODNEY CLARK, MANAGING DIRECTOR, INSURANCE 
                   RATINGS, STANDARD & POOR'S

    Mr. Clark. Yes. Thank you. Thank you, Chair Warren, Members 
of the Panel, good morning.
    My name is Rodney Clark, and I serve as Managing Director 
in Standard & Poor's Ratings Services, and from 2005 through 
2008 I served as S&P's lead ratings analyst covering AIG.
    I'm pleased to appear before you this morning. At the 
outset, I'd like to take a moment to speak generally about our 
ratings process and to explain what ratings are and are not 
intended to convey.
    S&P's credit ratings are current opinions on the future 
credit risk of an entity or a debt obligation. They express our 
opinion about capacity and willingness of an entity to meet all 
contractual and financial obligations as they come due.
    S&P forms its rating opinions through quantitative and 
qualitative analyses performed by our rating analysts and after 
an opinion is formed, S&P publishes the opinion in real time 
and for free on our website and we generally publish a more 
detailed narrative about our opinion. This is the process by 
which S&P arrived at its ratings on AIG.
    My written submission includes a table listing our global 
ratings history on AIG since 1990 and a more detailed 
description of our rationale for our rating changes. By way of 
overview, up to 2005, S&P's rating on AIG was AAA, our highest 
rating, reflecting our view that AIG's capacity to meet its 
financial commitments was extremely strong. Our opinion began 
to change starting in March of 2005 and S&P has since lowered 
its ratings on the company four times.
    In February 2008, S&P announced a negative outlook for the 
company's rating based on the way AIG was determining the fair 
value of its credit default swaps that it had entered into. AIG 
CDS guaranteed an array of structured finance securities, 
including securities backed by sub-prime residential mortgages.
    In May 2008, we lowered our rating on AIG further to AA 
Minus in reaction to the company's announcement of losses, 
including 5.9 billion related to its CDS portfolio, and we 
maintained a negative outlook on AIG's rating throughout the 
summer of 2008.
    In August, S&P announced its view that AIG's actual credit-
related losses in the CDS area would likely amount to $8 
billion with significantly higher mark to market losses. But 
the market value of AIG's investments and the investments of 
third parties that had purchased CDS guarantees deteriorated 
sharply amid the substantial market turbulence in September 
2008.
    In light of these events, on September 12, 2008, S&P placed 
its ratings on AIG and all AIG subsidiaries on credit watch 
with negative implications. On September 15, as AIG's condition 
continued to deteriorate, S&P lowered its rating further to A 
Minus in light of increasing CDS-related losses and its reduced 
flexibility in meeting the collateral needs.
    In our view, were it not for the extension of an $85 
billion borrowing facility by the Federal Reserve Bank of New 
York on September 17, 2008, AIG's creditworthiness would have 
continued to deteriorate.
    Our current rating on AIG, which remains A Minus, includes 
a five notch uplift to account for Federal Government support. 
Our current view is that AIG has made significant progress in 
re-establishing its insurance market presence and in 
implementing a very challenging restructuring plan. However, we 
believe AIG remains susceptible to competitive pressures as 
well as aggressive market pricing.
    With respect to the effect of AIG's current financial 
situation on the creditworthiness of its subsidiaries, we 
believe those subsidiaries are to some extent insulated by the 
state insurance laws and regulations. For example, if AIG had 
been forced into bankruptcy, the bankruptcy would have likely 
included a relatively small number of AIG's non-insurance 
subsidiaries, such as AIG Financial Products, with only a 
marginal impact on AIG's insurance subsidiaries.
    Nevertheless, when S&P lowered its credit rating on AIG to 
A Minus on September 15, we also lowered the ratings on most of 
the insurance subsidiaries to A Plus, where they remain today.
    While AIG's financial problems have no direct effect on the 
solvency of the insurance subsidiaries, we believe the 
creditworthiness of those subsidiaries is nevertheless 
indirectly affected by the decreased likelihood that they could 
receive additional capital from AIG as well as the reputational 
risk resulting from the parent company's financial problems and 
its impact on customers.
    You've asked me to explain S&P's ratings treatment of 
certain distressed exchanges. Our criteria call for 
consideration of various factors in assessing whether a 
distressed exchange would be viewed as a selective default, 
including whether default insolvency or bankruptcy in the near 
or medium term would be likely without the exchange offer.
    Chair Warren. Mr. Clark, I would ask you just to--just do 
one sentence. We've all read the report, but we're at five 
minutes.
    Mr. Clark. Okay. The important line then is every situation 
is different and any significant discount to the payment of the 
obligations, other than perhaps the time value of money, could 
potentially constitute a default under our published criteria.
    Thank you for the opportunity to participate.
    [The prepared statement of Mr. Clark follows:]

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    Chair Warren. That was impressive. Thank you, Mr. Clark, to 
be able to take those last pages and put them together in a 
sentence.
    Mr. Clark. I knew the important line.
    Chair Warren. That's right. Mr. Moriarty, could you give us 
your opening remarks, please, sir?

   STATEMENT OF MICHAEL MORIARTY, DEPUTY SUPERINTENDENT FOR 
    PROPERTY AND CAPITAL MARKETS, NEW YORK STATE INSURANCE 
                           DEPARTMENT

    Mr. Moriarty. Surely. Pleased to. Thank you, Chair Warren 
and other Members of the Congressional Oversight Panel, for the 
opportunity to present any information the New York Insurance 
Department can assist in fulfilling your important charge.
    There's some broad points I'd like to make. Number one. AIG 
Financial Holding Company is not regulated by state insurance 
regulators. The state insurance regulators are charged with 
regulating the insurance operating entities here in the United 
States.
    In that realm, our job is to make sure that policyholders 
are treated fairly and that the insurance that they purchase to 
protect themselves will be paid by the insurance company when 
legitimate claims are put on the table.
    Number two. The AIG crisis was the primary result of the 
credit default swaps issued by an entity that was, for all 
intents and purposes, an unregulated derivative shop that 
traded on the rating of AIG as a whole.
    During the crisis, the Fed's main concern was not the 
collapse of the insurance companies which we don't believe 
would have happened, but AIG Financial Products had CDS, had 
futures, had other derivatives with many of the major 
commercial banks and brokerage firms. The failure to perform on 
these transactions would have a systemic impact on the 
worldwide economy, especially since the counter-parties to AIG 
Financial Products were already reeling from the failure of 
Lehman, the problems with Bear Stearns, and the extreme 
distress of the other financial institutions.
    The aggressiveness of AIG's bullish outlook on the 
residential mortgage market did bleed into the insurance 
companies in the form of the securities lending. When the size 
of the securities lending program in the life insurance 
companies became known to the insurance companies in terms of 
its size, which was probably in the beginning of 2007, we, with 
other states, worked with AIG to begin to wind down the 
securities lending in an orderly fashion and did go from a high 
of $76 billion in the beginning of 2007 down to $58 billion 
right before the implosion of AIG in September of 2008.
    The crisis caused by Financial Products did spook the 
borrowers of the securities lending program and they would not 
let the borrowings roll over as they had done in the past and 
instead required that the AIG return the cash collateral that 
was provided for them.
    AIG had invested a lot of that cash collateral in 
residential mortgage-backed securities which were underwater 
and fairly illiquid and would have taken a significant loss at 
the life insurance companies if those collateral calls were 
made.
    Once the $85 billion federal facility was established by 
the Fed, AIG did take advantage of that and use some of it, $17 
billion worth, to pay back some of the borrowers of the 
securities, but the remainder of the lending portfolio remained 
kind of an albatross around AIG as a going concern.
    Maiden Lane II was formed in December 2008 to effectively 
end the lending program at the AIG life insurance companies. 
Now for the $19.2 billion that was provided by the Federal 
Government for approximately $39 billion in par value 
residential mortgage-back securities, again, they are being 
paid back and by all indications they could make a profit on 
it.
    I think it's important to remember that credit default 
swaps and securities lendings are different transactions. In a 
securities lending program, the borrower posts collateral. If 
you do not return that collateral, they will keep the 
securities that they borrow. So AIG was going to suffer a loss 
on the securities lending programs and it's a different 
transaction than a credit default swap.
    Quickly, in response to our oversight of the AIG insurance 
companies, as all states do, we review insurance financial 
statements and other ancillary documents that are furnished by 
our domestic insurance companies. We do on-site examinations 
and regular meetings with the management.
    At the time of the crisis AIG had 71 licensed insurance 
companies in the United States. Seven of those were domestic 
property/casualty insurance companies and three of those were 
life insurance companies.
    On Friday we did get the call from the CFO of AIG that a 
downgrade was imminent and it would have drastic ramifications. 
A team of New York Insurance Department high-level 
representatives were sent to the AIG office.
    It was during that weekend that the proposal to allow the 
property and casualty insurers to effectively swap $20 billion 
of liquid assets with some of the residential mortgage-backed 
securities were put on the table. I just think it's important 
to note that there were conditions to this and that there was 
capital provided by outside investors and that the life 
insurance companies be put underneath the P&C company, 
effectively becoming subsidiaries of the P&C companies.
    [The prepared statement of Mr. Moriarty follows:]

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    Chair Warren. Very helpful. Thank you, Mr. Moriarty.
    So I want to be clear, if I can, about setting the stage a 
little bit for this panel. If you've read the testimony from 
the Fed and we've had multiple meetings now with the Fed, they 
basically have made the argument that negotiation was simply 
not possible, and that it was not possible because negotiation 
under these circumstances, particularly in the case of rapid 
dissent, is never possible, that ratings downgrades would have 
triggered multiple cross-defaults and contagion throughout the 
market, and that the insurance regulators would have seized the 
insurance companies and therefore destroyed the value of the 
entity and possibly caused losses to the insured, people around 
the country.
    So the reason we asked this panel to come is that we wanted 
to probe that claim. That's what we're here about, to just push 
back on this alternative. So I at least am going to start that. 
I want to start that, if I can, with you, Mr. Clark.
    Following the bailout of a 100 cents on the dollar--because 
the Fed has described and they describe in their written 
testimony, it was totally binary. It was either a full bailout 
with full payment to everyone or it was no help, bankruptcy, 
and collapse, as they saw the alternatives, and so what I want 
to ask here is following the Fed bailout, there was still a 
ratings downgrade, right, of--I think I'm reading--you have 
some slight readjustment. No?
    Mr. Clark. You're saying following the----
    Chair Warren. The actual bailout.
    Mr. Clark [continuing]. $85 billion, the initial----
    Chair Warren. That's right.
    Mr. Clark. Okay.
    Chair Warren: Right. You have some change in how you're 
rating AIG?
    Mr. Clark. Yes. On September 17, following the change, we 
actually--we had lowered the rating on the Monday, the 15th, to 
A Minus. On the Wednesday, we maintained the rating at A Minus. 
We revised the credit watch, which indicates the direction of 
possible movement from negative because the trend was clearly 
negative on Monday to developing on Wednesday, that implied it 
could go up or down, but we were still sorting out the impact 
of this facility.
    Chair Warren. Got it. So government help--you had to 
evaluate it, evaluate what its impact was going to be, its 
size, the likelihood it would be there in the future, and I 
would assume from the ratings you gave, it was not guaranteed 
that it would be there forever; otherwise, it would have gone 
back up to AAA.
    Mr. Clark. Correct.
    Chair Warren. So you were trying to evaluate that, and as 
we all know, AIG ultimately paid every creditor 100 cents on 
the dollar and has continued to do so to this day.
    So here's my question. I also read in your testimony that 
right now AIG gets a five notch improvement because of your 
assessment of the value of the government assistance.
    Mr. Clark. Right.
    Chair Warren. If AIG had had a negotiated settlement of 
some kind with government assistance, with private assistance, 
and with a haircut to the creditors of some dollar amount, 
would they have been better off than if they had paid a 100 
cents on the dollar or would they have been worse off going 
forward into the future? What would have been their financial 
picture? If you can pay less on your debt, are you better off 
than if you pay a 100 cents on the dollar on your debt?
    Mr. Clark. Right. And it's difficult for me to explain in 
the hypothetical, but I know in our ratings criteria on 
distressed exchanges, which we shared with the Panel staff 
previously, it speaks to the fact that we would consider a 
distressed payment of less than what is owed to be a default or 
a selective default----
    Chair Warren. Yes.
    Mr. Clark [continuing]. Under our ratings criteria. 
However, it is true that in many cases following a 
restructuring, following either a distressed exchange or a 
series of distressed exchanges, that the credit condition could 
be better than before the time of the exchange.
    Chair Warren. Okay. Good. That was the part I needed, and 
then if one combined this distressed negotiation with 
substantial funding from some combination of private and public 
sources, what would the credit rating look like going forward?
    Mr. Clark. I can't speak to the hypothetical without 
knowing the terms, but it is possible that it could have been 
similar, better, or worse.
    Chair Warren. Okay. So I'll ask it then just the other way 
and then I'm through, and that is was it a foregone conclusion 
that their ratings would be completely wiped out if they paid 
something less than a 100 cents on the dollar, if they had 
secured both government and private money going forward?
    Mr. Clark. Under the criteria that we use, we look to was 
the counterparty paid what they were owed, and was it done in a 
distressed situation, that is, to save the company from 
insolvency or bankruptcy?
    If there was a modest discount, such as relative to 
interest rates and the time value of money, that would not have 
necessarily caused a default, but those are factors the rating 
committee would weigh in determining is the exchange distressed 
or isn't it in determining what the impact on the ratings would 
be.
    Chair Warren. Okay. Along with how much money is available 
going forward, right?
    Mr. Clark. Absolutely.
    Chair Warren. All right. Good. That's helpful. Thank you 
very much.
    Mr. McWatters.
    Mr. McWatters. Thank you. Let me follow up on that, Mr. 
Clark. If there's a distressed exchange at the same time the 
Government has made commitments, I mean has by this time, by 
November of 2008, put in so much money that it seems unlikely 
the Government is going to walk away from that, so at that 
point in time it's not that AIG needs to do these distressed 
situations in order to save money for liquidity because it has 
Uncle Sam providing the liquidity. It's in effect doing the 
distressed transaction in order to treat the taxpayers more 
fairly.
    I mean, does that resonate with you at all?
    Mr. Clark. I believe so. I'm not sure I'm hearing the 
question.
    Mr. McWatters. Well, the question is we're going to cut a 
deal. We're going to cut a haircut, but the reason we're 
cutting a haircut is not to save money for liquidity of AIG 
because that's been assured by the taxpayers, by the Federal 
Reserve Bank already putting in $85 billion, it's unlikely 
they're willing to walk away. We're going to cut a haircut 
because it's fair to the taxpayers. The taxpayers are putting 
in the money to take these guys out.
    Mr. Clark. Okay. Now understand the basis for our ratings. 
We've published a view that the rating, absent the federal 
support on AIG today, would be BB and suffice it to say a year 
ago it would have been worse than that. However, it's an A 
Minus rating with the benefit of the government support. That 
is based on a view that the support that exists is available to 
allow the company to meet its financial obligations.
    So it is fair to say that our rating committee would look 
at a situation where AIG has significant funding but isn't able 
to use it to satisfy its financial obligations in whole, be it 
for the credit default swaps or other obligations.
    We would have to form an opinion, well, will that funding 
be available to future financial obligations to pay them on 
time and in whole, and so those are all factors that we'd have 
to evaluate in determining the appropriate rating.
    As it's been to date, the credit facility has been there 
for essentially all of the financial obligations as needed. If 
that were not the case, we'd re-evaluate the value of the 
support in the rating.
    Mr. McWatters. Okay. So this is not a simple situation, 
that if there is one of these distressed exchanges, therefore 
the wall falls down. Okay.
    Mr. Bienenstock, I read your testimony with great interest. 
You seem to present an elegant alternative to what happened and 
I think you were about to get into that in your opening 
remarks. Would you care to elaborate?
    Mr. Bienenstock. Sure. Once the Government came forward 
with the $85 billion facility and secured it with everything of 
value, so far as I can tell, the dynamics changed. Bankruptcy 
was now off the table. Everything I've read in the public 
record so far has been the Fed, et cetera, didn't want to 
threaten a bluff about bankruptcy but now the strength of AIG 
would say we're not voluntarily filing and you can't 
involuntarily file because we have over 30 million creditors 
and we're paying 99.999 percent of them on time in full.
    So what is the remedy now of those creditors you think who, 
as a matter of equity to the taxpayers, should provide a 
discount? The remedy is not a lot. They can go at most to state 
court at the cost of great public notoriety. Some of these 
entities had government assistance separately. Other of these 
entities, for instance, purchased Lehman Brothers for $250 
million, plus the appraised value of the real estate it 
received, and then had to acknowledge in its SEC filing a $3.5 
billion profit on the purchase.
    I'm saying as a matter of common sense I don't think these 
entities were in a position to say to the U.S. Government no, 
we won't make some moderate but meaningful concession in 
exchange for taking us out entirely of these credit default 
swaps. Remember, that's what was done. They were paid 100 
cents, and we could always go or AIG could always go to the 
rating agency and say, look, we're only asking for concessions 
from businesses we're winding down. We're not doing more of 
this foolishness and as far as all our insurance companies, all 
ongoing businesses, we have the facility there. It's available 
for payment in full on time.
    Mr. McWatters. Okay. Thank you.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Mr. Bienenstock, your response just then, when 
in your view--I mean, let me first get this straight. This is 
your profession, is it not, giving advice in these types of 
situations, these highly-pressurized insolvency crises?
    Mr. Bienenstock. Yes, Mr. Silvers.
    Mr. Silvers. All right. When are you suggesting that the 
approach that you just outlined would have best been deployed 
by the Federal Reserve?
    Mr. Bienenstock. Once they--after--the first thing was to 
stabilize, to provide the $85 billion facility. Then in 
discussions with those people who should equitably give 
concessions over the next several weeks, months. They took 
until November and December to close their deals. So they had 
plenty of time to do this.
    Mr. Silvers. But essentially as soon as--you're saying as 
soon as it had been made clear to the markets, in general 
around the systemic risk issues and the like, that a simple 
Chapter 11 filing was not happening?
    Mr. Bienenstock. Well, yeah. To give you a bit more of a 
professional response since you said this is my profession----
    Mr. Silvers. Right.
    Mr. Bienenstock [continuing]. What I would say to the 
client is after you've taken care of your lifelines, now who 
were AIG's lifelines? First, speak to Mr. Clark to explain 
exactly what's going on, why this will improve creditworthiness 
going forward and not endanger others, after explaining to 
employees, customers, et cetera, here's how we're going 
forward.
    Then, once you've got your lifelines intact, once the 
Government, which is the revolving credit facility lender, 
knows what you're doing, now's the time to do it.
    Mr. Silvers. All right. Mr. Moriarty----
    Mr. Moriarty. Yes?
    Mr. Silvers [continuing]. You--it has been represented to 
us, and I think you heard some of it this morning, that absent 
what the Fed did and precisely the way it did it, there would 
have been a crisis for the insurance subsidiaries and their 
ability to maintain their business, pay their obligations, and 
the like, a crisis that's so serious that it was absolutely 
necessary to rescue the parent in the manner the parent was 
rescued in order to avoid such an outcome.
    I think there is a kind of implicit analysis made by the 
Federal Reserve and the Treasury in saying so, that whatever 
problems might have arisen in the insured subsidiaries, they 
would have been beyond the ability of the state insurance 
regulation and guarantee system to manage.
    What is your response to both those propositions and 
specifically what was the view of the New York State Insurance 
regulators and the--I forget the term of art now, but there's a 
sort of coordinating body of state insurance regulators.
    What was your view during the so-called Lehman weekend 
around these questions?
    Mr. Moriarty. Sure. I'd like to bifurcate my answer into 
two parts. We do not believe that the existing policyholders of 
the AIG property and casualty companies for sure or even the 
life insurance companies would have suffered any losses should 
there--would there have been a bankruptcy of the AIG holding 
company system.
    State insurance laws through the McCarran-Ferguson Act 
clearly give the states the authority to regulate insurance 
companies and to rehabilitate and liquidate them, which is a 
different process from a bankruptcy. So we would maintain that 
the existing policyholders would have been made whole, even if 
there was a bankruptcy.
    The life insurance subsidiaries would have suffered 
significant losses and the cushion, which we call surplus, 
which is effectively capital between assets and liabilities, 
would have taken a severe hit, but we still think it would have 
been positive.
    Now, when we look at AIG as a going concern that would have 
been a problem. Clearly, the reputational risk of bankruptcy at 
the holding company level could shake the confidence of the 
policyholders on the property and casualty side. Much of the 
business is placed by three big brokers. If they had 
blacklisted AIG for all intents and purposes as a going 
concern, they would be gone; the same on the life insurance 
side. So to the extent that there was a bankruptcy, there would 
be a concern as to the ability of the AIG companies, the 
insurance companies to proceed as a going concern.
    Now that being said, there are options. There could be 
sales of the book of business to existing insurance companies. 
There could be transfers of certain parts of the books to other 
companies. So, I mean, there could have been some money moved 
around. There could have been rebranding. I mean, it's hard to 
speculate, but clearly the bankruptcy would have had a 
troublesome impact.
    Mr. Silvers. Well, I'm not asking you to speculate but just 
to remember. Did you all communicate a view that--did your 
department or did, to your knowledge, other insurance 
regulators communicate a view to the Federal Reserve or to the 
Treasury during this period that the parent of AIG had to be 
rescued in the manner that it was rescued?
    Mr. Moriarty. No, we didn't.
    Mr. Silvers. Did you communicate any view at all to the 
Fed, the New York Fed or the Treasury?
    Mr. Moriarty. When we were at the Fed, beginning Saturday 
morning, I think it's clear from Governor Patterson's offer, 
New York and Pennsylvania at the time, which were the two lead 
regulators of the property and casualty companies, did see an 
opportunity to basically lend AIGFP $20 billion in more 
marketable securities and we would take over the less liquid 
residential mortgage-backed securities.
    We did that again on the premise that, number one, there 
would be new capital provided in AIG, Inc., by outside 
investors and, number two, that the life insurance subsidiaries 
and thus the value of the life insurance subsidiaries would be 
put underneath the P&C companies.
    So we were looking for, I guess you'd call it, a private 
savings but it had to be a global solution. It had to be part 
of a solution that would allow AIG to continue making its way 
through the financial crisis. Anything short of that I think 
we'd be highly reluctant to let any money come out of the 
property and casualty insurance companies.
    Chair Warren. Thank you. Professor Troske.
    Dr. Troske. Thank you. I guess maybe I'll start with you, 
Mr. Bienenstock, and you can help because one of the things I 
haven't understood about AIG in particular is the claim, the 
claim that seems to be made that had AIG entered bankruptcy, 
they would have simply ceased operating which seems somewhat 
different than most companies that actually do enter bankruptcy 
if recent experience of Chrysler and General Motors and a 
variety of airlines is any example. Companies often do enter 
bankruptcy and workers get up the next morning, go to work and 
continue to produce products.
    Do you have any sense of why, what's different about AIG in 
this instance and Chrysler or General Motors or, you know, 
United Airlines?
    Mr. Bienenstock. I think so. The clear distinction is that 
trading operations can only trade when there's confidence in 
the marketplace. That's why Enron's trading ceased before it 
filed its Chapter 11 petition. That's why AIG's would also.
    Dr. Troske. When you say trading, you mean their securities 
trading, not their insurance business?
    Mr. Bienenstock. Not--no. I'll get to that.
    Dr. Troske. Okay.
    Mr. Bienenstock. The insurance companies are subsidiaries 
that are ineligible to go into bankruptcy. They could be seized 
by state regulators or not, but they would not technically be 
in bankruptcy themselves. They might be in state proceedings, 
but at the holding company, the various non-insurance 
operations, the Bankruptcy Code has special provisions for 
derivatives trading that allows counterparties to terminate and 
to liquidate. That's the thing that doesn't operate.
    The rest of the operations that are, if there are any, more 
like the airlines, the auto companies, they can continue. I 
don't think AIG had many of that type of operation.
    Dr. Troske. Okay. And, Mr. Moriarty, you made the claim, 
and this is the claim that's often made, and it was a claim 
that was made of auto companies, of why they shouldn't enter 
bankruptcy because the warranties all of a sudden, you know, 
who's going to buy a car from a bankrupt car company because, 
you know, you got no guarantee that you could--you know, they 
were going to be around to protect the warranty. Of course, the 
warranties can often be provided by third party people and do 
it all the time.
    And, so again, when I look at it as an economist, if 
there's value being produced, somebody's going to produce that 
value because they want to make a profit in a market-based 
economy. So if AIG had valuable entities, even if part of the 
company went bankrupt, somebody's got to be able to step up and 
continue to provide the services they do, be it maybe under a 
different name.
    Does that seem like a reasonable outcome?
    Mr. Moriarty. I think it is. Again, there are reasons that 
the state insurance laws wall off the assets and the 
liabilities of the insurance entities from all the non-
insurance entities, simply because the assets are meant to pay 
the policyholder claims.
    AIG, as one of the former panelists indicated, employed 
over a 100,000 people worldwide. There were less than 500 
people employed by AIG FP which arguably brought down or caused 
severe stress to AIG. AIG clearly had a lot of talent in terms 
of its core businesses which were property and casualty 
insurance and life insurance, and those subsidiaries could have 
been sold, the business could have been taken by other 
entities.
    You know, I think there were options. I think the 
policyholders, number one, would have been paid and, number 
two, probably could have gotten new coverage, whether from a 
company that was sold by AIG or commercial accounts that just 
went to AIG.
    I do think that one of--two other concerns that we were 
most concerned about with respect to AIG were, number one, that 
they would lose customers because of the reputational risk and 
that they would lose good people because of the reputational 
risk. Those are concerns that, you know, still remain with us.
    Dr. Troske. But that's no different than any business. I 
mean, presumably, you know, do you want to fly on an airline 
that's bankrupt? I mean, when I get on an airplane, I sort of 
do you depend on the person driving it? I got to think that 
those concerns may be even more paramount. I think I'm more 
concerned when I get on an airline than about my life insurance 
policy.
    Mr. Moriarty. Oh, again, in insurance, it is a promise to 
pay.
    Dr. Troske. It is, yes.
    Mr. Moriarty. They don't make widgets and they don't make 
cars.
    Dr. Troske. An airline is a promise to get you there alive.
    Mr. Moriarty. Yes, correct, correct.
    Dr. Troske. Okay.
    Mr. Moriarty. But I understand your point, and I do agree 
with you.
    Dr. Troske. So let me--one more question. I'm sorry. Yeah. 
I remember. Mr. Clark. So we've discussed today about the 
combination of private sector/public sector, you know, the 
financial support for AIG.
    How would that have been affected had the Federal 
Government put in less money, private sector put in more? Can 
you speculate a little? Would that have affected the ultimate 
rating of AIG in your mind?
    Mr. Clark. No. We'd be looking to the outcome in terms of 
AIG's sources of liquidity, its ability and willingness to meet 
its obligations when due, whether that funding was private, 
public, or a mixture. That wouldn't have affected our rating.
    Dr. Troske. Okay. Thank you.
    Chair Warren. Thank you. Good. Thank you. Mr. Bienenstock, 
I think you were in the room to hear Mr. Baxter explain the 
role of the Fed in the Long-Term Capital Management 
negotiations, and I think his words were that the Fed explained 
to the creditors what was in their own best interests in 
reworking what needed to be done.
    Can you talk about what kind of conversation might have 
occurred with the counterparties to AIG and what was in their 
own best economic interests? I think you hit this, but I just 
want to make sure we got this one nailed down.
    Mr. Bienenstock. I'm sensitive to the concern of the Fed 
not to use its regulatory power in a debtor/creditor capacity 
where they're serving as a lender. So I'll phrase it as to what 
any 800-pound gorilla lender, such as one of the big banks or, 
in this case, the Fed, would have said to the other creditors 
and the answer is we're taking a lien on everything. In this 
case, it's unique, as I said, because bankruptcy was taken off 
the table for other reasons.
    We're taking a lien on everything. Bankruptcy is not an 
option. We're willing to do a transaction with you if you make 
a fair concession for the benefit of all taxpayers because if 
not for our money, you would have taken a big loss on us for 
the most part, and what are your options? Your options are to 
do nothing, in which case we won't do a transaction, you won't 
have more money from us, we won't buy out your CDO. Your 
options are to go to state court. We'll argue awhile about 
whether you're entitled to more collateral and how much more 
and by that time the underlying dynamics will have changed.
    But at the end of the day, you're not going to have a 
remedy that really gets you value because we're sitting here 
with an $85 billion lien and you'll be in the newspaper and on 
the news every night trying to frustrate the United States 
Government's effort to save the global financial system. Now 
what would you like to do?
    Chair Warren. Okay. I think we have that. Can I ask you one 
other that comes out of your testimony, your written testimony, 
and that is you talk about shared pain, the principle of shared 
pain and bankruptcy? Can you just elaborate a bit on that?
    Mr. Bienenstock. Sure. We all grow up being told that when 
we make a promise, we keep it. When we give our word, we keep 
it. And one of the things that makes bankruptcy 
counterintuitive and, frankly, offensive to a lot of lay 
persons is that in bankruptcy, if a debtor breaks one promise, 
takes one creditor and doesn't pay it, but pays its others, 
that's pretty unfair. So the more fair procedure is to break 
all its promises and to share the pain equally across all the 
creditors. That's where bankruptcy is contrary to most of our 
notions of substantial justice.
    So sharing the pain is the way of the creditor being hurt 
or the lender coming up with innocent taxpayer money, saying 
it's unfair that we're taking all the pain, you're getting paid 
100 cents for a business that couldn't have paid it if we had 
not come to the rescue. You have to share equally because 
that's fair.
    Chair Warren. Okay. Thank you very much, Mr. Bienenstock. 
I'm through.
    Mr. McWatters.
    Mr. McWatters. Thank you. Mr. Bienenstock, when I was 
reading your written submission, again I was struck by the 
elegance of it, rather the simplicity of it, which made me 
think, well, why wasn't this done, why didn't other people 
think of this?
    Then I got to page four and you say on page four, you say, 
``Additionally, the Federal Reserve Bank of New York retained 
an outstanding law firm and attorney for its work, but the law 
firm is identified with representing Wall Street institutions, 
such as JPMorgan, and it would be awkward for it to devise 
strategies to obtain concessions from those institutions.''
    Could you help me understand that?
    Mr. Bienenstock. Sure. In this case, I think it sounds to 
me because of the exigencies of time, the law firm that was 
probably familiar with the situation, other than AIG's own law 
firms, was the law firm being used by JPMorgan and Goldman 
Sachs to try to come up with a private solution which I heard 
earlier, I think, was a Monday, September 15, effort.
    Mr. McWatters. Yes.
    Mr. Bienenstock. So since they had immersed themselves in 
the documents, I suppose at least that was one factor why, with 
waivers granted and full disclosure and all the rest, this was 
all done properly, I'm sure, that JPMorgan and Goldman Sachs 
surrendered their counsel effectively to the Federal Reserve 
Bank of New York.
    Those counsel, they are outstanding, as I said, both as a 
firm and the individual who was leading it, but they are known 
to represent the Wall Street interests, not that they don't 
represent others, but they're synonymous in the restructuring 
industry with representing Wall Street interests.
    So it would be awkward, as I said, for them to concentrate 
on, ``well, here's how we might get concessions from 
counterparties'', who are their clients in many other matters.
    Mr. McWatters. Well, I assume this is particularly true, 
given that two weeks from now they will be back representing 
JPMorgan and JPMorgan may say, ``yeah, you're the guy that just 
came and represented the Fed and came to us and beat us up for 
a concession.''
    Mr. Bienenstock. Well, and I want to emphasize this was 
done, I think the Federal Reserve Bank of New York people said 
earlier, this was done with full waivers, et cetera. It was 
done totally properly and it's allowed to be done and it's 
often done.
    In this case, I just think it put counsel in an awkward 
position and also you've heard there are a lot of explanations. 
I mean not everyone gives my analysis, certainly, maybe no one 
did, and there were a lot of explanations that were facile for 
people to latch on to why you should just pay all the creditors 
all the time.
    Mr. McWatters. Correct. One last question. If, on September 
16, I came to you and retained you and said we've just given 
this entity $85 billion, this entity, AIG, $85 billion, and 
it's on a 180 days as a bridge. Can you work out a prepackaged 
bankruptcy of AIG, working with the insurance companies, the 
rating agencies, and the like, within a 180 days and reach 
resolution?
    Mr. Bienenstock. I would have told you less than a 10 
percent likelihood. Let me just amend something I said before.
    I did, before today, test with restructuring experts, both 
business and legal, the idea of getting concessions and I was 
surprised to find out I got unanimous buy-in to that.
    On the prepack, the reason I'm saying less than a 10 
percent likelihood is, as a matter of right, any creditor can 
ask for an examiner. God knows, there was a lot to examine 
here. I think that's what you're doing. That can take months or 
years. I would caution you that if you're doing the bankruptcy 
after the $85 billion revolver has been extended, that $85 
billion is subject to restructuring in bankruptcy, like all the 
other debts.
    Mr. McWatters. Sure.
    Mr. Bienenstock. Prepackage is a term used most technically 
for making a deal with everyone in advance, going to court and 
asking for swift approval of the plan. It basically works when 
you have a small group of sophisticated parties or you're just 
paying everyone in full.
    Here, if the decision had been made to pay everyone in 
full, then my answer of less than a 10 percent probability 
would change. I would say if you're going to pay everyone in 
full in that prepack, then yes, you can, more likely than not 
you can do it in a 180 days, but if you're not paying everyone 
in full, I would say the likelihood of dealing with millions of 
people who have guarantees for their insurance policies, 
thousands of other types of creditors, including derivative 
creditors, in six months, it's nearly impossible.
    Mr. McWatters. Okay. Well, thank you then, and that helps 
support your solution that you have in your paper.
    Thanks.
    Mr. Bienenstock. Thank you.
    Chair Warren. Thank you. Mr. Silvers.
    Mr. Silvers. Mr. Clark, you, like Mr. Moriarty, have been 
assigned responsibility by our national government for much of 
what has happened here. By you, I mean your firm and the other 
credit rating agencies.
    I want to offer you the opportunity to, if you dispute 
what's been said about the rating agencies by our other 
witnesses, to do so, but I want to also ask you a very specific 
question about a different way of thinking about the options 
available, which is, if, rather than rescuing the parent, all 
right, the Federal Reserve had chosen to make 13(3) lending 
available to subsidiaries on an as needed basis, would it have 
been possible to have maintained the same level of credit 
rating, by your agency and others that was effectuated by 
rescuing the parent.
    And just to make this question a little bit more 
complicated, do you agree with Mr. Moriarty's assessment that 
the subs could have handled their problems around securities 
lending absent the problems of the over-the-counter derivative 
business at the parent level?
    Mr. Clark. That's complicated.
    Mr. Silvers. That's complicated. Well three distinct 
questions. One open ended, the second question is, could you 
have maintained the credit worthiness of the subs directly and 
let the parent go?
    Or, have the parent have go through something like perhaps 
what Mr. Bienenstock was talking about? And thirdly, is Mr. 
Moriarty right, that the subs could have handled the securities 
lending problems without further assistance?
    Mr. Clark. Okay, I'm going to leave the open ended one on 
the table. But if the New York Fed had lent directly to the 
subsidiaries, I don't know that they had the authority to do 
that and I can't really speak to whether that would have helped 
the subsidiaries to maintain their credit ratings without 
understanding what the terms would have been.
    Mr. Silvers. Well let's just assume that we're talking 
about essentially what happened to the parent, a blank check 
under 13(3). And you can lend to anybody under 13(3), I think 
that's kind of what we've learned. But let's just--I don't want 
a legal opinion about whether the Fed had the authority. Let's 
just assume the Fed opened the spigot to the subs.
    Mr. Clark. Okay.
    Mr. Silvers. Could they have opened the spigot wide enough 
to maintain the credit rating of the subs?
    Mr. Clark. I presume that they could have. It's much, much 
more complicated when you look at the fact that by lending to 
AIG, they're sort of your filter to get money down to the subs. 
But when you talk about----
    Mr. Silvers. But they're a filter with a giant hole in it 
called credit default swaps.
    Mr. Clark. Of course, understood. But that was only one of 
the places that those funds coming from the New York Fed were 
going.
    Mr. Silvers. Right.
    Mr. Clark. And when you look at the literally hundreds, 
when you start looking globally, of regulated and unregulated 
subsidiaries of AIG, I think it would have been very difficult 
to get money to all of those.
    In addition, you had cross guarantees between certain of 
the subsidiaries, both domestic and foreign, which most often 
went back to insurance companies regulated in New York or 
Pennsylvania, not always. It was a very complicated web of 
relationships really just necessitated by the complex global 
nature of the group.
    Mr. Silvers. So it was simpler to do it at the parent?
    Mr. Clark. It was much simpler to do it at the parent.
    Mr. Silvers. But you're not saying you couldn't have done 
it?
    Mr. Clark. I don't know that under their authority they 
could or could not.
    Mr. Silvers. Well I'm talking about----
    Mr. Clark. It would have complicated the task.
    Mr. Silvers. Right, it would have complicated the task, 
okay. Do you agree with Mr. Moriarty that the resources were 
available to the subs to deal with the securities lending 
problem?
    Mr. Clark. I think it's possible that they could have. I do 
think though if you look at what happened between September 15 
and really the end of the year when the enormity of the 
financial crisis, the continued investment losses, not only on 
the securities lending program but on other investment holdings 
of AIG's insurance companies and many other insurance companies 
in the industry.
    There was a drain there and AIG through its resources from 
the New York Fed did inject significant capital into the 
domestic life insurance companies. Could they without the drain 
of the CDS have handled that themselves given the continued 
decline of the financial markets, possibly, but it's difficult 
to say with any certainty.
    Mr. Silvers. One more question. Is it possible, in your 
opinion, for a major insurance player company to operate with a 
double B credit rating?
    Mr. Clark. It depends on the businesses that they're in. 
Assuming they're diverse----
    Mr. Silvers. Assuming a diversified range of businesses, 
life and property and casualty----
    Mr. Clark. It's possible.
    Mr. Silvers [continuing]. And investments?
    Mr. Clark. It's possible, and we see it in certain areas. 
Certain areas of insurance are more confidence-sensitive than 
others. When you look at some of AIG's businesses that were 
high net worth life insurance and annuities, those are very 
confidence-sensitive, vulnerable to runs on the bank in a 
severe stress.
    And the large commercial insurance similarly, not a run on 
the bank risk, but very sophisticated purchasers of insurance 
who value credit and would be unlikely to purchase or renew 
business----
    Mr. Silvers. Double B is below the line, isn't it?
    Mr. Clark. Yeah, definitely. In most buyers' views it would 
be.
    Mr. Silvers. Mr. Moriarty, do you--I couldn't tell if you 
were agreeing or disagreeing.
    Mr. Moriarty. No, I disagree with my colleague. The 
commercial side of the business, whether it be on the property 
side or the high net worth individual are very rating sensitive 
and do due diligence in terms of the credit worthiness of the 
insurance companies that they're dealing with.
    But for some personal lines, like auto, and homeowners, 
arguably they can write at the lower levels. But something 
below investment grade even would be difficult to write any 
extensive book of business.
    Mr. Silvers. I have one more question.
    Chair Warren. Quick.
    Mr. Silvers. I'll be quick. Mr. Bienenstock, can you help 
us understand, from your general knowledge of these markets and 
so forth. JPMorgan Chase and AIG, was there a mutual dependency 
here of some kind during this period?
    Mr. Bienenstock. Well gee, I'm not----
    Mr. Silvers. Do you have any insight into this?
    Mr. Bienenstock. I'm not familiar with their contractual 
relationships.
    Mr. Silvers. Okay, thank you.
    Chair Warren. Thank you. Dr. Troske.
    Dr. Troske. Thank you. Mr. Moriarty, I guess I'm going to 
ask a general insurance question. And I'm going to try to put 
it in as simple terms as possible because I think sometimes we 
get a little confused by the jargon. AIG was writing credit 
default swaps, where essentially they were insuring mortgage 
backed securities.
    Mr. Moriarty. AIG Financial Products----
    Dr. Troske. Yes, some of them.
    Mr. Moriarty [continuing]. Yes.
    Dr. Troske. While simultaneously the company was also 
purchasing mortgage backed securities?
    Mr. Moriarty. Correct.
    Dr. Troske. So they were actually purchasing products that 
they were also insuring?
    Mr. Moriarty. Doubling down, yes.
    Dr. Troske. Yes. I'm no financial expert, nor am I an 
expert in insurance, but that seems rather odd to me that a 
company would both insure something and then expose themselves 
even further to the risk that they're insuring. Is that usual 
for insurance companies to double down in this fashion?
    Mr. Moriarty. No it's not, actually. You usually try and 
make sure that the risk on the asset and the liability side do 
have some--don't have a high degree of correlation.
    When we first looked at these securities lending programs 
it was uncovered by Texas, which has one of the biggest life 
insurance companies, and they were doing an examination. And 
they just noted that this thing was growing exponentially and 
alerted other states.
    At the time, AIG management had come in to the regulators 
to explain the program. And you know, we expressed concern 
about two things. Number one, was the size and number two was 
the fact that they were investing the cash in securities that 
were longer dated than the liabilities on the securities 
lending.
    So they depended on the counterparties to effectively roll 
over or else they'd have to liquidate the securities. Then we 
went into the diversity of these securities which were 60 
percent in--over 60 percent in residential mortgage backed 
securities, which was clearly a high amount.
    But they brought up the point, these were all Triple A 
rated, they were all Double A rated residential mortgage backed 
securities that were in fact diversified because they came from 
different originators, the collateral was spaced throughout the 
country, that basically the mortgages. And there hasn't been a 
meltdown of the residential mortgage, across the country in the 
United States, in a long time.
    Dr. Troske. 15 years.
    Mr. Moriarty. And so again, from their viewpoint, it wasn't 
an imprudent activity, I gave them more investment yield. But 
nonetheless, just the sheer size of it and the concentration in 
the RMBS, that they did, at our behest, begin a significant 
downsizing of it without reporting big losses.
    And they reduced it by 24 percent in a year, from $76 
billion down to $58 billion dollars. And we do things that, you 
know, again absent the issues at FP and the financial crisis, 
that the securities lending program would have been wound down.
    Dr. Troske. Let me ask another question too. And it's 
actually when you're doing this, when you're sort of both 
insuring and purchasing, and you exacerbate the risk. Because 
now you've got what's known as a co-variance, the way the two 
of them move together.
    Because typically you only have to worry about the changes, 
potential changes in one. So it's actually very important if 
you're doing both to understand how the things you're 
purchasing are going to vary with the things that you're 
insuring.
    Mr. Moriarty. No, no, I totally agree with you Dr. Troske. 
I think one of the issues though is that we regulate the 
insurance company----
    Dr. Troske. Right.
    Mr. Moriarty [continuing]. We do not regulate----
    Dr. Troske. And I'm asking you just as an insurance expert, 
not as that you should have been overseeing this because I 
don't want to imply that. So let me--and Mr. Clark, as Mr. 
Moriarty indicated that these were all triple A rated 
securities or double A rated.
    But your--when you take, and again I'm going to be real 
simple here, and this is not particularly what you've come to 
talk to us about--but when they were coming to you with 
essentially a box of mortgages and S&P was giving a rating on 
those mortgages, you were rating the mortgages in a box and 
then the bank would go out and sell them to somebody.
    But what AIG now had is they had--they were insuring a box 
over here and they were buying a box over here. You're not 
evaluating how those two boxes are going to move together which 
is a key point for AIG if they're both insuring and buying. 
You're not evaluating the co-variance between those two 
investments, are you? Well, your triple A--just tell me about 
the likelihood of loss from these mortgages I own not----
    Mr. Clark. Let me separate out what I can and can't answer.
    Dr. Troske. Okay.
    Mr. Clark. First of all, I'm an analyst in our insurance 
ratings practice----
    Dr. Troske. Right.
    Mr. Clark. [continuing]. Responsible for AIG.
    Dr. Troske. Okay.
    Mr. Clark. So I can't speak to how the rating were arrived 
at and structured financially.
    Dr. Troske. Fine.
    Mr. Clark. I can speak to the analysis we did on AIG's 
securities lending and its CDS portfolios.
    Dr. Troske. Okay, that would be great.
    Mr. Clark. And we were, throughout 2008, analyzing those 
portfolios and making projections, which we updated publicly to 
the market throughout the year as to our expectation as to 
losses that the firm would likely see on those portfolios both. 
We were looking at both and we were combining the analytics.
    What we saw, however, was that in the fall of 2008, and 
very much to Mr. Moriarty's point that we'd seen housing 
declines before, but one on a nationwide scale of this depth of 
magnitude, that was really outside of our assumptions and the 
assumptions of many in the market.
    It was quite unprecedented. So we did find that the 
performance of both of those portfolios, although we modeled 
them together, looked at the exposure together, the eventual 
losses did exceed what our expectations were.
    Dr. Troske. Okay, thank you.
    Chair Warren. Good. Thank you very much. I want to thank 
all three panelists, Mr. Bienenstock, Mr. Clark, and Mr. 
Moriarty. We appreciate your taking the time to be here with us 
today. This has been very helpful to the panel and will be very 
helpful to our report.
    We're going to call a recess for this panel for half an 
hour. We'll start again at a quarter of two. And our first 
witness at that point will be Clifford Gallant. Thank you.
    [Whereupon, at 1:14 p.m., a recess was taken.]
    Chair Warren. This hearing is back in session. I want to 
welcome Mr. Gallant, the Managing Director of Property and 
Casualty Insurance of Keefe, Bruyette, and Woods. Mr. Gallant 
is an equity research analyst who covers the insurance industry 
and he's here to share his thoughts on AIG's current financial 
outlook.
    We appreciate your being here today and I'd like you to 
make opening remarks if you would and limit them to five 
minutes.
    Mr. Gallant. Okay, thank you for the opportunity.
    Chair Warren. Thank you Mr. Gallant.

 STATEMENT OF CLIFFORD GALLANT, MANAGING DIRECTOR, PROPERTY & 
      CASUALTY INSURANCE RESEARCH, KEEFE, BRUYETTE & WOODS

    Mr. Gallant. Yes, on April 27th we published a report on 
AIG where we downgraded the shares to an Underperform. We put a 
$6.00 price target on the stock and at the time that was 
considered somewhat controversial, at the time the stock was 
trading in the mid-40's, it's still in the low 30's.
    However, we didn't view our conclusion that there was not a 
lot of common equity value in the stock to be all that 
profound. In fact, we view it to be somewhat self-evident. And 
by that I think there are two main realities of the company.
    One is that it's still dependent on government aide. And I 
think the evidence of that is in the first quarter that there 
was further access of government credit lines. The FRBNY loan 
went from $23.4 billion to $28.9 billion through April. And the 
Series F, U.S. Treasury-owned securities went from $5.3 to $7.4 
billion.
    Secondly, when we do any type of sum of the parts analysis, 
or try a valuation of the company it's just, it's hard to come 
up with a positive number. And I think that's a somewhat 
obvious reality of the current financial position of the 
company.
    I think that investors do need to understand a few key 
points. One, there is a great franchise beneath this company. 
The insurance operations have a fantastic global footprint.
    And I would say that the current management team has done a 
very good job with the company in terms of stabilizing it, you 
know to stem the loss of people and of clients. A lot of credit 
needs to go to them for dealing with what is obviously a 
difficult situation.
    That said, I think in terms of valuing the stock there are 
some things that people have to be aware of. One, is a book 
value is not a normal book value calculation, right. The debt 
to equity is something like seven to one. That's a ratio that 
most insurance--no other insurance company is at and could not 
normally operate at.
    If the U.S. Government were to be replaced with just normal 
private creditors, I don't think that they could conduct 
business. The only reason it does happen is because it is the 
U.S. Government that is the backer.
    The earnings that the company is producing do not accrue to 
the common shareholder in the normal fashion, because there is 
a preferred shareholder for its stockholder in the Series E 
stock.
    That dividend has not been paid, but if they financially 
get to the point where they can pay that, I assume that that's 
where the money's got to go. They can't accrue to the common 
shareholder. So again, you can't use a normal P/E ratio here to 
value AIG.
    And there are a number of book value concerns with the 
company. I think if we were to have a public offering of the 
shares on a large scale, I think investors would want a 
discount to book value for several reasons.
    One, concerns over the quality of property and casualty 
reserves, valuation of things, like the ILFC, aircraft leasing 
business. And I think one thing you need to keep in mind as 
well is that the peer group, the property and casualty life 
insurance companies today on the market, several of them have 
redundant capital positions.
    They're buying back stock, have leasing reserves and yet 
they're all trading below book value. Something like 85/90 
percent of book. I got to assume that AIG would trade at a 
discount to those, those peers.
    And finally, I think just as the systemic risk fades, I 
think the treatment of AIG is likely to change. I believe that 
you know, since September of 2008 as a result of systemic 
fears, the taxpayer has had to take some losses on AIG, has had 
to be very generous towards its treatment of AIG.
    You know, debt has been restructured, top debt was changed 
into this non-cumulative form. And those things were necessary, 
needed to be done to keep the company going. But I have to 
believe as that systemic risk fades, that it's less likely to 
happen.
    I think the taxpayer is going to say, you know, cash 
expended, needs the resulting cash back into the 
shareholder's--taxpayer's wallet. And is that--and during that 
process I believe that the common stock will largely be--you're 
not going to find a lot of value left for the common 
shareholder.
    So, I think it all comes down to a question of--when I talk 
to the bulls on the stock--that there is value in the company, 
yet in the same breath there's this discussion of somehow the 
taxpayer taking some losses as the government tries to exit its 
position. And in my point of view that, if anything, indicates 
that our initial assessment is right. I mean if the taxpayer is 
expected to take a loss, how can there really be value here in 
the company?
    [The prepared statement of Mr. Gallant follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Very helpful. Thank you.
    So let me see if I can just disaggregate this a little bit 
and figure out what's going on.
    Mr. Gallant. Sure.
    Chair Warren. Do you have any assessment of whether or not 
AIG is likely to need more government assistance to meet its 
liquidity needs?
    Mr. Gallant. In their--they disclose debt that's coming due 
throughout this year. You know, even excluding ILFC and AIGFP, 
there's something like $10 billion due in 2010. Since AIG is 
not able to access normal debt markets, I have to believe that 
they will further draw down on government credit lines to make 
those payments.
    Chair Warren. Okay, do you have any sense, just as you 
project this out, when the point might come that the government 
will not be called upon to continue its support for AIG? Before 
we get to the question----
    Mr. Gallant. Sure.
    Chair Warren [continuing]. Of unwinding the interest----
    Mr. Gallant. Absolutely, yeah.
    Chair Warren [continuing]. That we already have there.
    Mr. Gallant. No, that's a good question and I can't really 
answer. I think AIGFP, as that portfolio winds down, that would 
seem to be at least one indication of less systemic risk being 
posed by AIG. You know I think that the insurance subsidiaries, 
as I know other panels have discussed today, are probably 
financially stable and sound.
    And so that is probably not a reason to wait. It seems to 
me that the systemic risk seems to reside in the parent 
company.
    Chair Warren. So, actually, let me ask it in a slightly 
different way. What are the conditions that need to be met? And 
we'll take them in all, that the government doesn't have to put 
more money in and then we can talk about the second one, about 
how the government starts unwinding its position.
    What do we need to see happen? We've got two sales--AIG has 
two sales pending, right? So I presume part of it would be the 
completion of those sales?
    Mr. Gallant. Right, right. That's a big step, right? You 
really start to see--again, cash back into the taxpayer's 
wallet. You know I think the ability for AIG to access debt 
markets in a normal fashion would be a--is a key to----
    Chair Warren. It would be a very good sign when you can see 
AIG borrowing in the debt market?
    Mr. Gallant. That's right. That's right. Presumably with 
the expectation that they'll be able to internally generate the 
funds to repay that debt.
    Chair Warren. That's right.
    Mr. Gallant. Yeah, I think those are the big things that we 
would expect to see over the next year.
    Chair Warren. Okay. I noted in your written testimony you 
talk about how the current structure is unsustainable and that 
some sort of resolution must occur.
    Mr. Gallant. Yes.
    Chair Warren. Can you just elaborate----
    Mr. Gallant. Sure.
    Chair Warren [continuing]. A little bit on that?
    Mr. Gallant. Well simply that the government----
    Chair Warren. That wasn't all the way to a blueprint.
    Mr. Gallant. Yeah, well the government doesn't want to be a 
permanent investor in AIG. That's basically the bottom line for 
me. And I think if you were going to value the common stock, if 
you want to invest in this company, you have to assume that the 
government is going to get out. And so that's the approach we 
took in coming up with our price target.
    Chair Warren. Okay. Very valuable, thank you very much. Mr. 
McWatters.
    Mr. McWatters. Thank you. The Congressional Budget Office 
says the taxpayers may lose $36 billion dollars on AIG, and OMB 
says about $50 billion dollars. Do you have a guess as to 
whether or not these numbers are anywhere near accurate? Or can 
you see a larger or smaller number?
    Mr. Gallant. Yeah, that's a very difficult question to 
answer. I think the current debt outstanding is something like 
$79 billion. I've come up with my assessment of what the 
earnings power of the ongoing operations is--something like 
$2.8 billion a year.
    You could put a 10 to 15 multiple on that, add the gain 
that you expect on the operations that are to be sold and 
you're still short of what you need to cover a loss. So it 
might be--it still seems like that will be difficult for the 
taxpayer to break even.
    Mr. McWatters. If it was your job, how would you 
restructure AIG? How would you make it stronger?
    Mr. Gallant. That's probably beyond me to answer. But I 
would say that probably as a first step, I think there needs to 
be a test of what the common value, what the market price is 
for the common stock.
    You know the government does have the 80 percent ownership 
in the form of warrants. A public offering of part of those, 
part of that ownership might tell you what the market really 
does think AIG is worth. And that is a sort of a starting point 
as to where you can sort of go from there.
    Mr. McWatters. Do you think AIG is solvent? Or is it just 
simply getting along on its implicit government guarantee?
    Mr. Gallant. I think the government guarantee is intrinsic 
to its ability to conduct business on a daily basis.
    Mr. McWatters. Okay, okay. So it's possible, or I don't 
want to put words in your mouth, but I guess you're--is it 
possible AIG cannot be solvent?
    Mr. Gallant. If the government were to walk away today and 
you know, pull back all its support, then AIG would be a----
    Mr. McWatters. Oh, sure.
    Mr. Gallant [continuing]. Would not be in a position to be 
able to conduct business.
    Mr. McWatters. In your testimony or in some interviews I 
think you said that AIG has the potential to become--the 
government has the potential to be embarrassed by AIG. What did 
you mean by that?
    Mr. Gallant. You know I think I was just referencing the 
fact that AIG is obviously a very high profile name. There have 
been other high profile issues, you know, the compensation for 
the people at AIGFP about a year ago was obviously a big 
embarrassment.
    Mr. McWatters. Okay.
    Mr. Gallant. And you just want to--you don't want to have 
that risk out there.
    Mr. McWatters. And I'll close by just asking, what is your 
current outlook on AIG?
    Mr. Gallant. We maintain our $6.00 price target. We're 
advising our clients not to buy the stock.
    Mr. McWatters. Is that because 80 percent is owned by the 
government and there's only 20 percent outstanding and there's 
so much pressure that ultimately that 20 percent just might get 
crushed?
    Mr. Gallant. Yes, eventually that's right. I mean we 
believe that, as I said, as the government exits its position 
and tries to repay the taxpayer, there's not going to be a lot 
left for the common shareholder.
    Mr. McWatters. Okay, thank you.
    Chair Warren. Thank you. Mr. Silvers.
    Mr. Silvers. In a way I want to revisit my colleague, Mr. 
McWatters' questioning in a different way. Obviously, you write 
analyst reports for private investors in AIG's equity in 
particular----
    Mr. Gallant. Sure.
    Mr. Silvers [continuing]. Who are junior to the government, 
right? We are talking to you about the interest of the 
government.
    Mr. Gallant. Right.
    Mr. Silvers. That's the investor we represent, in a sense. 
So from what you were saying, it seems to me that you're 
basically saying there's not enough earning power, or cash flow 
power, so to speak, in this firm to support not only the stock 
price as it is today.
    I mean it's an astounding gap between what it is and what 
you say it should be, but perhaps not enough to even support 
repaying the government ultimately. Is that--am I reading back 
to you what you were saying, correct?
    Mr. Gallant. Yes, that's correct.
    Mr. Silvers. And AIG is currently drawing, as you point 
out, drawing on the government's, on the Fed's line of credit. 
Not paying down, but drawing.
    Mr. Gallant. That's right.
    Mr. Silvers. Now if you put those two things together, 
doesn't that suggest that from the government's perspective, 
not just as a senior, and a senior equity holder to the common, 
but as the continuing source of funding, right?
    That what we ought to, what the government ought to, be 
doing is demanding hair cuts from other investors in order to 
get this company to function properly. Or is there some other 
path here? Is there a way to get growth out of this firm? To 
get growth in earnings or in cash flow out of this firm?
    Is there an expectation that the market will view the 
underlying assets of AIG differently in the future? And I'm 
particularly interested in your perspective on AIG as a global 
firm given what seems to be happening in the global economy 
right now, as of today.
    Mr. Gallant. Well in terms of the ability for the company 
to increase its earning power or cash flow. You know you are in 
a difficult environment right now. Obviously the global economy 
is not on sound footing yet.
    And actually the insurance businesses are in a somewhat 
difficult environment as well. The property and casualty 
business prices are going down throughout the industry. And the 
profit outlook, at least our view of the profit outlook for the 
property and casualty, is not great. So the backdrop is not 
good.
    You know, AIG of course is still, even in the continuing 
operations, under earning what it once did. So there is always 
the potential to recapture some of that lost value. And I would 
say that the current management team seems to at least be 
moving towards that as they've stemmed the flow of lost 
employees and all.
    But, you know, in terms of another route, I don't see it. I 
mean I think it's a very difficult road ahead of them.
    Mr. Silvers. I'm sorry, in terms of--you don't see what?
    Mr. Gallant. No, I'm sorry, I thought you were asking about 
a second--in terms of generating more, additional earnings 
power.
    Mr. Silvers. You don't see a way to generate additional 
earnings power by a multiplier effect. By the way, and this is 
sort of unfair, but your somewhat radically pessimistic view, 
does that make you a maverick so to speak?
    I mean I just find it extraordinary the difference between 
a current market price of $44.00 in what is an active trading 
market, and then your view of $6.00.
    Mr. Gallant. It's hard--that is--I ask myself that question 
a lot. You know I think there are a few factors. I think for 
one, it is a complicated scenario. I mean AIG's balance sheet 
is not a typical balance sheet. It does have a stated book 
value number of $37.00, $36.00 and that I believe is a 
misleading number. But you know, it is out there. There is the 
underlying value of the company.
    Right, these insurance companies which are, like you said, 
it's a great global franchise. And that's actually a very 
frustrating thing for those who were watching the company in 
2008 as well. I was an analyst then and you saw all these 
underlying earnings that were very strong and you had this 
great franchise. It was hard to believe that the stock was 
zero. There's also been a series of good headlines. As I say, 
management has done a good job----
    Mr. Silvers. Right.
    Mr. Gallant [continuing]. And there's been some good 
headlines over the last year or so.
    Mr. Silvers. But fundamentally----
    Mr. Gallant. Yeah.
    Mr. Silvers [continuing]. You don't have a critique of what 
management is doing, you know I don't hear one. What you 
basically have is a critique that there are too many claimants 
on the cash flows to support either the stock price or the 
Government getting paid back?
    Mr. Gallant. That's--yes, that's ultimately correct.
    Mr. Silvers. All right. Why is that not sort of a no-
brainer in terms of that the government shouldn't really give 
this firm any more money until the existing claimants take 
haircuts?
    Mr. Gallant. You know I think the----
    Mr. Silvers. I mean what other choice----
    Mr. Gallant. Sure.
    Mr. Silvers. What other choice do we have?
    Mr. Gallant. Yeah, I can connect that to the question about 
the stock price. Because I think the bulls on the stock believe 
that through exiting, the government is going to be very 
generous as it tries to exit its position in AIG. Whether--that 
could mean walking away from things--walking away from 
ownership interests or forgiving parts of loans. You know 
I've--this is through private conversations with investors.
    Mr. Silvers. Do these people talk to their fellow citizens? 
Do they have any notion of what would occur if that--if we 
started handing out public money to the private investors in 
AIG in that way?
    Mr. Gallant. That's the argument. And to be fair, I think 
the reason that they might have held that view is that the 
government has been generous to AIG already, right? You know 
taking the top debt, which paid an interest, had an interest 
payment attached to it and shifting it to a preferred status 
that's non-cumulative, very generous acts.
    Interest rates have been changed for the company. You know 
government-owned debt has been moved from AIG's balance sheet 
to off balance sheet vehicles, which has lowered them out of 
debt that AIG itself owes, but with only a fraction of the 
result actually ending up back in the taxpayer's wallet. So I 
think there's reason for the investors to think that perhaps 
that will continue.
    Mr. Silvers. Thank you.
    Chair Warren. Thank you very much Mr. Gallant. Thank you, 
Mr. Silvers. Professor Troske.
    Dr. Troske. Thank you. You can call me Mr. If you really--
--
    Chair Warren. Oh, okay.
    Dr. Troske. That doesn't bother me. So I just want to 
follow-up a little bit and I guess I'm going to try to be very 
straight forward and clear. Basically--the stock price is, I 
believe, $33.00 you said.
    Mr. Gallant. Yeah.
    Dr. Troske. And you're estimate is it should be $6.00. So 
you're basically saying there are a lot of people out there 
that are making a mistake. Is that a fair assessment?
    Mr. Gallant. Yeah, I think buying the stock today is a 
mistake.
    Dr. Troske. Okay, or if you owned it right now, if someone 
owned it, would you advise them to sell it?
    Mr. Gallant. Yes I would.
    Dr. Troske. Okay, I just want to--and I guess you've 
elaborated a little bit on what you think the, where the 
mistake is coming from. And I read it as you're saying, it's 
really hard to figure out what this company is worth so we 
could get a bunch of different guesses. The market's got a 
guess, you've got a different guess. It's hard----
    Mr. Gallant. That's fair.
    Dr. Troske. Okay.
    Mr. Gallant. And in addition, that is a thesis of the 
government, as an interest.
    Dr. Troske. Okay, and yes, thank you, that's right. You did 
mention that the subsidiaries were solid. If I could remove 
them from the structure, just reach down, pull out and make 
them independent.
    Mr. Gallant. Sure.
    Dr. Troske. What would they be worth? Do you have a guess? 
And is that something equivalent to what we're--I mean is the 
price coming from this implicit value of at some point maybe we 
could just sort of remove them from----
    Mr. Gallant. Sure. I still think there is significant value 
in those insurance subsidiaries. I'd say the earnings power of 
the domestic life company, the ongoing operations, the ongoing 
insurance operations you know, could be $40, $50 billion 
dollars if they could in fact be, as you say, removed from the 
parent company.
    Dr. Troske. Okay, okay. And is there a way to actually do 
that without sort of--that you can see going forward that we 
can just sort of remove them from that and just keep that 
entity whole, which seems to be producing value for the market. 
There are parts of it that are a valuable company. There's 
parts of it that seem to be a very valuable company.
    Mr. Gallant. I mean you know, you could always sell the 
operations, right? Which would separate it and immediately 
recognize some value.
    Dr. Troske. And so why don't we?
    Mr. Gallant. [No response.]
    Dr. Troske. You don't know.
    Mr. Gallant. Well I think that there is, if you want to try 
to pay back the full amounts of the loans, you need an asset to 
create value to pay that back.
    Dr. Troske. Okay.
    Mr. Gallant. And so you can't, you can't remove all of the 
earnings generators.
    Dr. Troske. That's all.
    Chair Warren. Thank you very much. Thank you Mr. Gallant. 
We appreciate it, thank you for being here today.
    Mr. Gallant. Thank you.
    Chair Warren. And Mr. Benmosche if you could join us. 
Robert Benmosche is the President and Chief Executive Officer 
of AIG. Mr. Benmosche joined AIG as CEO in August of 2009. Mr. 
Benmosche when you're ready, welcome.
    Mr. Benmosche. Thank you.
    Chair Warren. Five minutes for an opening statement.
    Mr. Benmosche. Okay.
    Chair Warren. Thank you.

 STATEMENT OF ROBERT BENMOSCHE, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, AMERICAN INTERNATIONAL GROUP, INC.

    Mr. Benmosche. First of all, I appreciate the opportunity 
to be here with all of you and describe AIG's progress in 
stabilizing the company, preserving and growing the value of 
our businesses, reducing our risk, and repaying the taxpayers.
    I joined, as you said, in August of 2009 with a priority 
goal of stabilizing the company and boosting employee morale, a 
high priority. Throughout my years in the insurance industry, I 
respected AIG as a company and as a competitor.
    And in just nine months at the company, I can see 
substantial progress in redefining our strategy and in 
restoring credibility and confidence in AIG. Of course, were it 
not for the commitment of the U.S. Government at a time of 
great uncertainty, AIG would not be on the path it is today.
    I want to thank the Government and the American taxpayer. 
Since receiving that support, AIG has worked in close 
coordination with the Federal Reserve and U.S. Treasury. We 
appreciate very much the constructive role that they have 
played.
    Today, AIG remains a significant contributor to the U.S. 
economy and a critical provider of financial security to 
countless communities and individuals across the country. AIG 
has over 40,000 hard working and dedicated employees across the 
nation. Tens of millions of Americans are employed by entities 
that are protected by our commercial insurance.
    AIG is also one of the largest holders of municipal bonds, 
providing a much needed source of capital for municipalities to 
build new schools and better roads. Chartis, our property and 
casualty group, had gross written premiums of more than $40 
billion dollars in 2009, serving more than 40 million customers 
around the world.
    SunAmerica Financial Group, our life and retirement 
services business, is one of the largest life insurance 
organizations in the U.S., and served more than 16 million 
customers in 2009.
    And ILFC, our aviation leasing company, has a fleet of 
approximately 1,000 aircraft and has purchased more Boeing 
aircraft than any other airline or leasing company since 1990.
    At AIG, we take seriously the responsibility that comes 
with being so heavily integrated with the U.S. economy and we 
are well on our way to remaking AIG into a more streamlined and 
focused company with sound, well-managed businesses, a 
transparent and consistent governance system and a stable risk 
profile and capital structure.
    Prior to my arrival, AIG had focused on repaying taxpayers 
by moving quickly to divest certain parts of the organization. 
I was concerned that this course of action might not enable AIG 
to repay the aid the company had received. So I immediately set 
about to change this approach and secure greater value for the 
taxpayers.
    This strategy is beginning to pay off. We recently 
announced the sales of AIA and ALICO for approximately $51 
billion dollars, nearly $30 billion in cash and approximately 
$21 billion dollars in securities. AIA and ALICO both have 
demonstrated in these sales our inherent strength in our brands 
and the success of our strategy to maximize the value of our 
assets.
    Once closed, they will mean that AIG can repay the Federal 
Reserve Bank of New York with cash and sell securities over 
time to further repay the government. Our successes are now 
being reflected in the marketplace. Chartis reported a first 
quarter operating profit of $879 million dollars compared to a 
$710 million dollar profit the year before, a 24 percent 
increase.
    SunAmerica Financial Group reported first quarter operating 
income of $1.1 billion dollars compared to an operating loss of 
$160 million in the first quarter of 2009. In a sign of market 
confidence, ILFC has raised $4 billion dollars from private 
markets. And I might add, parenthetically, that is both secured 
and unsecured credit markets.
    And AIG financial products continues to make substantial 
progress in reducing and de-risking its portfolio from a high 
of over $2 trillion dollars at the end of 2008 to $755 billion 
dollars as of March 31, 2010. These many accomplishments are 
enabled by the dedicated and tireless efforts of tens of 
thousands of AIG employees.
    At AIG, it is critical that we strike the right balance 
between paying competitively and ensuring that pay levels are 
appropriate in light of our government support. We are 
implementing new compensation programs to create a consistent 
performance management culture, one that aligns our employees' 
day to day activities with the interests of our stakeholders. 
And with this approach, we are retaining top talent as well as 
attracting new talent to help manage our businesses.
    Chair Warren and Members of the Panel, I am confident that 
AIG is now on a clear path to repaying the taxpayers. I thank 
you for this opportunity to bring you up to date and look 
forward to your questions.
    [The prepared statement of Mr. Benmosche follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. Thank you very much Mr. Benmosche, we 
appreciate you being here today. Do you anticipate that AIG 
will need any more taxpayer money?
    Mr. Benmosche. Right now, we don't anticipate that. We are 
looking at where we're at. We're still dealing with minor cash 
flow issues. But if you look at the success we had with ILFC--
keep in mind we've been able to raise, with some sales of 
assets in the secured and unsecured markets, as well as 
renegotiating our bank lines after a lot of work with the banks 
examining our success there. That's almost an $8 billion dollar 
improvement.
    We were also able to raise in the market, with securitized 
financing, $3.5 billion dollars to support American General 
Finance. So thus far, as we continue to operate our company 
strongly, profitably, we show that we're retaining people, 
we're retaining business, we're showing new sales, all of the 
things you want with strong, vibrant companies. We're beginning 
to see we get more access to financing. So we would hope not.
    Chair Warren. Well we all hope not. What we're trying to do 
is just pin down a bit more. So when Mr. Gallant says he 
doesn't think you're going to be able to make it through the 
year without having to call on taxpayer funds, you're saying 
you think the combination of sales of major assets, the 
renegotiation of some of the outstanding debt, and raising more 
money in debt markets will be enough to meet your cash needs as 
they go forward? I just want to make sure I'm getting the 
strategy right.
    Mr. Benmosche. We, at this stage of the game, we look at, 
we have a credit line with the Federal Reserve.
    Chair Warren. Yeah.
    Mr. Benmosche. And so we see that as going up and going 
down. So you'll see, based upon activities or cash flows we may 
come down a little bit, we may go back up again. So we see that 
as a line of credit that we're using, that we have available 
until 2013.
    Chair Warren. Okay.
    Mr. Benmosche. We also, we'll go through certain activities 
like, we went to the Treasury and in order to strengthen the 
insurance company--keep in mind, that for AIG, our insurance 
companies are strong, and we want to make them stronger. And 
that's important because our clients look to us for our 
promises and our guarantees.
    And so therefore, when the state of Pennsylvania says that 
they're concerned about Chartis, the property and casualty 
insurer owning stock in the aircraft leasing company, and they 
say they're concerned about that being in their capital, they'd 
like us to remove it. Then if it strengthens the insurance 
company, which allows us to be able to continue to compete in 
the marketplace, we did in fact ask for money to be able to do 
that shift from the property and casualty company into the AIG 
holdings.
    So there is some of that financing going on, but it's only 
to make sure that we maintain solid strength in all of our 
insurance companies. And I don't see a huge amount of demand to 
do that between now and the end of the year.
    Chair Warren. Okay, so you think that you both have the 
cash to meet your needs for loans that are coming due, for 
payments that are coming due, and that the only time you'll be 
drawing down on government funds will be in order to strengthen 
the capital position of the individual insurance subsidiaries, 
is that right?
    Mr. Benmosche. That's correct.
    Chair Warren. I just want to make sure I've got the----
    Mr. Benmosche. Right, so for example, we are planning once 
the markets settle down, and here these are very unstable 
markets----
    Chair Warren. Okay.
    Mr. Benmosche [continuing]. As we can all read and see. We 
would like to repay the Fed their $4 billion dollars they lent 
ILFC. We believe that we can take some of the collateral that 
they've had holding against that $4 billion, we can go to the 
marketplace and raise the additional money to pay down $4 
billion dollars to the Federal Reserve.
    Now we may decide to pay it down and we may need $500 
million later on. So there will be some of that up and down. 
But we see major activities now, between now and the end of the 
year, to begin to reduce the amount of money we owe the Federal 
Reserve.
    Chair Warren. Now I note that Mr. Gallant was complimentary 
of the way that you have managed the company since you've taken 
over. But what I'd like to hear, if you have the strategy 
mapped out, what are the biggest challenges to the strategy, 
what are the risks? What are you know, where are the places 
that you might run into trouble and see problems?
    Mr. Benmosche. To me, the greatest risk has been the day-
to-day operations of the insurance companies in particular. We 
have never had a problem, through this entire crisis, with the 
insurance companies. They are well regulated, very well 
regulated by the states and by the countries we do business 
within.
    And so they have made sure that all of the things we do are 
protected for the policyholders. So we have to make sure we run 
those businesses successfully and we make sure that we have the 
right capital in those businesses and we have the right risk-
based capital ratios that are expected in those businesses.
    And that we show that we can retain and attract people, 
that we can be able to retain our current customers, and we can 
grow new customers as a vibrant, strong, operating unit, that's 
a successful company. That's our highest priority, and that's 
what we're focused on.
    The second priority is to show that we can exit the support 
of the U.S. Government in a way that we're left with an 
investment grade company that people will continue to feel 
confidence and support in.
    Chair Warren. Let me just focus you though, Mr. Benmosche.
    Mr. Benmosche. Sure.
    Chair Warren. I do understand that these are the goals, and 
of course I've read your testimony. My question was, the places 
that you see the most risk in not meeting those goals?
    Mr. Benmosche. By talking about not being able to achieve 
good operational results.
    Chair Warren. Good, that's what I needed.
    Mr. Benmosche. Pretty simple.
    Chair Warren. Thank you sir.
    Mr. Benmosche. All right. Took too long.
    Chair Warren. Mr. McWatters.
    Mr. McWatters. Thank you, and thank you for attending the 
hearing today. It appears that you will not need additional 
TARP funds, at least that's what you just said. Today, in your 
opinion, is AIG a solvent entity?
    Mr. Benmosche Absolutely.
    Mr. McWatters. Great, great. You also said, in your opening 
statement, that you intended to pay back the taxpayers. You 
didn't say, I'm going to pay back everything but $5 billion or 
$50 billion. It sounded like the intent is to pay back 
everything.
    Mr. Benmosche. I believe that we will pay back all that we 
owe the U.S. Government. And I believe at the end of the day, 
the U.S. Government will make an appropriate profit.
    Mr. McWatters. Okay, the CBO says we, meaning the 
taxpayers, will lose $36 billion and the OMB says we will lose 
$50 billion. So there's a spread here, it's a big spread. Can 
you help me close this gap in my own head to understand how you 
can pay back everything, how you can run the company, pay back 
everything when the CBO and OMB say to the contrary?
    Mr. Benmosche. I would love them to be able to let me buy 
back everything that we owe and go to investors and take a $50 
billion loss. I would be able to hit that bid tomorrow. And the 
fact is, nobody will sell it to me for a $50 billion loss. 
Because the fact is, we are a strong, vibrant company that's 
worth a lot of money. I can't tell you how they do their 
analysis, but I am confident you're going to get your money 
plus a profit.
    Mr. McWatters. Well then specifically, what is the exit 
strategy? I mean, when you come up with one, if you had to 
write a one-page exit strategy to pay back the taxpayers, what 
would it be?
    Mr. Benmosche. The first goal is to make sure that we pay 
back the Federal Reserve. And so we are working hard to 
monetize the assets that we have. We are continuing to look at 
other strategies and different forms of monetization.
    So the key is to pay back the $52 billion. Once that is 
paid back and the Fed is completely covered, and keep in mind 
again, we're doing that as quickly as we can knowing that we 
have a 2013 date, we still would like to get it done this year 
or next year, if at all possible. That's our goal.
    These sales give us a tremendous shot at getting that done. 
And then we're going to continue to monetize. So once the Fed 
is covered, then we're going to begin to talk with the U.S. 
Treasury about how they deal with the preferreds.
    Mr. McWatters. How about return to profitability? It's one 
thing to sell a subsidiary, take the cash, pay down the debt. 
But how do you return AIG systemically, to a profitable 
company?
    Mr. Benmosche. If you look at our first quarter, in fact, 
if you look at our fourth quarter where we reported a huge 
loss, if you look at what were the components of that loss, we 
actually made a profit.
    And so I believe that you're looking at a company that once 
we sell off the companies that we've talked about, or assets 
that we've talked about, I still think we're talking about a 
company that could earn, in 2011, without extraordinary charges 
and goodwill charges, and all these other things, I believe we 
have a company that can earn between $6 billion and $8 billion 
after taxes.
    So it is a substantial earner. If you look at the first 
quarter of Chartis, we had a huge earthquake in Chile, that 
cost us a lot of money because we're a huge insurer and so we 
covered a lot of damage. If you look at this quarter, we have 
the Gulf and the issues in the Gulf. We're going to take losses 
there as well.
    In spite of those losses, those catastrophe losses, we are 
still showing a healthy profit in Chartis. And if you look at 
our retirement business, and life and retirement business, 
we're also showing healthy profits. So we are restoring all of 
the aspects of AIG to profitability right now.
    Mr. McWatters. On Financial Products, are you making money 
winding down Financial Products or are you losing money?
    Mr. Benmosche. If you look at our numbers, right now I 
think basically we're holding our own, breaking sort of even. 
Keep in mind that one of the variables that occurs, is that we 
have a lot of debt against that business. And it's one of the 
anomalies of our accounting system. As people become more 
concerned about AIG, it actually improves the profitability of 
Financial Products because our spreads widen and therefore we 
can take an earnings, which is unfortunate, we shouldn't do 
that but we do, that's how we account for it. So in bad times 
we look better and in good times we look worse.
    But I will tell you that if you take all of that accounting 
out of the noise you will see that we're de-risking. The team 
has done an absolutely outstanding job. We are fortunate that 
they're still there. They're fortunate, even though they were 
vilified inappropriately, that they are working as hard as they 
can to de-risk this book, sell off the book, and do it in a 
break-even to slight profit.
    Mr. McWatters. When they close out a credit default swap, 
are they currently closing them out at par or are they 
attempting to negotiate discounts?
    Mr. Benmosche. We negotiate what we can negotiate in the 
marketplace from a position of strength. So I don't have the 
analysis. So I'm going to give you how much of that is at what 
level. But I will tell you that when we look at the market 
value and what the anticipated market values could be, and 
where we think is a good optimum position where we're getting a 
good price and getting out, and dealing with, in effect, de-
risking the company from where we have collateral potential 
calls and so on. I think they're doing an excellent job of 
getting good prices. They were not getting good prices a year 
ago.
    Mr. McWatters. Okay.
    Mr. Benmosche. We were getting hammered a year ago in the 
marketplace. That has changed dramatically.
    Mr. McWatters. Did it change because of the personnel 
within Financial Products, or the market?
    Mr. Benmosche. It changed because the market realized that 
we were going to change our approach. That we're not going to 
liquidate this company. And therefore, the Street realized that 
if they wanted to negotiate with us, they have to negotiate 
with us from a position of strength.
    Mr. McWatters. Yeah, if it's possible to let us know in 
general terms if you're able to negotiate discounts that would 
be helpful.
    Mr. Benmosche. I think it's more about trading and selling 
and doing things. And I think we're not--I'd have to go back 
and have the people give you an exact answer. I don't have 
that.
    Mr. McWatters. Okay, fair enough.
    Chair Warren. Thank you.
    Mr. Silvers.
    Mr. Silvers. Mr. Benmosche, I'm sort of interested in the 
contradiction or the contrast between your testimony, Mr. 
Gallant's testimony, and the testimony of Mr. Clark from S&P.
    Can you (a) explain to me your understanding of the 
difference between your estimation of the company's earning 
power going forward, after your asset sales, and Mr. Gallant's? 
And can you (b) explain to me if your general characterization 
of your company's financial position is consistent with S&P's 
view that absent government support you're Double B?
    Mr. Benmosche. I can't comment on Mr. Gallant, you'll have 
to get him to figure it out. I know what I'm running, I know 
the company I'm running, and I have confidence in this company, 
and I know what I'm talking about. So you'll have to see 
whether he understands the company as well as I do.
    Mr. Silvers. Mr. Benmosche, that's not an acceptable 
answer.
    Mr. Benmosche. Okay.
    Mr. Silvers. You know we represent your majority 
stockholder, or at least we kind of do. We are trying to look 
out for your majority stockholder. I am frankly frightened by 
what Mr. Gallant said on behalf of the American public. And I 
would like you to explain specifically with reference to 
numbers why he's wrong.
    Mr. Benmosche. I have not looked at his report. I'd be glad 
to have a team of people study it and do a side-by-side. We did 
that when we had a report that said that we had an $11 billion 
hole in our reserves. It was written by Bernstein, and in fact, 
you found out we did not have an $11 billion hole. We actually 
went through that report, showed them why they were wrong, and 
they still went forward with it. So I'm happy to do that for 
him as well.
    Mr. Silvers. Well perhaps there's a different--perhaps I 
can put it in a different way. Explain to me how you get from 
today's operating results to the type of cash flows that you 
were just describing, the $6 billion to $8 billion range in 
2011. How do you get from here to there?
    Mr. Benmosche. Well look at the first quarter. If you look 
at the first quarter we made $879 million----
    Mr. Silvers. Right.
    Mr. Benmosche [continuing]. In Chartis.
    Mr. Silvers. Okay.
    Mr. Benmosche. Okay, with casualty losses in Chile. If you 
look at what we did in our SunAmerica, we had a strong result 
of almost a billion dollars. If we continue to operate all the 
other companies at break-even to a positive, and just deal with 
those two companies alone, and deliver the times four, you get 
pretty close to the number.
    And so I would say to you that if you look at our results 
for the fourth quarter, without extraordinary charges, if you 
look at where we were in the first quarter----
    Mr. Silvers. Mr. Benmosche, I'm missing something. Your 
total operating income at corporate level in first quarter of 
this year was $800 million, I multiply that times four, I get 
$3.6----
    Mr. Benmosche. I don't know what number you're referring to 
then. We made a profit of $1.4 billion in the first quarter.
    Mr. Silvers. I'm talking about your operating income which 
is, I think, kind of more relevant to what we're talking about, 
is it not?
    Mr. Benmosche. You have to look at all of the pluses and 
minuses, all of the accounting charges. For example, we have to 
take the charge of the fee that is assumed by the government 
taking 80 percent ownership of $23 billion. We take charges of 
between $500 million and $800 million a quarter to amortize a 
$23 billion fee which represents the price we pay for the line 
of credit from the Federal Reserve. So in effect, we pay $23 
billion in points for an $85 billion----
    Mr. Silvers. But if you're a Double B----
    Mr. Benmosche [continuing]. Which is more----
    Mr. Silvers. But if you're a Double B credit without 
support from the government, aren't you going to have to 
replace that with comparably expensive capital?
    Mr. Benmosche. We're going to replace it. And I don't know 
how expensive it will be. And keep in mind what S&P said today, 
we're a Double B. As we begin to achieve our plans we'll be 
investment grade by the end of the year.
    Mr. Silvers. You can imagine, I think our concern is about 
just the gap between different assessments here. I would very 
much welcome, and I'm sure the other panel members would 
welcome a more detailed explanation of how you think you're 
going to not be a Double B without government support. Which 
seems to me to be critical to the question of whether or not 
you know, your representations about the likely outcome here 
for the public, being paid back in full with a respectable 
profit, are realistic and can be realized.
    You know, I think we have heard, I think in general, a 
great deal of support and a number of compliments for the way 
that you've managed the company so far. But you know we, I 
think we need to see some support for what the likely outcomes 
are here and why we don't have a structural problem. A problem 
not really susceptible to managerial skill.
    If I might turn and ask you a different question. Some have 
suggested including I think one of my colleagues, including 
Professor Troske, have suggested that we really ought to be 
selling assets more quickly. I would--I know that's not been 
your view. Can you explain why that--and I'll put my cards on 
the table, I'm sympathetic to your position. I think selling 
assets prematurely is a certain way to realize losses. But I'd 
appreciate to hear it from you, in your own words, why you've 
taken that view and what the benefit has been for the public as 
an investor in AIG?
    Mr. Benmosche. I think so far you have seen prices improve. 
I think at one point, they were thinking of selling AIA for the 
high teens. And so we got a very aggressive price. And other 
properties that are out there we are finding people willing to 
come to the table and talk to us about more value. Because you 
cannot buy a business that is in trouble, number one. And 
number two, you have to sell when the time is right. And we 
have to make sure that we're prudent, we move as quickly as we 
can. But so far, even for example, in Financial Products, we 
probably would have been down an additional $5 billion had we 
rushed the sales and tried to de-risk that business too 
quickly.
    And so now that we've reduced--taken the risk out, de-
risked it, you're going to see the fact that we have the money 
that's here. Sometimes it's not obvious that we didn't make it, 
but we didn't lose it. So I can only tell you that as we move, 
we're moving quickly. We're finding more people coming to the 
table. More people wanting to invest with us. I think you'll 
see more options open up. We just met with Boeing, as you know, 
we're a large customer of Boeing and our goal is to continue to 
buy Boeing aircraft. But Boeing is going to work with the XM 
Bank with us and others to be able to get sources of capital to 
continually invest and to continually strengthen that business 
over time. That will provide good operating earnings.
    So throughout the company, at all levels, we're looking at 
ways to improve our position, strengthen our position, and then 
find appropriate buyers when it makes sense. And I think we 
will do that as quickly as we can. We're not just sitting here 
saying, let's wait for 2013, but you got to do it when the 
market's right.
    For example----
    Chair Warren. Okay, I'm going to stop you there Mr. 
Benmosche.
    Mr. Silvers. Thank you.
    Chair Warren. Thank you. And I appreciate your offer to 
provide the numbers. And we'd like to have those numbers for 
the record on the Gallant analysis, why you have a different 
analysis on the profit projections, where those are coming 
from, and on the credit rating.
    Mr. Benmosche. I'll bet you my staff--I just heard her say 
that they're watching the TV, and I'll bet you they're off and 
running already.
    Chair Warren. I'm delighted to hear that.
    Mr. Benmosche. I'm sure they're running right now.
    Chair Warren. We will hold the record open so that we will 
be able to get those numbers.
    Mr. Benmosche. I'm not sure I'll have it in the next hour, 
but they're working on it.
    Chair Warren. That sounds good.
    Professor Troske.
    Dr. Troske. Thank you. I guess so I don't want you to ask 
you to comment on a report that you didn't write or maybe 
haven't even read. But the previous witness said his guess was 
$6.00, the market says $33.00. Do you have a guess as to what 
you think the share price for AIG should be? Just your own 
opinion?
    Mr. Benmosche. Totally inappropriate to even comment.
    Dr. Troske. Okay.
    Mr. Benmosche. I wouldn't.
    Dr. Troske. Okay, that's fine. You seem to suggest that you 
can operate in the--you are borrowing money in an unsecured 
credit market, so you are operating in the debt market, is that 
what I heard you say? That you----
    Mr. Benmosche. At ILFC, we have done that.
    Dr. Troske. Okay, and so the previous witness said that you 
couldn't borrow money and you're telling us you can?
    Mr. Benmosche. No, I'm telling you I borrowed $2.7 
billion----
    Dr. Troske. You did.
    Mr. Benmosche [continuing]. For ILFC aircraft leasing 
unsecured, without a guarantee from AIG.
    Dr. Troske. So can you give me, I guess some more 
background. Exactly when you say you're you know, spinning 
AIGFP down. Exactly as you are removing the risk from AIGFP, is 
that going to be--is that part of the long term solution for 
the company? Do you view AIGFP continuing to be a part of AIG 
in the long run?
    Mr. Benmosche. I do not.
    Dr. Troske. Okay, and so can you describe to me a little 
how you, how you're going to move from where you are today to a 
company that looks a little different?
    Mr. Benmosche. Well I think what's important now is we 
focus on the core businesses of AIG----
    Dr. Troske. Okay.
    Mr. Benmosche [continuing]. Which is the insurance 
companies.
    Dr. Troske. Okay.
    Mr. Benmosche. What you have is a lot of other companies 
were created outside that entity, which you heard a lot about. 
I think we should minimize all of those, which were basically 
trading the Triple A of the insurance companies, and being able 
to borrow in the market short, and then begin to do things with 
assets long. And so those kinds of carry trade kinds of 
businesses, we need to stop. That's not a business we should be 
in.
    We should be in a solid business that talks about, we 
provide protection in various forms, whether it's property, 
casualty, life, annuities, and so on. And those should be the 
primary businesses that we'll run, and run them in a way that 
they're not over-leveraged.
    Dr. Troske. Okay. Okay, and so that's essentially your 
vision of what your company is going to look like at the end of 
the day when you are out of all of this, these problems, focus 
primarily on the core insurance businesses.
    Mr. Benmosche. We will be the world's largest property and 
casualty insurer with a strong life and annuity business in the 
United States and other selected businesses that will enhance 
that nucleus and core.
    Dr. Troske. Okay, thank you.
    Chair Warren. Mr. Benmosche, I have been struck as I've 
read through the documentation on AIG about the incredible 
number of intra-corporate guarantees and loans among the 
various, particularly among the various insurance subsidiaries 
and the parent and the various insurance subsidiaries among 
themselves. And I see that as once the parent got into trouble, 
as everyone likes to point out, AIGFP was just one tiny little 
part of AIG. And it at least threatened the entire rest of the 
company in part, because of this incredible interconnection.
    So I'd like to know about how you're managing that going 
forward. Is this a company that will still be run as one that 
has lots of cross guarantees and intra-company loans and inter-
subsidiary loans?
    Mr. Benmosche. The answer is no. I think that it was 
created out of a lot of complexity over a lot of time. We're a 
company that has over 500 general ledgers in it today. The 
degree of complexity to run the business every day is huge. 
Which is why the people are so important to this company. And 
so I will tell you that they are working daily looking at ways 
to deliver, to change, and move.
    So part of what you'll see is us going to the Treasury 
saying, we need capital to put into the insurance company. You 
just don't take something out of an insurance company without 
the approval of the regulator. Whether it's in Malaysia, or 
whether it's in Korea, or whether it's in Tennessee. All of 
those, as well as New York and Pennsylvania, and so and so. 
You've got to make sure, as we do this, we do it in an 
appropriate way such that the regulators are satisfied.
    But at the end of the day, we want very clear discreet 
businesses that we can see what they are, where we can see 
their financials. And therefore, we can go to the capital 
markets for that insurance company. And for example, deal with 
raising debts through bonds and so on which is what makes them 
even stronger from a ratings agency point of view. Because they 
have access to the markets and so we've got to have them 
understood, clean and plain. It's not easy to do. It's taking 
us time to get there. Which is why you can't accelerate some of 
the sales. Because it's too intertwined, too complex.
    Chair Warren. So would it be fair then to say that you're 
striving for a simpler, a more transparent business than you 
had in the past?
    Mr. Benmosche. We will achieve a simpler organization.
    Chair Warren. I like that.
    Mr. Benmosche. Not striving for. We will do that because 
you have to do that to have your exit from the government. 
You're going to have to be able to do that to get the rating 
agencies to give us very good ratings for our insurance 
companies.
    Chair Warren. And would you be able to demonstrate some 
progress along that line, say from a year ago?
    Mr. Benmosche. [No response.]
    Chair Warren. You don't have to do it off the top of your 
head.
    Mr. Benmosche. No, I think that the whole----
    Chair Warren. We can hold the record open for this.
    Mr. Benmosche [continuing]. The whole rating agency, or 
feedback from S&P in particular, basically talks about the kind 
of progress we're making. And I think that at the end of the 
day when we have rating upgrades in our insurance companies 
will be the sign that we've achieved.
    Chair Warren. But you would forgive us if we weren't 
entirely reliant on rating agencies at this moment.
    Mr. Benmosche. I won't comment on that.
    Chair Warren. Thank you.
    Mr. Benmosche. You're welcome.
    Chair Warren. But it would be helpful, I just want to 
stress this point because I think it's very important, about if 
you could give us, as a supplement to your testimony, some 
examples of the work that has already been done to make this a 
more transparent company, let us describe it as one with a 
simpler chart of how it works.
    Mr. Benmosche. I'm happy to have the team put together 
things we've done in Chartis and SunAmerica and things we're 
starting to do to begin to pull things apart so we don't have 
to deal with all of the cross-guarantees and cross-
collateralization agreements.
    Chair Warren. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you. I'll follow-up on Professor 
Warren's comment and I'll put it this way. It still seems to me 
that AIG is too big to fail. That if, for whatever reason, you 
ran out of cash, you had a liquidity crunch again, chances are 
the taxpayers would have to come to your rescue.
    Okay, let's just stipulate that for a second. What has your 
firm done to negate that status? How are you drawing back from 
this too big to fail situation where a year from now, two, 
three years from now, we're not going to have to worry about 
AIG being too big to fail? If you fail, than you can just be 
liquidated, sold off, broken up, or whatever. In other words, 
do you have a living will? Do you have a plan? Are you 
developing a plan?
    Mr. Benmosche. I think that to say that we're too big to 
fail comes from the fact that we have a lot of assets and all 
the different insurance companies are added up. My personal 
belief that the reason you might think we're too big to fail is 
we owe you a lot of money. And therefore, we can't fail until 
we pay you back.
    Mr. McWatters. That would be nice, yes.
    Mr. Benmosche. Well I think that's the issue. The issue is 
we're not too big to fail, but we are right now because you got 
to make sure that we do this in a way that clearly pays back 
the taxpayer 100 cents on the dollar with an appropriate 
profit.
    And I think to the extent we do that, the remaining 
company, other than by what Congress decides is too big to fail 
in terms of assets size or whatever, I don't believe that AIG, 
once we pay back the government and we exit as an investment 
grade company, I believe that we are no longer too big to fail.
    Mr. McWatters. So there will be no ``Financial Products 
II'' or ``Son of Financial Products''? I mean you're out of 
that business?
    Mr. Benmosche. I can only tell you what I will do. I hope 
that somehow we find the appropriate regulations that say in 
the future that any company that decides to get in businesses 
and put at risk some of the businesses that we had in insurance 
or banking is prevented.
    I can't tell whether my successor will come in and find a 
clever way to go back into the FP business. But I will tell 
you, while I'm here I want to make sure that that is not part 
of this company because that's not what we should be doing.
    Mr. McWatters. Well specifically, have you adopted risk 
management and internal control provisions that will just 
simply prevent, prohibits FP from coming back?
    Mr. Benmosche. You cannot create policies that will prevent 
people from making bad management decisions. At the end of the 
day, the CEO has to take responsibility for the activities in 
their company. And when they blow up, they have to take 
responsibility for why they let that happen.
    At the end of the day, I am very confident we have all of 
the processes in place in risk management. But at the end of 
the day, if I don't listen to it and I don't lead this company 
the right way, I can get the company in trouble.
    And the Board of Directors will do their best to oversee 
me. They will make sure they have the checks and balances. But 
at the end of the day, if we don't listen to what we hear, we 
can get in trouble. And I believe our Board at AIG today is 
very strong. It would not let that happen. I will not let that 
happen. And over time, we hope new Board Members and new CEOs 
will also make sure that doesn't happen.
    Mr. McWatters. So is it fair to say you're developing a 
culture that is anti-FP?
    Mr. Benmosche. We're developing a culture that is anti-
taking inordinate risks. That would jeopardize the quality of 
our businesses when the businesses we are in make guarantees to 
people, sometimes for their lifetime.
    Mr. McWatters. Are you in doing that, making any effort to 
separate risk from reward? So if you have an employee who comes 
up with a brilliant idea like someone did at FP a few years ago 
on credit default swaps, where they are paid a huge bonus, 
let's say in year one, for doing the deal. If the deal blows up 
four years later, I mean is that still possible?
    Mr. Benmosche. It wasn't possible before either. I think I 
need to clear up something. When you look at AIG and the people 
at AIG, the 10 people that reported to me when I got there, 
those 10 people lost $168 million dollars of their prior pay 
because of what happened at FP.
    They lost $168 million. Five senior people at FP, 
leadership at FP, those five people lost $88 million dollars of 
their prior pay. Their pay has always been at risk for almost a 
five-year period of time through stock and cash plans.
    So you've got to have something other than pay. You got to 
reward pay, you have to have risk in the pay process. You have 
to have controls over when it gets paid out. But at the end of 
the day, the real challenge is to make sure you have good risk 
management and a good management of the company, and not rely 
on the compensation system. Either way, we've got to run the 
company the right way. So I can tell you that at FP, that was 
never the case, of getting rewarded in one year.
    Mr. McWatters. Never the case?
    Mr. Benmosche. Never the case.
    Mr. McWatters. As I suspect right now, and from what I've 
read, at least in the popular press, at 2:45 in the afternoon 
there's some guys on the 14th hole right now teeing off. And 
it's because they made a lot of money at FP and then left. But 
they left the damage behind, which is the key.
    Mr. Benmosche. There are people who worked there, and I 
will tell you in the last five years, most of their 
compensation was wiped out. In fact, even the bonuses that I 
got approved for people----
    Mr. McWatters. Right.
    Mr. Benmosche [continuing]. 40 percent of that bonus goes 
into a deferred compensation plan at FP, which is so negative 
they will never see the light of day. And so people today are 
still losing pay for what happened in the past. Unfortunately, 
there are people who caused the problem that aren't there which 
is what----
    Mr. McWatters. That's my point.
    Mr. Benmosche. And my point is, it's a shame that we picked 
on the people who are there trying to get the job done. So I 
can only tell you that they still, the people who left, even 
the person who ran it, lost almost $70 million of his prior 
pay. But he got a lot of money from prior years, no question 
about that.
    Mr. McWatters. Exactly.
    Mr. Benmosche. But at the end of the day my concern is, 
from what you said is, it's not about their pay. It's about the 
fact we should have strong risk management and we should have a 
company that doesn't over leverage itself and too cheaply 
allows parts of the company to leverage a Triple A of a solid 
insurance company. That was the mistake, not the pay.
    Mr. McWatters. Okay, thank you.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. I'd like to come back to this pay question and 
look at it a different way. Last fall, the Federal Reserve 
system promulgated a sort of set of principles around pay for 
entities they regulate. And indicated that they would, that the 
Fed was going to be looking at pay at financial institutions 
that they regulated. Basically, looking at two issues, risk and 
time horizons.
    What processes do you have in place, as an entity that has 
this sort of unique relationship with the Federal Reserve 
system, what processes do you have in place and what, if 
anything, is the Fed doing to oversee them in relation to those 
policies?
    Mr. Benmosche. I believe that the Fed is overseeing not 
only our compensation policies, but I will tell you first and 
foremost, that they're in every aspect of our business, and 
rightfully so, because we owe them a lot of money.
    I will also tell you that I believe the working 
relationship--I'm going to make a comment. Our working 
relationship with them is extremely professional and very 
effective. They've been terrific partners. So they watch 
everything we're doing and everything we're working through.
    Mr. Silvers. So tell me exactly what does that mean in 
relationship to compensation policy? What are they asking you--
how is that oversight manifest?
    Mr. Benmosche. Well, first of all, we can start with Ken 
Feinberg. And so Ken Feinberg deals with the way we're paying 
the top 100 people.
    Mr. Silvers. Yes, but I'm asking you about the Fed, and the 
Fed's relation--and the Fed's implementation of their policy.
    Mr. Benmosche. They are aware of our compensation plans. We 
share with them all the long-term incentive plans, what our 
goals are. We talk about the vesting, we talk about claw back, 
we talk about how we're doing it. All of our plans are 
presented to them and they're aware of the things we're doing.
    Mr. Silvers. Okay. Now to pick up on my colleague's 
question about sort of downside exposure. You described that 
some individuals made money in AIG during the boom period and 
then lost it during the bust. I don't doubt that that's true.
    If you look at it though from the beginning of the process, 
the moment when people make decisions as executives about 
taking risk. All that money all right, all the gain is the 
upside. You don't seem to have described any kind of actual 
downside that anybody took.
    So my question is, going forward, how do you build real 
downside around risk, around risk for your senior employees? 
And how do you avoid this asymmetry where it's all about how 
much you gain and the comp plan can't really embody the notion 
of the loss that investors in your company or ultimately the 
public, it appears, will bear?
    Mr. Benmosche. I think it's a question of how you design 
your goals and you design things. So for example, if you have 
part of the company where they are incentivized to create 
operating earnings----
    Mr. Silvers. Okay.
    Mr. Benmosche [continuing]. And that's all they're asked to 
do, then they will do that.
    Mr. Silvers. Right.
    Mr. Benmosche. They may also make that part of the business 
insolvent. They also may not choose to clean out the inventory 
of some antiquated product and therefore, they're not taking 
losses that you should take. So you have to design your 
compensation program that takes risk into account, sets 
parameters of what those risks are, and you have to manage it.
    You cannot let the compensation program drive results. And 
that's why, for example, in the securities industry, I have 
always been against just revenue compensation plans. Because I 
think they don't talk about risk, they don't talk about bottom 
line.
    Mr. Silvers. How do you build downsides, how do you build 
true downside in from any perspective?
    Mr. Benmosche. What would you like downside to be?
    Mr. Silvers. Well I mean, look, from an investor 
perspective downside is downside. I put up money and if I 
don't--and if I lose, I lose, right? If you think about it 
graphically, I have real downside exposure and real upside 
exposure.
    Most executive pay plans I am familiar with, that purport 
to be performance based or to tie compensation to performance 
have only the upside of that line, they don't have the 
downside. And that creates situations like that which my 
colleague Mr. McWatters was referring to. Where executives are 
not really fully exposed to the risks that investors are 
exposed to and the public is exposed to.
    Mr. Benmosche. Well----
    Mr. Silvers. I'm just curious if you've got a solution to 
this problem given----
    Mr. Benmosche. Yes.
    Mr. Silvers [continuing]. Given the stakes involved for AIG 
and for the country.
    Mr. Benmosche. I think when you have stock ownership, you 
want to have downside. If you look at what happened to the 
associates of AIG. People have been there their whole careers 
have been totally wiped out through no fault of their own. Keep 
in mind there were 44,000 trades at FP, 44,000. Less than 125 
went bad.
    Almost all the people at FP, all the people, 100,000 
employees of AIG all suffered huge losses in various forms 
because of what happened here. Because a lot of them owned AIG 
stock either in their 401k or in their bonus plans or stock 
plans.
    So I will tell you that there was huge losses taken by 
people who owned the company. And that's about the only way 
you're going to be able to do it. The downside is, you own the 
company and if you screw it up you're going to lose money.
    Mr. Silvers. I don't think--my time is up, but I don't 
think that's exactly what happened. People lost some of the 
money they made. It's not the same thing as the perspective of 
investors or the public who are at risk of losing money they 
brought to the table. It's quite different. Thank you.
    Chair Warren. Professor Troske.
    Dr. Troske. One of the advantages of going last is I get to 
free ride on my colleagues and they get to ask all the 
questions. And so I don't have very many left. But I guess I do 
have one. And that would be, does AIGFP still pose a threat to 
the success of the overall company?
    Mr. Benmosche. I believe the AIGFP threat at the end of, at 
the beginning of 2009, was probably a $20 billion to $22 
billion cash call.
    Dr. Troske. Okay.
    Mr. Benmosche. That has been reduced to almost $4 billion. 
So there's still a risk. I think the greatest risk is 
downgrade. That's why operating results are important and as 
long as we continue to do that I think that will be further de-
risked as we go through the year.
    So I think that it's manageable and will continue to be 
manageable until we get through the end of the year and then 
the rest of it gets absorbed into the rest of the company as 
just investments that have to wait until the duration gets 
there.
    Dr. Troske. Okay. Thank you.
    Chair Warren. Thank you very much Mr. Benmosche.
    Mr. Benmosche. Thank you.
    Chair Warren. We appreciate your coming and we will hold 
the record open for the additional information.
    Mr. Benmosche. Okay, thank you very much.
    Chair Warren. Okay, thank you.
    Mr. Millstein.
    We now call our fifth and for the day, final panel, Jim 
Millstein, Chief Restructuring Officer of the U.S. Department 
of Treasury.
    Have you found a comfortable place? I think you found a low 
chair sir. That or you're shorter than I recall.
    Mr. Millstein. It might be that.
    Chair Warren. There we go, much better. When you're ready 
if you could give us an opening statement and hold it five 
minutes please.
    Mr. Millstein. I will.

 STATEMENT OF JIM MILLSTEIN, CHIEF RESTRUCTURING OFFICER, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. Millstein. Chair Warren, members of the panel, thank 
you for the opportunity to testify today. Since joining the 
Treasury Department in May of 2006, I have been--2009, sorry. I 
have been--it feels like four years. I have been primarily 
responsible for overseeing the taxpayers' significant 
investment in American International Group.
    As you know, prior to joining the Treasury Department I 
spent 28 years working in the private sector focused 
exclusively on financial restructurings.
    I will use my time today briefly to outline our current 
investments and commitments to AIG, the company's restructuring 
plan, and the Government's exit strategy.
    As of today, the Federal Reserve Bank of New York and the 
Treasury Department have extended $132 billion of financial 
support to AIG. The New York Fed has provided $83 billion of 
this support, $26 billion of which represents loans outstanding 
to the parent company.
    $25 billion of which represents the preferred interest in 
AIG's two largest international life insurance subsidiaries, 
AIA and ALICO, and $31 billion of which represent loans to two 
special purpose vehicles formed to acquire troubled assets from 
AIG in November of 2008.
    The Treasury has provided $49 billion in the form of Series 
E and F Preferred stock. In addition, the AIG Credit Facility 
Trust established for the benefit of the taxpayers in 
connection with the original funding of the New York Federal 
Reserve Credit Facility, holds AIG's Series C Preferred stock 
which represents approximately 80 percent of AIG's outstanding 
common stock on a fully diluted basis.
    This substantial financial commitment has enabled AIG to 
remain a going concern with an investment grade rating. 
However, without government support, because of its leverage 
and the risks associated with its financial products business, 
it would not have an investment grade rating, a rating that is 
critical to the competitiveness of its insurance subsidiaries.
    Therefore, the objective of the company's restructuring 
plan is to restructure its balance sheet and business profile 
so that it can sustain an investment grade rating on its own. 
Thereby, permitting the government to exit its support and to 
monetize its investments.
    The restructuring plan has six essential components. First, 
the company will have to substantially reduce its debt through 
asset sales and divestitures. Next, the Company will have to 
demonstrate independent access to the capital markets and 
secure standby lines of credit.
    Third, the wind down of AIGFP will have to be substantially 
completed. Fourth, AIG will need to divest any businesses whose 
potential cash needs or credit rating represent a potential 
drag on the parent company rating.
    Fifth, the company will have to demonstrate that its core 
insurance subsidiaries are profitable, well capitalized, and 
have repaired the damage to their franchises that the 
uncertainty associated with rescue has generated. Finally, the 
company will have to demonstrate that it has improved its risk 
management procedures and practices.
    Today as you've heard, AIG has made significant progress on 
each critical front. The pending AIA and ALICO divestitures 
will result in a substantial deleveraging of AIG's balance 
sheet and will facilitate its access to third party capital.
    AIG's leasing and finance businesses have accessed the long 
term debt markets again, allowing them to refinance their 
maturing debt and meet their own liquidity needs without 
recourse to the parent. The wind down of FP has made 
significant progress and is targeted to be completed 
substantially by year end.
    Financial results have stabilized and begun to improve at 
Chartis and SunAmerica Financial, the core businesses of AIG's 
future. And finally, its risk management practices have 
improved.
    At the conclusion of this process, once it can sustain an 
investment grade rating without government support the 
government will exit as promptly as practicable. Whether we get 
all of our money back remains an open question. Let me briefly 
review where we stand today.
    If the AIA and ALICO divestitures close as planned, 
proceeds of those sales and the sale of other non-core assets 
should be sufficient to repay the New York Fed facility and 
redeem the preferred interest it holds in AIA and ALICO in full 
with all interest and dividends.
    Cash flows from the assets in Maiden Lane 2 and 3 and 
recent valuations of those assets suggest that the New York Fed 
loans to Maiden Lane II and III will also be paid in full with 
interest. And that the equity they own in each of those 
facilities is likely to have a real value.
    As a result, it seems very likely that the $83 billion 
dollars of outstanding Fed support will be paid in full. 
Similarly, at current market prices, the common stock that the 
Series C represents has value. Market conditions may change 
before the trustees have the opportunity to sell that stock, 
and the very selling of that stock, given how much they have, 
will put significant downward selling pressure on the price of 
AIG's common stock. But the stock market today suggests there's 
real value there.
    Finally, that leaves the Treasuries Series E and F 
Preferred, the $49 billion. The timing of our ability to 
monetize those investment in AIG will depend on the pace at 
which the other steps of the restructuring plan are 
accomplished.
    Whether Treasury ultimately recovers all of its investment 
or makes a profit, will in large part depend on the company's 
operating performance and market multiples for insurance 
companies at the time the government sells its interests.
    Chair Warren. Mr. Millstein, we're at five minutes.
    Mr. Millstein. I'm done.
    Chair Warren. Do you want to just give me another sentence?
    Mr. Millstein. One more sentence.
    Chair Warren. You got it.
    Mr. Millstein. But as soon as we are confident that AIG can 
stand alone, we will move to exit these investments as promptly 
as practicable. Now I'm ready for your questions.
    Chair Warren. There we go. I like that, ``promptly as 
practicable.''
    [The prepared statement from Mr. Millstein follows.]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Chair Warren. So let me just get started here, I want to 
walk through this. I'm hearing you say that it is very likely 
that the American taxpayer will be repaid in full from AIG?
    Mr. Millstein. I think----
    Chair Warren. Is that what I heard you say?
    Mr. Millstein. What I said is that the New York Fed, which 
has about $83 billion dollars outstanding today, is very likely 
to be paid in full. The asset values that we've seen in both 
Maiden Lane II and III, and the sales prices for AIA and ALICO, 
should be sufficient to pay them in full.
    The Series----
    Chair Warren. That's not everyone though.
    Mr. Millstein. No, that's not everyone. The Treasury 
Department has $49 billion dollars outstanding in Series E and 
F Preferred. And as I said in my testimony, the recovery on 
that will depend on the performance of the remaining businesses 
and how those businesses are valued in the market at the time.
    Chair Warren. So do you have any estimate at this point? 
You've heard the estimates----
    Mr. Millstein. I have.
    Chair Warren [continuing]. We've referred to them multiple 
times----
    Mr. Millstein. I have.
    Chair Warren [continuing]. From CBO.
    Mr. Millstein. I have. I think that there are, you know, 
substantial--there's a lot of things that have to occur before 
we'll know the answer to that question. And I think if--as you 
heard from the KPW analyst today, if the common stock has a 
value of $5.00, the preferred is paid in full.
    While that may be a lower stock price than the company is 
trading at today, that implies that the preferred is money 
good.
    Chair Warren. Okay.
    Mr. Millstein. And even at that $5.00 stock price, the 
Series C Preferred held by the Series C Trust would have a 
value of $3 billion dollars. That's pure profit to the 
taxpayers.
    Chair Warren. But--since I see you wince and hesitate on 
the second number, that is you feel confident about the $83 
billion repayment, a little less confident about the $49 
billion.
    Do you feel that Mr. Benmosche perhaps is a bit optimistic?
    Mr. Millstein. No, in fact he knows his business better 
than I do. And if he can, in fact, drive----
    Chair Warren. You are principally responsible for 
overseeing him though----
    Mr. Millstein. Yes, I am.
    Chair Warren. So I take it only a little bit better.
    Mr. Millstein. Well no, he's a you know, an experienced 
insurance executive. I'm a financial restructuring 
professional. He knows his businesses better than I do. And his 
confidence that he can get Chartis and SunAmerica Financial to 
an $8 billion dollar net after tax earning. If he can do that, 
we're going to be paid in full.
    Chair Warren. All right, so what do you see as the biggest 
risk here that we won't get repaid? I know you've laid out some 
of the things that have to happen. But where do you see the 
biggest risk?
    Mr. Millstein. I think the biggest risk----
    Chair Warren. You assess risks.
    Mr. Millstein. The biggest risk for an insurance company 
are the state of the financial markets and the impact it has on 
their franchise values. Remember, an insurance company you 
know, writes long dated risk and it takes the premiums and 
invests in a variety of financial assets.
    The markets go up, the assets perform. The markets go down, 
the assets are impaired, and so they vary. The fortunes of this 
company, like every other insurance company, in part ride on 
the performance of the financial markets. We're obviously in 
very volatile times still. And so to me, that is the greatest 
risk.
    Chair Warren. All right. So the American taxpayer is on 
this ride along with the up and down of the stock market?
    Mr. Millstein. Yeah, I think----
    Chair Warren. Or the down of the stock market.
    Mr. Millstein. There's no question we've made a substantial 
investment in the largest insurance company in the world. And 
we did that for, in my view, good and valid reasons to prevent 
a further catastrophe in the financial markets.
    I think it's been very successful. We have stabilized AIG. 
And the returns on that investment and on that policy approach 
will depend on the future performance of the company, which in 
part, depends on the performance of the financial markets.
    Chair Warren. Actually, let me ask you about that 
performance since we're hearing a lot of good news here. The 
preferred stocks held by Treasury are not paying or 
accumulating dividends. And that means that we have, we the 
American taxpayers, have given up about $5 billion dollars in 
foregone cash?
    Mr. Millstein. Actually----
    Chair Warren. Why has Treasury chosen this course of 
action?
    Mr. Millstein. The math is a little more complicated than 
that. Remember, we own 80 percent of the common stock. So we 
really, the giving up of dividends on the preferred, was really 
just giving up 20 percent of them because the value of those, 
the value of that dividend would otherwise flow to the common 
stock if it doesn't go to the preferred. And we own 80 percent 
of the common stock.
    Chair Warren. Now wait, wait, wait though. But those 
pockets don't match. So you're saying that we gave away $1 
billion of the $5 billion to the other----
    Mr. Millstein. We haven't given it away.
    Chair Warren [continuing]. AIG shareholders----
    Mr. Millstein. We haven't given it away.
    Chair Warren [continuing]. By not collecting the dividends 
that belong to the taxpayer?
    Mr. Millstein. Chair Warren, with all due respect, we 
haven't given away anything. These are dividends the company 
could not afford to pay. And in its current----
    Chair Warren. Well I'm hearing so much optimistic news I--
--
    Mr. Millstein. I know, but----
    Chair Warren. So they can't afford to pay their dividends.
    Mr. Millstein. I understand.
    Chair Warren. And that's cost us $5 billion.
    Mr. Millstein. It hasn't cost us anything. These are 
dividends they could not afford to pay.
    Chair Warren. All right. And you're saying but that's all 
right because we're still going to sit in the common 
shareholder position----
    Mr. Millstein. Had they been able to pay the dividend, they 
would first have to bring the preferred dividends current 
before they could pay a dividend to the common stock, and 
that's where we are today. But at this point, at this point, 
the company's cash flows, its net income after taxes are 
insufficient to support a preferred dividend.
    Chair Warren. Okay, so where do you anticipate between this 
optimistic view of AIG repaying the American taxpayer in full, 
and the position where we are today, which is they can't pay 
the dividends owed.
    Where are we going to cross that line where we don't 
continue----
    Mr. Millstein. Okay.
    Chair Warren [continuing]. To lose money from a company 
that can't pay us dividends that it owes us.
    Mr. Millstein. I laid out the six steps of the restructure 
plan.
    Chair Warren. I heard those.
    Mr. Millstein. Okay, so if you just bear with me for a 
minute. What is going on is a resolution of a large financial 
company. And that resolution involves its downsizing, okay?
    We're selling stuff to pay back debt. We're selling AIA and 
ALICO. We've got a sale transaction for the life insurance 
operations in Taiwan. We've sold buildings and real estate 
around the world. All of----
    Chair Warren. I understand all this.
    Mr. Millstein. Wait, wait.
    Chair Warren. I've read the Treasury.
    Mr. Millstein. Bear with me.
    Chair Warren. I've read your report.
    Mr. Millstein. Bear with me. It takes time to take a 
company of this size and scope to get it down to a footprint 
where it's actually reduced its debt, reduced its leverage, 
reduced its risk----
    Chair Warren. I understand that. That's why I----
    Mr. Millstein [continuing]. And can pay a dividend.
    Chair Warren [continuing]. Asked a time question.
    Mr. Millstein. What was your--what time question?
    Chair Warren. And the time question was, I hear this 
enormous optimism which suggests that you have some kind of 
plan in mind and that AIG has a plan in mind for where it will 
end up. And what I see today, is that it is not able to pay the 
dividends owed on the preferred shares.
    So what I'm asking is, when in this downsizing do we expect 
those two to cross over so that it can at least meet its 
obligations----
    Mr. Millstein. Okay.
    Chair Warren [continuing]. Before the happy day comes that 
it pays us back in full?
    Mr. Millstein. If the AIA and ALICO deals close, they'll 
likely close sometime in the third and fourth quarter of this 
year, okay? So that's--that will result in an immediate pay 
down of the Federal Reserve facility--sorry, of the preferred 
interest at the--at AIA and ALICO, that's about $25 billion 
that will be immediately retired with the cash proceeds.
    And the balance of the consideration can be sold, given the 
terms of the lock ups we've negotiated with MetLife and 
Prudential over the course of a year to a year-and-a-half. When 
those proceeds are realized, they should be sufficient to pay 
off the credit facility at the parent level in full.
    So sometime, I would expect, in 2011, if those deals close, 
the Federal Reserve will be paid in full for all of its 
existing exposure to AIG.
    Chair Warren. Okay.
    Mr. McWatters.
    Mr. McWatters. Thank you. Mr. Millstein, when the deal was 
struck in September, current shareholders of AIG stayed in 
place. It was not a bankruptcy, they weren't wiped out.
    So today we have sort of an odd situation of pre-bailout 
shareholders that may live to collect dividends someday, may 
live to sell their stock for a profit even though the tax 
payers may lose, CBO $36 billion dollars, OMB $50 billion 
dollars, is that correct?
    Mr. Millstein. Well let me just--if in fact, the preferred 
stock interests lose money. It's unlikely the common are going 
to get anything, right? In the way a balance sheet is 
constructed, the preferred stockholders are going to get paid 
first before the common stockholders get anything.
    Now we have, it is true that the stock is trading. The 
common stock is trading and 20 percent of it was left 
outstanding. People are buying in and selling that every day. 
No dividends are being paid on that stock. So it's a bet on the 
company's future.
    Mr. McWatters. But given that it's trading for $33.00 a 
share today, there must be a lot of people, a lot of smart 
people, a lot of analysts who think the preferred stock will be 
repaid.
    Mr. Millstein. That would be the inference you would draw, 
yes.
    Mr. McWatters. Yeah.
    Mr. Millstein. So that's good news for the taxpayers. The 
common stock, the common--the people who are trading the common 
stock are suggesting the preferred stock is money good.
    Mr. McWatters. Okay, but the equity, the pre-bailout equity 
was not wiped out in this deal?
    Mr. Millstein. It was substantially diluted.
    Mr. McWatters. Substantially diluted, but not wiped out.
    Mr. Millstein. If I may though, again, just to take the 
market price of the common stock. The 80 percent of the stock 
that was represented by the Series C, if you valued that at the 
$33.00 a share, at which the common stock market is trading the 
outstanding float, that's an $18 billion dollar profit to the 
taxpayer for the privilege of having made all creditors whole, 
and for having put a wall up around this company to keep it 
from failing. You know, if that's how it plays out, I think all 
of you would agree that this was a very successful rescue.
    Mr. McWatters. It was only successful because the taxpayers 
got lucky. If we go back to September 16, 2008, and we start 
looking at the CDOs, we start looking at the RMBS, that was 
junk, nobody wanted it. Because there was not a market. We had 
no idea what it was worth and it was simply purchased because 
it had to be purchased.
    The fact that it appreciated, that's to our benefit, and 
that's great. But that was far from assured or guaranteed at 
the time.
    Mr. Millstein. Listen, I was a private citizen at the time 
that this rescue occurred. So I had no greater involvement with 
it than you did. And I stood back at probably the same distance 
from it that you did.
    But I think if you listen to the testimony of my 
colleagues, my now colleagues at the Federal Reserve, what you 
hear them tell you is, that this wasn't done to make a profit. 
It wasn't done for the protection of Goldman Sachs, or JP 
Morgan, or any of the other counterparties. It was for the 
protection of the financial system of this country, to try to 
prevent a panic. A panic that had already started that would 
have been worsened and exacerbated had this company failed. And 
I believe that.
    Mr. McWatters. I agree, but that's the reason I said in my 
opening statement that if you, if the supposition is, we need 
to save AIG to save the world financial system, well the world 
financial system is Goldman Sachs and JP Morgan and some 
others.
    So if the world financial system had collapsed, these 
institutions would have collapsed. So it was certainly in their 
best interests to have AIG bailed out. And if they can be 
bailed out at 100 cents on the dollar, it's a happy day.
    Mr. Millstein. Listen, I understand the ambivalence about--
the view that AIG is a vehicle to pay other large financial 
institutions. But if you believe that its a collapse would have 
created fear and panic across all financial markets, and it 
wasn't just Goldman Sachs and JP Morgan who were being helped 
by this rescue.
    It was you and I as depositors in our banks. It was the 
insurance policy holders across AIG and every other insurance 
company. It was the pensioners whose pension plans were racked 
by AIGFP. It was the holders of stable value funds, whose----
    Mr. McWatters. I agree. I totally agree with what you're 
saying. But none of those folks you just mentioned got the wire 
transfer that Goldman Sachs and the others did.
    Mr. Millstein. In fact though, they did. In fact they did, 
because the 44,000 trades that Mr. Benmosche talked about 
include all those stable value insurance contracts that FP 
wrote that FP has honored. It includes the various transactions 
they did with pension funds to insure their assets too.
    We've singled out, because they happen to have held very, 
very volatile assets on AIG's--that AIG had insured, and that 
the decline in the price of which were running through AIG's 
income statement and creating enormous losses in the fourth 
quarter of 2008.
    So in order to try to mitigate the losses at AIG, and in 
order to try to stabilize its balance sheet, the Federal 
Reserve went after these two asset classes that were causing 
such losses and such instability. And tried to buy them in at 
those prices to terminate the losses going forward so as to try 
to keep this company from needing more money and it becoming 
even more unstable.
    So yes, Goldman Sachs, and Societe Generale, and the other 
counterparties to those RMBS and to the CDOs, got paid, but it 
was part of a broader effort to stabilize this company so they 
could honor everybody's contracts in full. They weren't the 
only parties whose contracts were honored in full. Everybody 
since September of 2008, has had their contracts honored by 
AIG.
    Chair Warren. Mr. McWatters.
    Mr. McWatters. I understand.
    Chair Warren. Are you okay?
    Mr. McWatters. I'm done.
    Chair Warren. Are you through?
    Mr. McWatters. I'm done.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. I wasn't planning to ask this, but I now feel 
compelled to do so. I notice Mr. McWatters didn't bring up 
Goldman Sachs or JP Morgan, so obviously it's on Treasury's 
mind.
    Is it not the case that in the week of September 15, 2008, 
that the cash calls that the company could not meet were in two 
lines of business and two lines of business only. And but for 
those cash calls, none of this would have been necessary?
    And those two lines of business were, and it depends on 
what--you know you can believe or not--you can argue I guess 
with the state insurance regulators, they certainly were the 
swaps business and they may have been the securities lending 
business.
    And but for those two enterprises, none of this would have 
occurred? Is that not so?
    Mr. Millstein. That is not so. So let me----
    Mr. Silvers. Are you seriously asserting that if you wipe 
those two pieces of business off the books, that AIG was 
nonetheless insolvent?
    Mr. Millstein. Let me----
    Mr. Silvers. And are you accusing the New York State 
Insurance Commissioner of lying to this panel?
    Mr. Millstein. Can I answer the question? I'm trying to 
be----
    Mr. Silvers. I'm just astounded at the lengths you will go 
to to defend something that may, in fact, be defensible in a 
perfectly straightforward way.
    Mr. Millstein. No, I actually have sat through the entire 
hearing today.
    Mr. Silvers. I know.
    Mr. Millstein. I've heard----
    Mr. Silvers. I'm impressed.
    Mr. Millstein. And I've heard the testimony of all the 
expert witnesses and fact witnesses before you. And I've spent 
a year now with this company's balance sheet and understanding 
its liability structure. And I want to give you the benefit of 
my learning.
    All of the contracts at AIGFP are guaranteed by the parent. 
The parent has a $100 billion dollar balance sheet of its own. 
On September 8th of 2008, with $15 billion dollars of 
commercial paper, we all know what happened to Lehman Brothers, 
to the commercial paper markets after Lehman Brothers filed and 
defaulted on $5 billion dollars of commercial paper.
    Fifteen billion dollars of commercial paper at the parent 
company. Eighty billion dollars of repo. Again, the repo 
markets went into seizure after the Lehman Brothers filing. And 
a much smaller amount of repo. Two trillion dollars of notional 
derivatives, $400 billion of credit derivatives, concentrated 
very much in the real estate part of the market.
    Had AIGFP defaulted on the collateral posting requirements 
that it had on September 16, every counterparty, 44,000 trades 
could have terminated their trades, declared cross default----
    Mr. Silvers. You know Mr. Millstein, you've--you're not 
paying attention to what I was asking you.
    Mr. Millstein. I'm sorry.
    Mr. Silvers. And you've actually agreed with me.
    Mr. Millstein. Oh.
    Mr. Silvers. What you've said is, is that--you said that 
all kinds of terrible things would have happened had they 
defaulted on the collateral posting obligations. But it was, 
but it's the collateral posting obligations that were the 
triggering issue, right?
    Mr. Millstein. The collateral posting obligations were 
actually triggered by the downgrade. The downgrade----
    Mr. Silvers. Yes, I know that. But that's where the cash 
need was that week.
    Mr. Millstein. I'm sorry.
    Mr. Silvers. All the witnesses, all day long have said 
this.
    Mr. Millstein. And the----
    Mr. Silvers. You're not disputing that.
    Mr. Millstein. And the securities lending part----
    Mr. Silvers. Right, exactly.
    Mr. Millstein. They refused to roll over----
    Mr. Silvers. Okay, so we all agree.
    Mr. Millstein. Okay.
    Mr. Silvers. Let me move to the present. As my colleagues 
have expressed, there are these estimates from the government 
accounting bodies that $30 billion or $50 billion dollar losses 
is likely.
    It appears from your testimony, that what that really means 
is that they believe that the preferred Series E is worthless. 
Or in the better case scenario, the $30 billion dollar loss, 
they believe that it is worth 60, no 40 percent, of the face.
    Mr. Millstein. Right.
    Mr. Silvers. Am I understanding their point of view 
correctly? I know it's a little unfair to ask you what they 
think. But is that essentially what that means?
    Mr. Millstein. Yeah, I mean there's $50 billion 
outstanding, if they think it's only worth $30, there's going 
to be a $20 billion dollar loss.
    Mr. Silvers. And we're not--explain to me why you think 
they are wrong, because clearly you do.
    Mr. Millstein. Well no, I don't think any of us can predict 
the future.
    Mr. Silvers. Okay.
    Mr. Millstein. I think that the Government Accountability 
Office and the OMB have to, under the regulations they're 
subject to, they have to make estimates of this for purposes of 
budgetary accounting.
    Mr. Silvers. Yes.
    Mr. Millstein. And I suspect they're being conservative in 
their view. You know, I'm working to get the taxpayer's money 
back.
    Mr. Silvers. Right.
    Mr. Millstein. I think we have a--or the company--has a 
restructuring plan that they've worked on with us that is going 
to take time to implement. But it should--and we've spent a lot 
of time on it, if they can implement it--should leave them as 
an investment grade company and if it can perform, if the two 
core businesses can perform the way that Mr. Benmosche 
suggested they can, the NEF should do very well.
    Mr. Silvers. My time is up. Thank you.
    Chair Warren. Professor Troske.
    Dr. Troske. Maybe we'll continue on a related line. And you 
were here for Mr. Gallant's testimony as well and his estimate 
of what the stock price should be. And can you sort of respond 
to that a little.
    And apparently you disagree with him as well. I don't know 
whether you've had a chance to look at his estimate. And there 
are widely different estimates out there. And I recognize that 
people are making--I understand how we come up with different 
estimates that we're making different assumptions about the 
outcome.
    Mr. Millstein. Yeah I've seen his work and you know, an 
analyst report such as that is built on a number of 
assumptions. And----
    Dr. Troske. Can you tell me which ones you would quibble 
with specifically?
    Mr. Millstein. In part I'm constrained not to quibble with 
any particular assumption because I actually know more than he 
does. I have much more material non-public information and it 
is a publicly traded stock and it would be inappropriate for me 
to do so.
    Dr. Troske. Okay.
    Mr. Millstein. I mean I'm not--I'm not trying to----
    Dr. Troske. No, I respect that. Can you give us some broad 
indication that you're comfortable with where you think that 
there are differences that you might have.
    Mr. Millstein. From my point of view of representing the 
Series E and F, I take some comfort from his conclusion that 
the stock actually has positive value because it means the 
interests I'm trying to recover are going to be paid in full.
    Dr. Troske. Okay.
    Mr. Millstein. And it also means that the Series C stock 
has real value. And that's pure profit to the tax payers.
    Dr. Troske. So I guess you--I believe you answered Chair 
Warren's question about when you thought the AIG will no longer 
need government support. Was that what your estimate was in 
2011? Or I guess that's where you said it was going to cross 
the line.
    Mr. Millstein. Yeah, I think the de-leveraging that is a 
predicate to its being able to garner a stand alone investment 
grade rating, is dependent upon these major asset sales closing 
and our monetizing the value of the stock that we're taking 
back on those deals.
    And I see that occurring you know, sometime between year 
end this year and year end next year when we've fully monetized 
those interests.
    Dr. Troske. Okay.
    Mr. Millstein. And therefore, you know if its got its 
leverage profile, that is its debt down and its coverage to a 
point where it looks like an investment grade company. Then I 
think we can begin you know, assuming the other elements of the 
restructuring plan that I outlined.
    Which, as I said, independent access to capital, that the 
parent company starts tapping the credit and capital markets 
again independent of the government. You know I think that's 
when we can start thinking about exiting the Series E and F.
    Dr. Troske. Mr. Gallant also said that he thought the share 
price, the current share price reflected the trader's beliefs 
that the government was going to walk away leaving--you know, 
giving a gift, another gift to AIG.
    Mr. Millstein. I think you can be certain that that is not 
going to occur.
    Dr. Troske. Okay. Let me change gears just a little.
    You are an expert in restructuring. If you're--and you were 
not in the room at the time, as you made clear. Had you been, 
would you have done anything different?
    Mr. Millstein. Yeah, Mr. Bienenstock and I go a long way 
back together. We've been on opposite sides of the table, we've 
been on the same side of the table on numerous occasions.
    I think that his confidence in the ability to actually have 
a discount negotiation with 16 counterparties is misplaced. In 
part because I think he's simplified some of the assumptions on 
which his analysis relies.
    During the period from September to November, when he 
assumes we had that three months in the Federal Reserve and the 
government to conduct a negotiation, collateral was required to 
be posted almost every other day.
    So the failure, while it--well he's right, having put the 
$85 billion dollar loan in place, bankruptcy was remote, but 
default was not remote. Every day, those 16 counter-parties or 
every week those 16 counter-parties were making demands for 
collateral.
    So in order to have the dissident account negotiation, the 
company would have had to be prepared to say, I'm not paying. 
And to take the risk that anyone of those 16 counterparties or 
anyone who had cross-default rights, the other 44,000 
claimants, or anyone at the parent who had cross-default 
rights, would not exercise their rights to cross-default.
    So while we could--you could have gathered the 16 major 
counterparties in a room and had a negotiation. I can tell you 
at the time, I was actually concluding a very--the very similar 
negotiation to that which was urged upon AIG, after nine months 
of negotiating with that very same group over the extent of 
their discounts and how it would be done in another entirely 
different situation.
    But most importantly for AIG, the company would have had to 
be prepared to take the risk of nonpayment, and have that 
nonpayment put at risk every other debt instrument that had a 
cross-default at the parent level and at FP.
    And if I may, I know where you're going. If I may, that 
would have made that company completely unstable. Any creditor 
with the right to declare a cross-default could have brought 
the house of cards down.
    Chair Warren. So if I can just follow-up on that. Is that--
you were talking about you were negotiating the same thing. 
Were you negotiating something like that with a government back 
stop behind it? Where the government said, I will make sure 
that between us, we get you paid so long as you don't cross-
default and bring this company down?
    Mr. Millstein. No I----
    Chair Warren. Doesn't that change the negotiating dynamic 
somewhat? A carrot the size of Manhattan----
    Mr. Millstein. Yeah.
    Chair Warren [continuing]. And a stick the size of----
    Mr. Millstein. Right.
    Chair Warren [continuing]. The global economy.
    Mr. Millstein. If--I mean I'm not sure I'm comfortable 
with, as a citizen, with the Federal Reserve using that power 
to pick and choose winners.
    Chair Warren. I'm sorry, were you uncomfortable with Long 
Term Capital Management?
    Mr. Millstein. The government didn't put any money up in 
that situation.
    Chair Warren. The government had nothing to do with what 
happened in Long Term Capital Management?
    Mr. Millstein. No, no. I think you heard----
    Chair Warren. I think we heard, they were in the room----
    Mr. Millstein. We were both----
    Chair Warren [continuing]. And said nobody leaves the room 
until there's a deal done here.
    Mr. Millstein. I know it's tempting to believe this, that 
the government could have made this possible and extracted 
discounts. But just assume with me for the moment that among 
the creditors who had cross-default rights with someone not 
within the territorial limits of the United States, who held a 
material claim and didn't care about the government of the 
United States or its policies wanted just to perfect its rights 
to payment.
    Chair Warren. And how exactly--you know this is--you 
weren't there--I wasn't there. This is a crazy conversation to 
have. But how exactly was that person going to enforce those 
rights? Either they had collateral, in which case they hang on 
to them or they've got to go to court. And I think you and I 
both have an idea of how long that takes. I just----
    Mr. Millstein. I understand that. I understand that. But 
this is a huge balance sheet with numerous creditors on it.
    Chair Warren. This is what bankruptcy lawyers do for a 
living.
    Mr. Millstein. I understand that. And I did this for a 
living. And I can tell you that I would have been very 
nervous----
    Chair Warren. Well who wouldn't have been nervous?
    Mr. Millstein [continuing]. About creating--about 
threatening default or even defaulting on this without being 
prepared to put this company into bankruptcy. Because you would 
be putting holders of claims of $100 billion of debt and of $2 
trillion of notional derivatives at the table on the first 
default.
    Chair Warren. So let me see, this may be an unartful pivot. 
But from that very point I want to go to another one that you 
made. And that's the question, it's ironic that AIG is in the 
insurance business because the American taxpayer ended up in 
the insurance business here. They ended up insuring, in effect, 
that AIG's creditors were going to get paid 100 cents on the 
dollar.
    And so I'm wondering, what was the value of that insurance? 
What's the value of the guarantee that we won't let your 
company fail?
    Mr. Millstein. Yeah.
    Chair Warren. You described potentially here an $18 billion 
profit. Except it treats that insurance policy that came from 
the American taxpayers as worth nothing.
    Mr. Millstein. No, I think we're coming at this from two 
different frames of reference. And I think again, just having 
spent time with the Federal Reserve and understanding what they 
thought they were doing at the time, in 2008.
    And I don't think they thought they were underwriting 
creditor recoveries at AIG. They thought they were preventing a 
meltdown of the financial system. And a consequence of that was 
that everybody at AIG had to get paid.
    Because just imagine that the government had tried to 
extract concessions from major counterparties, other 
systemically significant firms who did business with AIG. What 
would the risk have been then? What would be the inference that 
other creditors of those institutions would draw----
    Chair Warren. I'm sorry Mr. Millstein, we've been around 
this before. But the question I started with is, what is the 
value of the guarantee that the American taxpayer put into 
this? You describe the profit here as $18 billion.
    Mr. Millstein. No, I think----
    Chair Warren. Potentially $18 billion. And I just want to 
put it against--you treat the guarantee from the American 
taxpayers as if it costs nothing.
    Mr. Millstein. No, I think the benefit to the American 
taxpayers is that the financial crisis we all have lived 
through, which has been--had horrible effects on the economy 
wasn't worse.
    And if it turns out that the cost of this operation with 
AIG is--that there is some cost to it in the billions of 
dollars, I hope it won't be, that was money well spent in the 
sense of avoiding what could have been a much, much worse 
crisis.
    Chair Warren. I just have one small question to finish with 
this. And that is, you can't tell us why Mr. Gallant is wrong. 
And I understand the reason for that. Others agree with Mr. 
Gallant, others obviously don't. The market is trading 
somewhere else.
    But I'd just like your advice for what you would offer to 
an oversight panel. Are we just supposed to take your word for 
it? That it's all going to work out fine? How do we evaluate 
these very differing points of view if you can't give us 
anything more specific?
    Mr. Millstein. The question I think you need to ask 
yourself today is, as a result of the government's actions is 
the company today stable? The answer is yes. Is it improving? 
Yes. Is it executing against the restructuring plan? Yes. Is it 
moving to a position where it can give up on its government 
support and stand alone? Yes. Are there risks? Certainly.
    A company of this size and scope can't help but have risks 
to its outcomes and financial performance. But in terms of you 
know, where it was and where it's going, it's making progress. 
That's all that can be told.
    Chair Warren. So when people ask us whether or not the 
American taxpayer's going to get repaid, the answer is, we 
don't know and we don't have anything to look at.
    Mr. Millstein. No I think I did answer it. I think you can 
say with confidence, as an oversight panel, that the Federal 
Reserve is going to be paid in full. You can say that the----
    Chair Warren. But----
    Mr. Millstein. Wait. You can say that--it was a comma, not 
a period. You can say that an analyst, a well respected 
analyst, came in to your hearing and said that the--basically 
the E and F is going to be paid in full and that the government 
Series C is worth something.
    Chair Warren. But there will be losses----
    Mr. Millstein. No.
    Chair Warren [continuing]. According to the----
    Mr. Millstein. No, that's not what this gentleman is 
telling you.
    Chair Warren. You think he thinks we're going to get paid 
in full.
    Mr. Millstein. If he's----
    Chair Warren. And that the CBO----
    Mr. Millstein. If the stock is----
    Chair Warren [continuing]. Estimate is simply wrong.
    Mr. Millstein. If he believes the stock has a positive 
value of $5.00, that means that what I'm trying to recover is 
going to get recovered.
    Chair Warren. Because we're going to be paid in full. Okay, 
thank you Mr. Millstein.
    Mr. Silvers.
    Mr. Silvers. What----
    Chair Warren. No, Mark isn't finished. Oh, I'm sorry, Mr. 
McWatters.
    Mr. McWatters. So this means that AIG is solvent, in your 
opinion? In the opinion of the Department of the Treasury?
    Mr. Millstein. It's a--you know solvent's a legal term. It 
has a positive net worth and it's paying its debts as they come 
due.
    Mr. McWatters. Okay, fair enough. AIG to me appears like it 
is still too big to fail. What are you doing, as the majority 
shareholder to lessen that risk?
    Mr. Millstein. I think if the restructuring plan that we 
have worked with the company on designing and implementing is a 
plan that is downsizing this company relatively rapidly.
    We're selling off its international life insurance 
operations. FP has--is not a shadow of its former self, but 
it's about a third of its former self. And those risks should 
be wound down substantially by the end of the year.
    The aircraft leasing business and consumer finance 
businesses are now financing themselves, not drawing on the 
government to finance them. And as you heard Mr. Benmosche say, 
the inter-company loan that last year was necessary to finance 
ILFC, he hopes to be able to raise money to refinance it this 
year.
    So the core business of AIG, at the end of this 
restructuring plan, will be Chartis and SunAmerica Financial, 
the largest property casualty company in the world and a very 
strong annuity and life insurance provider in the United 
States.
    A much smaller, much simpler--and a company that he's 
confident he can manage with the help of his Board. And that is 
much smaller than the company that the Fed confronted on 
September of 2008.
    Mr. McWatters. So let's say a year from now, a year-and-a-
half from now, after this had been implemented, if AIG was to 
fail again for whatever reason, then a filing under Chapter 11 
followed by the insurance regulators doing whatever insurance 
regulators do.
    In other words, would working the resolution of AIG in its 
bankruptcy--and its insurance subsidiaries through the normal 
protocol seem to work? In other words, there's nothing out 
there that would start triggering the dominoes that take down 
the other too big to fail institutions?
    Mr. Millstein. Yeah, I mean if that plan that I just 
outlined has been implemented and the environment stays as 
relatively friendly as it is today, I think that you know, it's 
not up to me to make a systemic risk determination but it seems 
to me this will be much less of a risk to the system than it 
was in September of 2008.
    Mr. McWatters. What are the consequences on the competitors 
of AIG's insurance business who have received perhaps a 
subsidy, or at least AIG subsidiaries who have received a 
subsidy from the U.S. taxpayers. If you're competing against 
AIG in the insurance business, what's the consequence?
    Mr. Millstein. It's a pretty competitive business. And in 
some sense, I think AIG's burdened by its government ownership 
in the competition it has with other insurance companies. I 
think you know, we're not a natural holder, we're a reluctant 
owner, but we're still a majority owner.
    And you know when the government of the United States rolls 
over you know, you might not like being underneath it. So I 
think the answer is, that I think the sooner they can shed us 
the more competitive they will be.
    Mr. McWatters. Okay, so there's no indication to you that 
the rates or the underwriting standards of an AIG----
    Mr. Millstein. You know there was some----
    Mr. McWatters [continuing]. Are considered different----
    Mr. Millstein. There was some chat about--you heard some 
noise about that in the marketplace shortly after--you know in 
early 2009. You haven't heard that since.
    Mr. McWatters. Okay, I'm done.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Mr. Millstein, AIG is the only participant in 
the Treasury Department's SSFI program, Systemically 
Significant Failing Institutions program. What are the--this 
may seem silly after this day's worth of testimony, but it's 
not. What are the characteristics of AIG that made it an SSFI?
    Mr. Millstein. You know, for a company you're going to take 
a majority ownership in and invest $132 billion to create a 
program called failing institution, you know, it's--it's a 
little contrary to the objective of getting your money back. I 
don't know who named it that. I myself don't tend to use it a 
lot as the program description. It's the--you know, it's the 
AIG program.
    Mr. Silvers. But the fact that it was the only participant 
in that program, the only institution--you know, my colleagues 
have made a big--Mr. McWatters was talking about how the 
Treasury left 20 percent of the common stockholders intact. 
That was actually pretty tough treatment in relation to what 
happened later with other people.
    And Treasury at the time articulated to this panel--and I 
know this is a different administration, but, you know, there's 
some continuity--articulated to this panel that AIG was 
different. Do you disagree? Do you think AIG wasn't different?
    Mr. Millstein. I really--I can't--I don't know what was in 
their minds in that regard. You mean in terms of taking their 
common stock?
    Mr. Silvers. Well, no, just in general. What made--what 
made AIG--why does AIG have a unique program all to itself?
    Mr. Millstein. I don't know. I mean, you know, we have--
we--the Federal Reserve was the lender of last resort here 
first.
    Mr. Silvers. And this comes back to my question this 
morning about sort of what's the--you know, when did things 
kind of get set in stone? You seem to be sort of saying that 
you guys--the Treasury--inherited a circumstance created by the 
Fed.
    Mr. Millstein. Well, I think the sequence--actually in my 
written testimony I lay this out.
    Mr. Silvers. Yes.
    Mr. Millstein. And--and if, you know, in September--and 
again, this is sort of an advertisement for a regulatory reform 
resolution regime because in September of 2008 the government 
really didn't have the tools to resolve an institution of this 
size. The Federal Reserve could make a loan. But you really 
didn't have the tools to put it to bed quietly.
    Mr. Silvers. Now, let me--I mean--you know, I think it's 
critical--the fact that there's not a--the fact that you can't 
give a clear answer to this--to the question of--and I 
understand why. It's not a criticism of you necessarily. But 
the fact that there's not a clear answer that can be 
articulated across administrations to why it was that AIG got 
unique treatment is a problem, I think. And I just leave that 
as an observation.
    I wanted to shift to something you said earlier in response 
to one of my colleagues' questions. You said that you had to 
think about the impact on other systemically significant firms 
during the period, you know, in September 2008. What firms are 
you talking about?
    Mr. Millstein. No, no, I was--I did say that, but I said it 
in the context of Chair Warren's questioning with regard to, 
you know, we insured all of AIG's creditors through this 
bailout. And again, what I was trying to convey there is that I 
don't think that was a consequence of what we did. I don't 
think that was the intent of policy.
    Policy intent was to draw a line and try to prevent a 
further collapse of the system. And they drew the line at AIG. 
And the next point I was going to try to make was that if, as 
some have urged, the government rather in November or some time 
else along the way, should have tried to extract concessions 
from AIG's creditors, having intervened in AIG, what would that 
have communicated to the broad market about--about the 
government's role with regard to other firms that--you know, 
the other 20 large financial institutions, which by then it had 
made investments in? Would it have promoted financial stability 
to think--for the markets to think that the government was 
going to turn around for all of the large financial 
institutions in which it then owned preferred stock and demand 
creditor concessions?
    Would that have encouraged financial intermediation or 
discouraged financial intermediation? Would it promote 
stability or promote instability? I submit that if that were 
official government policy that we were going to use our 
ownership stakes in these large institutions to demand 
concessions from their creditors, I think you would have had 
risk running away from those companies--the contagion 
associated with that government policy would have been 
enormous.
    Mr. Silvers. No, I'm sorry. I think my----
    Mr. Millstein. You would have discouraged people from doing 
business with our large financial institutions.
    Chair Warren. But the point is about the debt that existed 
prior to the government putting its own money on the table. 
This is like post-petition financing. The haircut is for those 
who were dealing with the company so that you get some market 
discipline, so you keep some market discipline.
    And the government says we're going to provide the backstop 
going forward. But we're not paying off the old people who 
understood the risks they were taking, at least not paying them 
off 100 cents on the dollar.
    Mr. Millstein. But, Chair Warren, you know and I know the 
staff knows that these large financial institutions don't have 
near long-term debt. Their debt is coming in and out everyday. 
So once you communicate to the financial markets that these 
large institutions are going to be--have required haircuts, the 
people who are lending money on a short-term basis to them 
withdraw their credit.
    Chair Warren. No.
    Mr. Millstein. They withdraw their credit.
    Chair Warren. Not from AIG. What you're now talking about 
are all the other participants in the financial market.
    Mr. Millstein. No, AIG--that's----
    Chair Warren. Once the government says I am putting money 
on the table and the money will be available to backstop the 
creditors, there's been no indication the government has ever 
backed off from that. And indeed, we have heard repeatedly in 
every meeting we've had with the Fed that they could not back 
off.
    Mr. Millstein. No.
    Chair Warren. That's why the decisions made in September 
had to be followed through in November in the way that they 
did.
    Mr. Millstein. But, if I may, what you have been urging or 
at least inquiring about is whether or not they should have 
done something different.
    Chair Warren. Right. Yes.
    Mr. Millstein. And what I'm suggesting to you----
    Chair Warren. That--that is----
    Mr. Millstein. Had they done that, their short-term 
creditors would have run on them before you could have asked 
them may I have a discount.
    Chair Warren. I think we will simply have to agree to see 
the world differently on that. I apologize.
    Professor Troske.
    Dr. Troske. So as a professional economist, I don't deal in 
individual companies. I sort of look broader at the economy.
    But I think when I hear the comments that my colleagues on 
the Panel are making, what I think about is the moral hazard 
problem going forward. The fact that when we make credit--when 
the government consistently makes creditors whole--creditors 
play an important regulatory role in a market economy in that 
they regulate the performance of the people that they're 
lending money to. If the creditors don't believe that that's 
important because the government's going to come in and bail 
them out, they no longer play that regulatory role.
    And obviously then we have to create a government structure 
to regulate, which is incredibly challenging. And it's much 
cheaper for the taxpayers if creditors actually do the 
regulation for them.
    And I would argue much more efficient. Can you sort of--I 
mean, so you've talked about this instance. Can you maybe 
expand a little on the moral hazard that's introduced by what 
we've done? Because I'm not sure I would agree with your 
statement that even if we get paid off and make a profit, we're 
better off once you consider the dynamic implications.
    Mr. Millstein. I think if we fail to follow this episode in 
American economic history with strong regulatory reform, then 
we will have created--we will have compounded the problems that 
existed in early September of 2008 before AIG was bailed out. 
The system that allowed an AIG to run up $2 trillion of risk 
without really any capital behind it, that allowed it to lever 
itself up the way it had without any effective holding company 
regulator supervising it and demanding that it have both 
capital and liquidity to support the risks it was 
underwriting--that system, you could argue, created the moral 
hazard that certainly has been compounded by what occurred. So 
we need to have a regulatory reform package to counter what has 
occurred and to make sure this doesn't happen again.
    Dr. Troske. You know, I think I would disagree with you. I 
think that if the government had consistently allowed creditors 
to fail in Long Term Capital Management, in--you know, back 
over the last 30 years, then we would have regulators. They 
would be called creditors.
    And this problem wouldn't exist in the first place because 
the creditors to AIG would have taken a much more active role 
in ensuring the company didn't get into the problems in the 
first place. And the solution you're proposing is for the 
government to go out and hire creditors to do the job----
    Mr. Millstein. No, not at all.
    Dr. Troske. Excuse me--the government to go out and hire 
regulators to do the job that creditors should have been doing 
is going to produce a much more inferior solution to the one we 
would have if we actually allowed the market to function in an 
efficient fashion.
    Mr. Millstein. No, I actually agree with what you've said.
    Dr. Troske. Okay.
    Mr. Millstein. But when firms of this size fail, they have 
spillover effects that are enormous. And so, when I say strong 
regulatory reform, I mean a resolution regime that can contain 
the spillover effects of a failure of the size of this firm.
    Dr. Troske. And that offers me a good segue into my next 
question, which is, again, a fairly general question that I 
want to ask. I have heard the term systemic used more often 
since I've been appointed to this panel than I had, you know, 
in the last--in my entire previous life. Yet I have yet to see 
an operational definition that would allow me to know what a 
systemic firm looks like and what one doesn't look like.
    And if you seem to be arguing that we need a regulatory 
regime that regulates systemic firms that offer a systemic 
risk--to do that, I think we need a definition. And I would 
love for someone to give me one. And you're sitting here, so 
I'm asking you. Sorry about that.
    Mr. Millstein. And I would love to take the bait and join 
issue with you on that. But I think we don't have the time.
    Dr. Troske. Okay.
    Mr. Millstein. I mean, I think it's important. I agree with 
you. It's important. And if the regulatory reform bill passes, 
I think you'll see one emerge from the new systemic risk 
regulator that is----
    Dr. Troske. So you think we're going to come up with a 
definition? Because, I mean, I would be happy if we did in 
which, you know, the government basically said these are the 
firms that we're going to backstop--and so, we know the moral 
hazard is here with these firms--and everybody else we're not. 
And we've got this dynamic definition. I guess I'm less 
confident than you are that that's going to arise in a----
    Mr. Millstein. Well, I mean, I think the premise, though, 
is wrong, that--some people worry about that the systemic--the 
systemic designation means that no, we're not going to backstop 
you, you're in the resolution regime where, you know, you're 
going to be put to bed and you're going to have, you know, 
living wills or whatever you want to call it, but severe 
regulatory oversight to prevent us from having to do what we 
did with AIG again.
    Dr. Troske. That's all.
    Chair Warren. Thank you very much, Mr. Millstein. I 
appreciate your being here today.
    Mr. Millstein. Thank you all.
    Chair Warren. This hearing is concluded. We will hold the 
record open for questions and additional documentation from our 
various witnesses. Hearing adjourned.
    [The Congressional Oversight Panel, at 3:45 p.m., was 
adjourned]
    [The following written statement of Keith M. Buckley, Group 
Managing Director, Global Insurance, Fitch Ratings, was 
submitted for the record:]

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