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Edward Liddy Speaks Before House Committee Investigating AIG; Why Were AIG Bonuses Paid?; Job Seeker Struggling Despite Qualifications; Generics a Cost-Effective Alternative
Aired March 18, 2009 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
KYRA PHILLIPS, CNN ANCHOR: And pushing forward through a tidal wave of rage. Outraged lawmakers lash out at huge rewards for catastrophic failure at AIG.
It's your money, so make it go further. Today our "ROAD TO RESCUE" leads the way to spend less on everything. You may never pay retail again.
Hello, everyone. I'm Kyra Phillips, live from the CNN world headquarters in Atlanta. And you're live in the CNN NEWSROOM.
Well, desperate times call for unprecedented coverage, and all week long CNN is covering the economic meltdown as only CNN can. "The Road to Rescue" begins with a simple idea: knowledge is power, power to find or keep your home, job, savings and hope. And for the big picture, the family snapshots, the stats and the stories, stay on "The Road to Rescue: The CNN Survival Guide" all week long.
Well, rescuing AIG required more than 170 billion taxpayer dollars so far. That explains the uproar over seven-figure bonuses to the wheelers -- or the very wheelers and dealers, rather, who drove that company and the world's largest insurance company to ruin.
And just minutes ago President Obama weighed in on his way to California. He says that the buck stops with him, and the answer lies in the new regulations.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: Look, rather than go into sort of the details of finding it out, ultimately I'm responsible. I'm the president of the United States. We've got a big mess that we're having to clean up.
Nobody here drafted those contracts. Nobody here was responsible for supervising AIG and allowing themselves to put the economy at risk by some of the outrageous behaviors that they were engaged in. We are responsible, though. The buck stops with me. And my goal is to make sure that we never put ourselves in this kind of position again.
(END VIDEO CLIP)
PHILLIPS: AIG's new CEO is about to spend a rocky afternoon before an outraged panel of lawmakers on Capitol Hill. Get a load of New York Democrat -- who's always a character -- Gary Ackerman. (BEGIN VIDEO CLIP)
REP. GARY ACKERMAN (D), NEW YORK: There's a great company called "I Can't Believe It's Not Butter." Yes, at least they have the decency to tell you it's not butter.
I mean, this is insurance without being insurance, because if they called it insurance, they'd have to have money to pay you off. But they don't have the money to pay you off, and they're calling it credit default swaps, because if they called it "I Can't Believe It's Not Insurance," maybe nobody would buy it.
(END VIDEO CLIP)
PHILLIPS: CNN's Brianna Keilar joins me now from outside the hearing room.
Brianna, what is the government doing to prevent this from happening again in the future, besides all eyes paying attention once again to Gary Ackerman and his interesting sense of metaphors and analogies?
BRIANNA KEILAR, CNN CORRESPONDENT: Interesting. And he went on to say some of us may be laughing, but really we're crying.
And one of the things Congress is trying to do is to prevent this from happening in the future. There's an -- there's an effort right now not only to recoup that money that's already gone out to these executives at AIG, but to make sure it doesn't happen at these other companies. That's coming in a bipartisan agreement from the Senate that would tax these bonuses going to executives who get this -- their companies get this bailout money.
And what it would do is make the company pay a big chunk of tax, make the executive pay quite a bit of taxes. And then this bonus is subject to income tax, as well, so it would basically overall eradicate those bonuses.
That's one of the things going on here, Kyra, as they do try to recoup these bonuses, and not just for the future.
PHILLIPS: All right. What about Edward Liddy? When is he supposed to show up?
KEILAR: We do hear from a committee source that he's in the building. I'm standing outside of the hearing room where he is expected to be testifying. Maybe here in about an hour.
And you can see I'm not the only one waiting for Edward Liddy. There is just a gauntlet of media waiting for him. We understand that he could be coming through here any moment. And Kyra, if he does, of course, we're going to let you know, and we're going to try to bring that to you live.
PHILLIPS: Sounds good. We'll be waiting, Brianna. Just let us know. I'm also finding out Gary Ackerman is going to join our Rick Sanchez live, coming up in the 3 p.m. hour.
All right. The AIG debacle is B-I-G, as we well know, and peeling all the layers would take all day. But pushing forward, here are two questions that we plan to answer: what exactly was AIG insuring that dragged the company down? It sure wasn't cars or movie sets or oil rigs. So our Josh Levs explains the company's innovative and suicidal role in mortgage-backed securities.
All right, we also want to know whether and how and when we might get our bonus money back. Offenders say that a deal's a deal, but deals have been broken for a whole lot less than $165 million.
And for more on the yard (ph), the law and, of course, the deal, we turn to CNN legal analyst Jeffrey Toobin.
Jeff, let's start by talking about how does, I guess, one deal like this work itself out? I guess would be the fact that it's a contract. It's not just a proof of performance type of deal.
JEFFREY TOOBIN, CNN LEGAL ANALYST: Well, what happened here is these employees in this notorious group based in Connecticut had contracts. And under those contracts, according to the AIG lawyers, they had to be paid these bonuses, even though their -- their unit was a catastrophic failure and brought down the company and almost brought down the whole economy.
Now that may be a debatable proposition. The AIG lawyers may have been wrong about the obligation to pay those bonuses, but that's what they thought, and they paid the bonuses. That's how we got to where we are.
PHILLIPS: And Jeff, stay with me a minute. I just want to make reference, the president of the United States getting ready to take off to Costa Mesa, California, tonight. As you know, he's going to hold a town-hall meeting there, talking about the economy. I'm sure questions will come with regard to AIG, as well. So we're following the president as he heads out to California.
Jeff, let's continue our discussion. You know, I think a lot of people, they hear big bonuses and they wonder, OK, how could this company in trouble, knowing that it was in trouble, still pay out such large sums of money to its employees, especially employees that didn't even work for the company anymore?
And I think that's where the tricky line is with regard to it was a contract and that they had to abide by the contract. But then critics, of course, are saying, OK, but can't you negotiate that, considering the times that we're in?
TOOBIN: Well, and what makes this whole deal even more outrageous is that AIG wasn't paying bonuses with AIG's money. They were paying with government money, with the taxpayers' money. That's what makes this, I think, such an outrageous situation. What this comes down to is what did the contract say, and these contracts have not been made public yet? Were these really ironclad commitments, and if they were, how could AIG have entered into contracts with people who were guaranteed bonuses even in the face of terrible failure?
Now, the other possibility is that, even if AIG's lawyers thought this money needed to be paid, can these recipients of the $165 million be sued now to get the money back? Andrew Cuomo, the New York state attorney general, has raised that possibility. Barney Frank, the chairman of the House Financial Services Committee, he's raised that possibility.
So their -- the fact that they have the money now doesn't necessarily mean that they'll be able to keep it. But all those lawsuits will certainly be difficult and long, if they are to succeed.
PHILLIPS: OK. Just final question, Jeffrey. Aside from the fact that it was a contract, there were legal -- legal issues involved here, a number of people saying, look, if we wanted to keep people because that would cost more in the long run if we lost the clientele, that depending on these individuals we gave, you know, retention bonuses to.
But putting all that aside, wouldn't you think that, in this time and considering the economic struggle that everybody's going through, that someone within that group of executives would have said, "You know what? I don't want -- I don't want the million. I'm going to step forward and say this is just not right." That's a lot of people that still took the money and ran.
TOOBIN: Oh, Kyra! That's so -- that's so nice that you would think that way. I'm so touched!
PHILLIPS: Come on! Would you take the millions and run?
TOOBIN: How many Wall Street -- I -- you know what? I'm sorry. You know, I guess I am just too cynical.
PHILLIPS: You have no hope in the common man or woman.
TOOBIN: The line of -- the line of AIG executives to give their money back, you know what? I think that we, the taxpayers, would be happy to take it, but I'm not holding my breath. And, you know, you're a sweet soul, but I don't think you should either.
PHILLIPS: Look, I can see you're a huge pessimist. I'm just trying to say what's morally right at this moment.
TOOBIN: Oh, boy.
PHILLIPS: On a serious note, there's a lot of people that are outraged. Obviously, it's touched a huge nerve, and we'll continue to follow it. It will be interesting, like you said, Jeffrey, to see that contract. Agreed.
TOOBIN: All right.
PHILLIPS: Thanks, Jeffrey.
TOOBIN: See you, Kyra.
PHILLIPS: All right. Well, now about those credit default swaps described by Congressman Ackerman as "I Can't Believe It's Not Insurance." CNN's Josh Levs gets to that at the bottom of the hour.
But first, a word to the 73 current and former AIG executives who pocketed a million bucks or more in bonuses. Not even Congress knows your names yet, although we are slowly starting to see some names. "The New York Post" published three of your names today.
So here's my offer. We're on the air for the next two hours. Some of you must be watching. So step up, come forward, tell us your side of the story. Just e-mail us at CNNnewsroom@CNN.com. Tell us how to contact you. We'll get your story to the world. Maybe Jeffrey Toobin won't give me such a hard time anymore.
Well, jobless in America. Millions of people know that the pain right now. It's graduate degrees, lots of experience, a guarantee of anything. Well, what do you do? Come with us to a job resource center, and we're going to hunt down some answers for you.
PHILLIPS: Well, what's wrong with hedging a risky bet? Depends on the bet and the hedge and, of course, the risk. We're pushing forward on the formula for disaster at AIG.
PHILLIPS: Well, in this recession millions of Americans are pounding the pavement looking for work. And a lot of them have discovered job fairs popping up across the country.
One of our iReporters, Miguel Spivey, sent us photos of a big job fair in Independence, Ohio. As we see, there were plenty of people looking. Organizers say that 6,000 people waited in long lines to meet with employers. It was so crowded, 700 were sent home, because they hadn't pre-registered.
All right. We're being told Edward Liddy entering just outside -- is that just outside the courtroom, Katie? OK, yes. This is just outside the -- or the hearing room. Thank you very much.
And it looks like he just went inside. Of course, our Brianna Keilar is there, hoping to get a chance to talk to him as he testifies. I'm sure we'll have some more colorful testimony within that committee hearing. We'll take it live and bring it to you as soon as it happens.
All right. Here in Georgia, tens of thousands of people now living without a paycheck. CNN's Brooke Baldwin actually met with one woman with a master's degree, years of experience, who's been to nearly a dozen job fairs now. And so far, no luck.
BROOKE BALDWIN, CNN CORRESPONDENT (voice-over): Don't let the positive tone fool you. It's the fifth job fair for Kim Thomas in five months. So far, not even a nibble. Even though she holds a bachelor's degree in criminal justice, a master's in administration and ran an after-school program in New York with a $1 million budget before she was laid off.
KIMBERLY THOMAS, JOB SEEKER: So I'm just trying to be very patient.
BALDWIN: But her positive attitude is turning to frustration. She's been getting by raising her daughters, 21-year-old Nicole and 12-year-old Brianna. Along the way coping with tragedy: the untimely death of her husband of 20 years.
THOMAS: He worked for the transit authority. Excuse me.
BALDWIN: The family has been getting by: life insurance policy and unemployment benefits. On a tight budget, Kim and family headed for what they hoped would be brighter skies and broader horizons in the south.
THOMAS: We was raised in New York City all our lives, so this is like an adjustment, coming down here.
BALDWIN: They now all live with Kim's mother, Helen Garrett, in Kennesaw, Georgia, not the life they were expecting at this stage in their lives.
Nicole wants all the things college-age young women want: education, a car. For now, they're out of reach. She must live here one year to qualify for affordable in-state tuition.
They know many others in the country face similar hurdles, but Kim does have hope.
THOMAS: Thank goodness, with the economic stimulus package, they provided $25 extra a week.
BALDWIN: And the stimulus package will help extend her unemployment benefits an additional three months. It's not a lot, but it's enough to keep her going, focusing on her late husband, her daughters and their aspirations.
THOMAS: I'm dreaming to get a home. And that's what he would have wanted us to have. I'm trying to fulfill that dream.
PHILLIPS: Brooke Baldwin with us now from that job resource center here in Atlanta, Georgia.
Brooke, Georgia has a high unemployment rate, as we all know. We live in this city. But there is a positive statistic when it comes to reemployment. Right?
BALDWIN: There is. Let's get a little bit of positivity here when we're talking about job outlook, at least specifically for Georgians, for people here in this career center.
According to the Georgia Department of Labor, the time it takes to go from being laid off to finding a job, they say is 11.6 weeks. That is the average. That is four weeks faster than the national average -- Kyra.
PHILLIPS: All right, well, how is the stimulus money, then, going to good work in Georgia?
BALDWIN: Couple examples specifically. One we heard in the piece. Kim is already getting $25 extra a week because she's receiving unemployment benefits. Well, that extra 25 bucks certainly goes a long way for some of these folks.
And also, last Wednesday, they're saying here that was the biggest career fair, job fair in Atlanta, some 15,000 people. And the stimulus money will help foot that bill, as well.
PHILLIPS: All right. So coming up at 2 p.m., tell us with whom we will speak.
BALDWIN: Yes, this is very exciting. Surprise, Kim who you just saw on the piece, she is sitting in a workshop through those doors working on her resume. But we're giving her 30 seconds live on CNN coming up at 2 p.m. And we're going to hand her the microphone and give her 30 seconds to pitch herself to a potential employer. And hopefully, Kyra, we can help her get a job.
PHILLIPS: Maybe she wouldn't -- maybe she doesn't even need the job fair. We're going to hook her up right here. All right, that sounds good. See you at 2 p.m.
PHILLIPS: All right.
PHILLIPS: Well, too cool to buy generic? Yes, well, your pocketbook disagrees. We're going to get Susan Lisovicz's two cents on house brands.
PHILLIPS: Well, this week we are all about survival, solutions and success. Spin, politics, forget them. Our "Survival Guide" is about knowledge.
Today and tomorrow we talk about easy ways to save money around the house on stuff you can't live without, like food. So we're talking with some of the nation's premier tight wads, cheapskates and penny pinchers. We're also going to show you how to trim those bills in ways that maybe you hadn't thought of before. And Friday, how to have fun when money's tight.
Now in normal times, a lot of shoppers look down their nose at generics in the grocery stores. But baby, these ain't normal times, and stores are seeing big interest and big money in house brands.
Susan Lisovicz buys those generics. Right, Susan?
SUSAN LISOVICZ, CNN CORRESPONDENT: I'm a cheapskate, and I'm proud of it, Kyra!
PHILLIPS: Yes, but I also know you, too. You mix them up very well. And you and I have talked about this. I've been in your kitchen. And I'll see some really nice name brands. I also see a good mixture of the house brands.
So I guess what a lot of people are asking, do you get the same quality? I mean, yes, it's obvious that more people are buying these house brand because of the economy, but are you getting something that's as good as the name brands?
LISOVICZ: The answer, the short answer, Kyra, is yes, because amazingly enough, they come from the same place. A lot of products that you buy at a premium price are made by a manufacturer who also sells them to other customers who may sell them to Kroger's or Shop Rite. They are the house brands.
And the major difference there is marketing. And that's why the average difference between a house brand and a premium brand is about 30 percent. That adds up real quick.
PHILLIPS: All right. So let's -- let's take an example, because you and I got into a talk about ketchup. Because normally, I buy Heinz ketchup.
LISOVICZ: You're a snob there, Kyra.
PHILLIPS: Well, because I bought the generics before, and to me, it doesn't taste the same. And what I'm cooking doesn't turn out the same. And you're...
LISOVICZ: Is it worth $1 more, Miss Phillips? Is it worth $1 more a bottle?
PHILLIPS: Well, we're talking 50 percent savings? Is that what you're saying?
LISOVICZ: That's what I'm saying, yes. If you look at the difference between Heinz ketchup, same amount, 14 ounces, and then the Shop Rite brand, it is a $1 difference.
And if you think about that, if you apply that to everything you've bought, that's thousands of dollars in a year. And that's why the lowly house brand, Kyra Phillips, has such cache during a recession.
PHILLIPS: Wow. I have one more question for you. LISOVICZ: I think you're going to still -- you're still going to buy that brand, I know.
PHILLIPS: Exactly. You know me. Because I'm -- there's this one recipe that I'm just convinced I have to stay with for that.
But OK, stay with me for a second. I just want to go to our live picture here. And I know you're following this, too, as well, Susan. Edward Liddy moving into the committee room here, getting ready to testify on the controversy over these big bonuses for AIG employees.
As you know, he's the new CEO that has taken the reins. It's been a bit of a rocky road for him. As soon as he starts talking, we are going to monitor that and bring it to you live.
So Susan, back to your focus now about name brands versus generic brands. Something else, too. This is probably the time where, if we have a doubt about that house brand, it's very easy to take the name brands and the house brands and just compare the ingredients in the back or -- and see if, indeed, you're getting the same thing for less money. Right?
LISOVICZ: Well, it couldn't be easier. Because basically what happens in the supermarket is they position their house brand right next to the premium brand. They usually put it in the same shaped bottle, the same color, the same key words, whether it's "Lite" or "New" or "Improved."
And yes, a lot of the ingredients are the same. The major difference is the price. You get more, typically, for less. The average difference, Kyra, is about 30 percent.
So think about it. If you spend $150 a week at the supermarket, that's $50 savings a week, $200 a month, $2,400 a year. That's -- that's real savings. And that's why so many retailer, like Wal-Mart on down, are expanding their line of house products, because they've seen a lot of demand. That's what consumers are doing. They're sticking to essentials, but even there, they're trading down.
PHILLIPS: And, you know, since we're on the note of money, all right, I'm going to step away for a second because we've got this live picture, Susan. You know, at a time where we're -- everybody is scrimping, no -- no matter what your situation is. That's why what we're seeing here live has triggered such -- or hit a nerve with Americans and with everybody right now across the country who's feeling the economic pinch.
And that is because of AIG, and that is this outrage over the millions and millions of dollars that have been handed out to employees under contracts that they signed when this organization was also receiving bailout money from the Bush administration.
So a lot of questions going to be asked to Ed Liddy, the new CEO of AIG. We're going to listen to that. And my guess, Susan, we'll be talking about this coming up in a little bit.
So let's dip into it live.
REP. PAUL E. KANJORSKI (D-PA), CHAIRMAN, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES: Do you solemnly swear or affirm that the testimony you will give before this subcommittee in the matters now under consideration will be the truth, the whole truth and nothing but the truth, so help you God?
EDWARD LIDDY, CHAIRMAN & CEO, AMERICAN INTERNATIONAL GROUP: I do.
KANJORSKI: Thank you very much, Mr. Liddy. If you'll kindly be seated.
Mr. Liddy, you and I are not strangers to one another. We have had the occasion to visit personally some two or three months ago in my office for what I thought was a great conversation, and then subsequently, maybe four to six weeks ago, a telephone conversation that wasn't as great, as I recall.
And I want to just have the record to reflect, so that the public knows and the record reflects, Mr. Liddy is not a person that is being paid anything for the CEO position he occupies at AIG. He has been impressed into federal service by officers and public officials of the United States government, and he responded to their call.
He's a former CEO of one of our largest insurance companies, now presently retired before he took on this command.
I wanted to make that clear, Mr. Liddy, because I'm sure that you and your family have had a great deal of abuse, particularly in these last few days. We do not intend to harass you here in this committee, nor should we.
On the other hand, I think it's only fair that we set the record straight. When we discovered that there were potential bonus payments about two months ago, we talked with each other, and I urged you to do everything within your power to see if you could suppress the payment of those bonus payments or deny them in their entirety.
At that time, it was my understanding and the understanding of my staff that both AIG people and my staff on the committee would cooperate, would have a transfer of information and some documents to indicate whether or not there's any assistance we could lend in interpreting what positions AIG could take in regard to these bonuses.
Specifically, to make it simple, we wanted to say -- see whether or not we could vitiate that contract. And when I say "we," members of Congress and for the benefit of this committee.
The disappointment and why you are here under these circumstances, Mr. Liddy, is that I warned you at that time that if these bonuses were paid and no mitigation was made to the general public of the United States or to this Congress, the action by AIG in doing that would jeopardize the second rescue plan that is anticipated and potentially needed to save the American economy.
As of Saturday last, we had received no communication regarding the documents, papers and facts that we had expected from AIG prior to payment.
The only thing we received was a letter indicating that payment was made and that it was done on the basis of an attorney's -- attorney's position that a contract was involved, and apparently they advised that no way around that contract could be found.
Not to get in an argument about it, I -- I do want to render this opinion. In my prior life, I was an attorney, and I dealt with your prior insurance company that you were CEO of, and I won't mention the company because it's of no concern to anyone else, but I'm sure everybody knows what large company that was.
In cases that I had with your company, there were clear cases of the need for recovery or payment and, yet, defenses were rendered and time was taken and, very often, those cases had to go to trial. And that practice exists all over the United States.
So this is not a thing of first impression. It's sometimes insurance companies delay payment or take a position they will not pay until they were sued. In this case, there is an opinion in the land and in this committee reflected today that this was a rush to payment; that there were other alternatives at hand.
One of the last alternatives would have been a denial the right to pay on the contract and the simple words of these folks, sue us. Now, that is not a bad remedy in my estimation, and I hope you'll address it in your statement today -- and I've read your prepared statement -- insofar as if you had taken that position, these bonus recipients would have been in the same position as the taxpayers of the United States. They would have had to sue and wait until the resolve of whether AIG succeeds or not or goes the distance of the suit would be two or three years.
The worst that could have happened would be a penalty fee under the laws of the state involved. But if, in the meantime, an election were made to take AIG into the bankruptcy or some other relief, those funds would not have been paid.
Now, I indicated to you I thought that you were missing the gravity of the situation in terms of that if the American people were responding to they had enough. This was an unreasonable action on the part of AIG to pay these funds.
So in your testimony today, I hope you address some of these ideas. And with no further assertion on my part and looking forward to the questions, Mr. Liddy, if you will summarize your testimony, we'll allow you some leeway because of the evolving situation. So provide it all, and you may proceed.
UNIDENTIFIED MALE: Mr. Chairman, I don't know how long Mr. Liddy's statement is, but I would -- because of the gravity of this matter, even if it's 10 minutes, I would...
KANJORSKI: Absolutely. I'll be very lenient. Mr. Liddy can take all the time he wishes to respond to the committee, I hope. But I'm going to be heavy on the gavel because there's a lot of criticism at the lower levels of the committee that we haven't gotten down to. And I assume there's nobody at this hearing today that isn't going want their five minutes with Mr. Liddy.
So I'm going hold everybody to their five minutes and probably be annoying by slapping the gavel.
Mr. Liddy, proceed.
LIDDY: Thank you, Chairman Kanjorski, Ranking Member Garrett, members of the subcommittee. I appreciate the opportunity to appear before you as the representatives of the largest shareholder we have, the American people.
My name is Edward Liddy. Six months ago, I came out of retirement to help my country. At the government's request, I've had the duty and extraordinary challenge of serving as chairman and chief executive officer of American Insurance Group or AIG.
I speak to you today on behalf of the 116,000 AIG employees around the world who are remarkably united around one simple belief; when you owe someone money, you pay that money back.
I'm sure we all share that belief. I believe that you and I also share a common agenda today to clean up the mess at AIG and, in the process, help get the American economy moving again.
Let me speak directly to the situation at AIG that has sparked the nation's outrage over the past several days. No one knows better than I that AIG has been the recipient of generous amounts of government aid. We are acutely aware not only that we must be good stewards of the public funds we have received but that the patience of the American -- of America's taxpayers is, indeed, wearing thin.
Where that patience is especially thin is on the question of compensation. I am personally mindful both of the environment in which we are operating and the president's call for a more restrained compensation system. At the same time, we are essentially operating AIG on behalf of the American taxpayer so that we can maximize the amount we pay back to the government as quickly as possible.
We weigh every decision we make with one priority in mind. Will this action help our ability to pay monies back to the government or hurt it? Although we have wound down more than $1 trillion in the portfolio of AIG Financial Products, roughly a third from its peak, the unit that is at root of our financial problems, that portfolio remains very large -- $1.6 trillion. And it continues to contain substantial risk.
The financial downside for taxpayers is potentially very large, and it's very real. And that's why we're winding down that business as quickly as possible.
To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based upon a compensation system that prior management put in place at the end of '07 and the beginning of 2008. Payments were made to employees in the Financial Products unit that caused many of AIG's problems, and Americans are asking quite simply, why pay these people anything at all.
Here's why. I'm trying desperately to prevent an uncontrolled collapse of that business. This is the only way to improve AIG's ability to pay taxpayers back quickly and completely and the only way to avoid a systemic shock to the economy that the U.S. government help was meant to relieve.
Make no mistake. Had I been CEO at the time, I would never have approved the retention contracts that were put in place over a year ago. It was distasteful to have to make these payments, but we concluded that the risk to the company and, therefore, the financial system in the economy, were unacceptably high. And if not paid, we ran the risk that we would have happen what everyone has worked so hard thus far not to have happen.
That said, we've heard the American people loudly and clearly these past few days. The payment of large bonuses to people not very unit that caused so much of AIG's financial troubles does not sit well with the American taxpayer in any way, shape, or form and for a good reason.
Accordingly, this morning, I've asked the employees of AIG Financial Products to step up and do the right thing. Specifically, I've asked those who received retention payments in excess of $100,000 or more to return at least half of those payments. Some have already stepped forward and offered to give up a hundred percent of their payments.
The action we are taking today is a result of discussions with numerous parties, many of you, including Attorney General Cuomo of New York. We will work to ensure the highest level of employee participation in this effort in the days ahead and will keep the Congress and the American people informed of our progress.
Now, obviously, we are meeting today at a high point much public anger and I share that anger. As a businessman of some 37 years, I've seen the good side of capitalism. But over the last few months, in reviewing how AIG has been run in prior years, I've also seen evidence of its bad side.
Mistakes were made at AIG on a scale few could have ever imagined possible. The most critical of those was the creation of a credit default swap portfolio which eventually became subject to massive collateral calls that created a liquidity crisis for AIG.
I agreed to take the reins at AIG last September after the company had turned to the U.S. government for financial support. On behalf of my colleagues, I want to thank the Federal Reserve and the U.S. Treasury and the American taxpayer for making the extraordinary tough call to provide that support.
It has meant that, together, we have been able to preserve jobs and businesses and, most importantly, protect policy holders who rely on the promise of insurance to secure their well-being. We are moving urgently on a business plan designed to maximize the value of our four businesses so that, in turn, we can maximize the amount that we repay to the American taxpayer.
We, at AIG, want to believe that we are all in this together. I've led AIG for six months, and I want to assure you that the people there today are working as hard as we can to solve this problem for the benefit of America's taxpayer. And, quite frankly, we need your help. We need the support of the Congress to do this. And if we do it together, I've confident we can achieve two hugely important things.
First, repayment of AIG's debt to the government to the maximum extent possible. And second, and perhaps equally important, a solution to AIG's condition that is a giant stepping stone to the economic recovery we all desire.
With that, Mr. Chairman, I would request that my remarks and several additional comments be included in the hearing records. And I'm happy to respond to your questions or those of the members.
KANJORSKI: Thank you very much, Mr. Liddy.
I guess my first question is, you've just announced that some of your members or employees that received those bonuses after Saturday this week have agreed to return it. Why couldn't that have been negotiated for the last two months? And why couldn't that information have been made available to both this committee, to the secretary of the treasury, and to the chairman of the Federal Reserve?
LIDDY: I think there's two parts to that question, sir. Let me see if I can address them in turn.
We've been working on this issue of what to do with these retention payments. We've made the information publicly available in our various 10-K filings and 8-Ks and (INAUDIBLE). The decision we made -- I made -- was as much one of risk assessment as it was blindly following legal advice. The risk assessment was we've made great progress in winding down this business, but there is still $1.6 trillion of stuff in that portfolio.
There's risk that that could blow up. And if it were to explode, it can cause irreparable damage to that progress that we've already made.
KANJORSKI: Necessitating, Mr. Liddy, a further investment of the American taxpayers in (INAUDIBLE) with equity if we were to keep you solvent.
LIDDY: Would you repeat that, sir?
KANJORSKI: The risk is if those assets deteriorate or blow up, you would either go into total destruction or have to come back to the United States government and this Congress for additional funds.
LIDDY: Yes. I think that's exactly correct, sir.
So the judgment that we made, in cooperation with the Federal Reserve -- we treat the Federal Reserve as our very important partners. The decision we made was that we could preserve that unit and continue to wind it down in a very orderly fashion and not expose the taxpayer and the company for the risks that, heretofore, they've been exposed to.
I know $165 million is a very large number. It's a very large number. In the context of $1.6 trillion and the money that's already been invested in us, we thought that was a good trade.
KANJORSKI: Am I to understand you're saying that Chairman Bernanke or his designated person at the Federal Reserve was informed that you were going to make these payments and acquiesced in that decision?
LIDDY: Yes. Everything we do, we do in the partnership with the Federal Reserve. The Federal Reserve is at our board meetings, at our compensation committee meetings, at our various meetings on strategy. And they have the ability to weigh in either yea or nay on anything that we decide.
KANJORSKI: Why wasn't this committee informed, as you had previously indicated that you would put a plan together and you would immediately, after that plan was submitted to Treasury and to the Federal Reserve make us aware of what that plan was?
Why did you hold us in the absence of that information and make the payments on a Saturday night?
LIDDY: Sir, there was no intent to deceive or hide anything. These payments were due to be paid on March 15th. We've been discussing this issue at large with many of the people's staff that are represented here today and with the Federal Reserve since...
KANJORSKI: You purposely did not discuss this with my staff?
LIDDY: I don't remember, sir, whether we discussed all of the particulars of this with your staff or not. I would just like to make the point that there's no attempt to do anything under the stealth of darkness or under cover. We wanted to do what was right in these contracts, the contracts called for a payment on March 15th. And we've done that. We've been talking about this within the board and within the -- with our representatives at the Federal Reserve, literally, for three months.
KANJORSKI: And with the secretary of treasury?
LIDDY: No. The way our relationship generally works is we review things with the Federal Reserve, and the Federal Reserve, if they think it's appropriate, discusses it with the secretary of the treasury or with representatives at Treasury.
I've asked if the Federal Reserve would like us to have a separate line of communication with Treasury or not. And I've asked Treasury. I think they're trying to get as efficient a process as possible.
KANJORSKI: Are you aware of the fact that probably the funds available, the TARP funds, will run out shortly and the likelihood is additional funds will have to be secured by action and authority of Congress?
LIDDY: I am.
KANJORSKI: And do you realize that the actions that you take at AIG and took in this precise case not only impacts AIG and the potential of that reality occurring that you described, but it may have jeopardized our ability to get a majority of this Congress to support further largesse to provide funds to prevent a recession, depression or meltdown.
Are you aware that that's the process of your decision and how important it was?
LIDDY: I am, sir, although I think there's also a question of -- of another element, and that is, if something happens to AIG and it goes bankrupt or goes belly up and puts that risk -- all the money that has already been put into it, that also can have dire consequences.
So it's an issue of, can we stabilize the AIGFP situation, run it down so nothing untoward happens there, and reach (INAUDIBLE) promise of paying back the taxpayer.
KANJORSKI: Well, not to argue that point further, but you're going to serve further. Are we to assume that you're going to continue this process of decisionmaking and disclosure of talking only to the Federal Reserve and not informing the Congress or the American people or the executive branch of this government?
LIDDY: I -- I will do it in any way that you and the Federal Reserve ask -- ask us to do it. Heretofore what we've assumed is that, in our discussions with the Federal Reserve, that they were being properly communicated with others. That appears that we need to improve upon that process. We'll do everything we can to do that.
KANJORSKI: All right. My time has expired.
REP. SCOTT GARRETT (R-NJ), RANKING MEMBER: I thank you.
First, with -- opening, appreciate your service and recognize the fact that you have to step up to this situation. The chairman didn't -- make mention of the fact -- I guess it's in the press -- as far as, apparently physical threats, what have you, to yourself or to your family, which, of course, are condemnable. And no one should be going through that.
Secondly, along this line, we realize how difficult I understand it is to get people to fill spots like this, and also we recognize right now the treasury secretary has had his dilemma in filling spots, as well.
It may be because the government has engaged in an activity that it's never engaged in before, basically crossing the line between public and private, and the conflicts then are inherent there that we have to have a public discussion of what otherwise would be private activity. This is something that Congress needs to consider going forward as we put this forward.
I would just raise one -- much of the discussion will be on the bonuses. I'll just raise one -- one question with regard to that, and it goes along the line as far as who knew what when, what have you. I appreciate your comment with regard to discussions that you've had with -- with the Fed on this.
I would presume that, even though the Treasury was not sitting in at those meetings, that the information should still be hopefully flowing back from the Fed to the Treasury. You probably don't have any personal knowledge on that.
LIDDY: I don't. I'm pretty sure that it did, but I'd be hard pressed to prove that to you.
GARRETT: And the reason is this, because there's stories in the paper today and yesterday saying that the White House has now instructed the Treasury to try to engage in some clawback provisions in use of the TARP language and pass legislation to engage in trying to get some or all of this money back.
And I'm reading that, and I'm wondering, is the White House basically then second-guessing what the treasury secretary must have known, at least I will assume that the treasury secretary must have known for a period of time, A, through these discussions with the Fed and, B, just by the fact that the treasury secretary is from Wall Street and we sort of know that these are -- this type of employment contract and contingency contract is not unique to top-level management.
I presume you would agree?
LIDDY: I'm sorry, Mr. Garrett. The treasury secretary is from...
GARRETT: Well, the -- well, the treasury secretary obviously comes from a financial history. He comes from having been involved with the AIG situation in the past administration, as well. And whether you had that conversation with him or not, some of this is sort of obvious on the face that these types of employment contracts would have been there.
So it's just puzzling to me that the White House now seems to be second-guessing the decision that the treasury secretary made, if he allowed this to go forward.
LIDDY: Yes, I don't -- I don't have a comment on that. I talked to the treasury secretary last week, and he indicated to me that the first he had heard about -- heard of this whole situation was about a week before that. So I -- I don't know where all of the...
LIDDY: ... where all the rubber meets the road, so to speak.
GARRETT: One of the -- final question is on the bigger picture. And that is, how do we get the taxpayer off the hook going forward? Is there basically, in a word, an exit strategy here for the government to get out from under this?
LIDDY: There is.
GARRETT: Is that exit strategy basically in part to sell off some of the assets? And if that is the case, do you see -- I know you haven't been able to do it now, because of the global economic climate. Is there anything that you would see in the near future that any of this exit strategy is really going to engage itself?
LIDDY: The exit strategy, I think, is a solid one. It's been in place for a while now. And it's sell whatever assets we can, use that money to pay back the Federal Reserve and the TARP money.
To the extent we -- we can't sell an asset, we're going to ring- fence it, put it in a -- in a separate trust, and actually give that asset to the Federal Reserve as satisfaction of the debt.
LIDDY: And then, when that asset can be taken public or it can be sold, we would actually -- then the Federal Reserve would decide to sell it. So there is an exit strategy. I think it will work. But it's very market-dependent.
GARRETT: And the final question, the area is this. The number you gave was $1.7 trillion?
LIDDY: $1.6 trillion.
GARRETT: $1.6 trillion. The testimony on the earlier panel was talking about just the derivative aspect, and you originally said it was $360 billion or $370 billion on the foreign derivatives overseas and around $80 billion or $90 billion here, adds up to $400 billion something. So where -- why is that number different than what you see as being the outstanding...
LIDDY: I believe the prior testimony, which I -- which I was watching -- -- had more to do with credit default kinds of things.
LIDDY: But in addition to that, there's all kinds of derivative contracts. There are currency contracts, interest rate contracts, oil contracts, a whole series of contracts.
So there are three measures. Let me see if I can clarify that for you. There's a measure of, how many dollars of notional exposure is there? At the beginning of 2008, that was $2.7 trillion. It's now $1.6 trillion. We've made great progress winding it down.
With respect to the credit default swaps that have caused us all the difficulty, that number started out at about $80 billion. It's now about $10 billion.
LIDDY: And then there's another category called regulatory capital trades, and that started out at about $350 billion. It's now down to $230 billion, and we'll get it down to -- to considerably less than that by the end of the first quarter in 2010. So there -- there are different metrics designed to measure different things.
GARRETT: I appreciate your answers. Thank you.
KANJORSKI: I think you've tried my patience now. The pink ladies, the signs are either going to be removed from the room or you're going to be removed from the room before I recognize another speaker. Now, do you wish to remain in the room?
Those of you that are in pink with the signs, are you going to surrender those signs so that they can be held for you later on, or do you want to be removed from the room?
KANJORSKI: Officers, take the signs. Now, if I see any more signs on camera, you're going to be physically removed from this room.
The chair now recognizes the chairman of the full committee, Mr. Frank of Massachusetts.
REP. BARNEY FRANK (D-MA), CHAIRMAN, HOUSE FINANCIAL COMMITTEE: Thank you, Mr. Chairman.
Given your method of dealing with this, I assume it's a good thing no one was wearing a T-shirt with a slogan.
The -- let me begin by repeating what Mr. Geithner has said and others. Mr. Liddy is in no way responsible for these bonuses having been agreed to. He as a public service agreed to come in and inherited a situation.
I disagree with some of the ways in which he's handled it, but there ought to be a clear distinction between people who had a responsibility for creating the situation and those given the responsibility for handling it, who may differ with us.
And, frankly, on some of those signs talking about jail with regard to Mr. Liddy, they were entirely inappropriate and not, it seems to me, seemly for people who believe in civil liberties and fairness to incorrectly suggest that there was any criminality on the part of this witness.
Now, having said that, I do want to say, also, I have said several times I think the time has come to make some changes. And, indeed, I think the time has come for the Federal Reserve to assert greater ownership rights.
That's in part motivated by what I would think was a stronger legal position. If we sued against these bonuses as the owner, charging that there had not been adequate performance to justify the bonuses, as opposed to as a regulator, I think many, myself included, would have more comfort with the federal government as a party, an interest, as the actual owner, saying, "We are exercising ownership rights not to have paid out bonuses when there was a poor performance," than for the federal government to interfere with an existing third-party contract.
I also have said that I thought there should be some people removed, and I was not talking about Mr. Liddy. And I may not have been as clear about that. I am very critical of the people who put these contracts in place.
As I read earlier from the contract, there was a pool of money to be distributed and then it says, "But losses are to be subtracted from that," but the losses that can be subtracted to it are capped by $65 million.
Let me just ask you, Mr. Liddy, is it possible, under the way these contracts were written, that you inherited, that the company as a whole could have lost money, but there still would have been a bonus pool to distribute to the employees?
LIDDY: Congressman, I -- I think the contracts that you are reading from have to do with performance bonuses. No performance bonuses at F.P., zero. It's a different issue than the retention bonuses, where we basically said to people, "You have a job. That job's going to go away after you wind down the book of business that you manage. If you'll stay"...
FRANK: So you're talking about the only bonuses that were paid recently were the retention bonuses?
FRANK: There were no other bonuses paid?
LIDDY: Not -- not at AIGFP. No, I don't believe so.
FRANK: All right. And the retention bonuses, some people were told who got retention bonuses have since left, is that correct?
LIDDY: The -- yes, sir. The...
FRANK: Did they give back their retention bonuses?
LIDDY: No. The arrangement is, if you stay, wind down your particular business, do a good job of it, and we're comfortable with the job you've done, you'll get that retention bonus.
FRANK: So some of these were people who got a retention bonus and then they left -- what -- what would be the average period of time after which people got a retention bonus that they left? I don't expect you to know that off the top of your head; I'd ask you to submit it to us.
FRANK: One other issue before I get to -- well, two others. You are optimistic in here about paying down the Federal Reserve debt. You don't mention the debt to the Treasury. Is that next, after the Federal Reserve debt?
LIDDY: Yes. It's really important for us, sir, to pay the debt down first so the rating agencies remain relaxed...
FRANK: As opposed to the TARP, which is considered a different category? Is that the -- the...
LIDDY: ... although could I clarify? I think there's some confusion. Right now, the federal government has invested two major tranches of money in us. One is $40 billion of TARP, and the other is...
LIDDY: ... just under $38 billion of a loan from the Federal Reserve. That's it. It's $78 billion. There's another $30 billion of TARP, which is available to us, if we have to draw...
FRANK: Which (INAUDIBLE) and you're talking about paying off the Federal Reserve debt, the $38 billion?
LIDDY: The order in which we would do things is, first, the Federal Reserve debt and then the TARP dollars.
FRANK: Next question, before I ask you my final one. While I'm running out of time, I would be interested in your submitting in writing, given your experience, whether we should be dealing with this question of an orderly resolution procedure.
You were put in place where there wasn't any. The secretary of the treasury previously and currently have said we need an orderly way to wind down a troubled non-bank.
But let me ask you this now, and you said some people are giving the -- the bonuses back. I'm now asking you to send us the names of those who received bonuses who have not given them back. Can you do that?
LIDDY: Sir, I -- I will, if I can be absolutely assured that they will remain confidential.
FRANK: Well, I -- I won't give you that assurance, sir. And so if that's the condition, it would be my intention to ask this committee to subpoena them.
And I would -- this is a situation where there's a lot of public activity. I ask you to submit the names of the people who've received the bonuses, noting that they paid them back or not, and I won't accept them under confidentiality, personally. In fact, you submitted some confidential information and I, frankly, threw it away after reading it, because I was afraid I would inadvertently breach the confidentiality.
But I -- I do ask that you submit those names without restriction. And if you feel unable to do that, then I will ask the committee to subpoena them.
LIDDY: Congressman, if -- if you'll -- if you'll let me explain, I very much want to comply with your request. I would hope it doesn't take a subpoena. If -- if it does, then we will obviously comply with the law.
I'm just really concerned about the safety of our people, so let -- let me just read two things to you. "All the executives and their families should be executed with piano wire around their necks." "My greatest hope: If the government can't do this properly, we, the people, will take it in our own hands and see that justice is done. I'm looking for all the CEOs names, kids, where they live, et cetera."
You -- you have a legitimate request.
LIDDY: But I want to protect the well-being of our employees.
FRANK: Could I get an additional minute by unanimous consent, because this is a subject to be addressed?
FRANK: I -- I understand that. Many of us get these kinds of threats. Clearly, those threats are despicable, people who engage in this kind of threat. And I would say to my colleagues, the rhetoric can get overheated, so we ought to be very careful.
That's why I want to be very clear, Mr. Liddy, that I disagree with the way you've handled this, but I understand that you inherited it. I disagree with the people who wrote those contracts, but it did not appear to me to be criminal.
I will be willing to be guided to some extent by what the security officials may say, but this is an important public subject. And my guess is that there are probably threats aimed, without too much specificity, about people who work there.
(LIVE COVERAGE CONTINUED IN 1400 HOUR OF CNN NEWSROOM)