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AIG Chariman & CEO Edward Liddy Appears Before House Finance Committee

Aired March 18, 2009 - 14:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

(CONTINUED LIVE COVERAGE OF AIG CEO EDWARD LIDDY SPEAKING BEFORE HOUSE FINANCE COMMITTEE)

REP. BARNEY FRANK (D-MA), CHAIRMAN, HOUSE FINANCIAL COMMITTEE: So I am going to keep that request on the table. I will consult with the law enforcement people, including the federal law enforcement people. And if they tell us they think there is a serious threat, we will have to take that into consideration.

But I -- I do want to keep that request on the table, and it is subject to our being persuaded. If I ask for a subpoena, it would be a committee markup. It's not a unilateral decision. And, yes, it's legitimate to take into account.

I have to say that that is -- if we give in to these kind of threats, we would never get information made public about a lot of things. And I would certainly ask that the state and local and federal law enforcement officials get full cooperation, and I would urge that any threat that anybody even comes close to carrying out or even threats (INAUDIBLE) be prosecuted.

But at this point, I am persuaded, but it is a -- I will ask before we act if we get information from the security people and then I'll be before the committee when we vote.

Thank you, Mr. Chairman.

EDWARD LIDDY, CHAIRMAN & CEO, AMERICAN INTERNATIONAL GROUP: Thank you, sir. We'll wait to have more decision with you.

REP. PAUL E. KANJORSKI (D-PA), CHAIRMAN, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES: Thank you very much, Mr. Frank.

The gentleman from New Jersey -- from Alabama, Mr. Bachus.

REP. SPENCER BACHUS (R), ALABAMA: Thank you.

Mr. Liddy, mark-to-market, I think, is good in concept but insurance and banking CEOs are telling me that it is not working well in a distressed market. I'd like your comments on modifications I and others have proposed and, in general, modifications and how it might help AIG to increase the likelihood of the taxpayers being fully reimbursed.

LIDDY: Yes, sir. I think mark-to-market is a good concept run amuck. On balance, knowing what something is worth every day is a good thing, but it presumes that there's a market. It prepares that there's a willing buyer and a willing seller.

When liquidity completely dries up, there's not a willing buyer so you have to keep marking the value of the assets down to an unwilling buyer level. In insurance companies, we have a long liability. We will insure your life. And we will match it with a long-dated asset. Those long-dated assets like commercial mortgage- backed securities and residential mortgage-backed securities, because they're long-dated, they are not liquid right now. And they have been buffeted in value unlike anything most of us have ever seen.

As a result of that, AIG and many other insurance companies have had to write the value of those assets down, and it's caused great stress on the liquidity.

So I'm a believer in mark-to-market, but I think it's not a one- size-fits-all. And I think it's not a one-size-fits-all with respect to all the various assets to which it applies. I think it is important that some adjustment be made.

To be honest with you, much of the damage is already done. But that's not an argument for not closing the door. We still close the door and, perhaps, be more prudent about how we apply it starting with this quarter, the first quarter of 2009 going forward.

And maybe it would be critical to get that guidance out before those first quarter reports.

LIDDY: Yes. I know this topic has been discussed before, and it made sense to me to not do anything in 2008. You kind of can't do it in the fourth quarter of the year. But to start afresh with the new quarter of 2009, to the extent it's possible, that makes sense to me.

BACHUS: Thank you. You said that you've unwound all but about $10,000 worth of credit default swaps. That's very good news. That's $70 billion. What about the balance sheet rental?

When you were talking about regulatory capital, was that the same thing or a different thing?

LIDDY: No. That's the balance sheet rental. The regulatory capital trades are really of a substantially different nature. They don't require -- for the most part, they don't require the collateral postings that the credit default swaps did. It's pay-as-you-go.

If a company actually doesn't get a payment, then you have to make them whole. What's happened -- and the fellow -- a couple of the individuals on the previous panel did a great job, I thought, of explaining that. With the AIG credit default swaps, was we did was we insured the value. So when the value went down, we to post- collateral.

In most cases, what you're doing is you're insuring the payment. Regulatory capital works in an entirely different way.

BACHUS: What, on the balance sheet rental -- have you had progress in that regard?

LIDDY: Yes. That number was, at its height -- I'm going to give you box car numbers. I don't remember it precisely. It was $350 billion or $370 billion. It is now down to $230 billion. And because of some things that are happening in the regulatory environment in Europe, that will be reduced by 95 percent by the end of the first quarter next year.

BACHUS: All right. Let me -- you know, I've had some problems. We used that figure $170 billion bailout money that the taxpayers are owed.

LIDDY: Yes.

BACHUS: Now, I'm aware of the federal loan which is $37.8 billion. The $40 billion TARP, now, that's $77 billion, $78 billion. Is that what is actually owed? Or is it $170 billion?

LIDDY: No, it's $78 billion that is actually owed. Let me -- if you would, let me break down the pieces. $40 billion of TARP money, you're a hundred percent correct. $37.8 billion at the end of the 2008; it might have gone up a skosh. It's in the range of $80 billion is what we actually owe.

Now, the Federal Reserve invested in some of our distressed assets. They bought into financing vehicles that have RMBSs in them...

BACHUS: Those are the Maiden Lane?

LIDDY: Yes. Maiden Lane II and III. They were able to acquire those assets at a discount at $0.40 or $0.50 or $0.60 on the dollar. They are current performing. There's been no credit losses on them. And they are a patient investor. They, and the American public, will do very well on that investment.

So I believe what frequently happens is people take the 40 and they take -- we can have as much as $60 billion in the Federal Reserve. We've only tapped into, let's call it, $40 billion. But analysts -- writers will take 40 plus 60 plus the $50 billion of assets that the Federal Reserve has invested in and a few other things and they get to that $170 billion number.

It's an important distinction because for us to pay off what we owe the federal government, it's roughly an $80 billion target right now. And we can do that. But we need some help from the markets to be able to do it.

BACHUS: Thank you.

Let me say this, Mr. Chairman, as I close. It's my understanding most of those assets, they were -- like you say, they were $0.45, $0.50 on a dollar. Now, in the private -- in the markets, general, they're trading about $0.90 on the dollar.

Is that...

LIDDY: No, that's too high, sir. That's too high.

They are down -- it depends upon the specific assets, but they are probably anywhere from $0.30 to $0.75. It depends upon the assets. But the really important thing is they are currently pay. You know, for every dollar that's owed on those, $0.96, or $0.97, or $0.98 is being paid.

BACHUS: That's performing?

LIDDY: Yes.

BACHUS: So they're performing?

LIDDY: Yes. They are performing.

BACHUS: And, you know, when you talk about $1.6 trillion under management and you having to have people to manage that I would say to the committee, we're talking about one -- we're talking about -- this is a big number, but 1 million 600 thousand million. That's a pretty big figure.

LIDDY: That really is the risk tradeoff that we made. I don't want that book to blow up and cause to come undone all that we've achieved, all that you all have achieved thus far.

You know, do other reasonable people see it in an entirely different way? Yes. Is the American public mad as a hornet about it? Yes. Would I have liked not to have made those payments? Yes.

But I don't want that business to erupt on us and cause the difficulties we've tried so hard to avoid.

BACHUS: I think that is the definition of the risk if those aren't properly managed is a million six hundred thousand million.

So we ought to all keep that in mind when we talk about you having the skill to manage those.

Thank you.

KANJORSKI: Thank you, Mr. Bachus.

Mr. Liddy, you have basically been parachute in to the helm of a ship that's already hit the rock and you get no pay. You get a buck a year. You have no stock options. It's my understanding you have no financial upside no matter how good a job you might do. And on behalf of a lot of people I want to thank you for rising to the occasion to take on the task of setting this thing straight to the best of your ability.

LIDDY: Thank you, sir.

KANJORSKI: You're going to hit some bumps in the road, but you have no right and neither do the good people who work for your company to be subjected to the kinds of things that you've been subjected to and the threats to yourself or your family from anybody.

And I just want to apologize on behalf of the millions and millions of decent Americans who understand, really, what is going on but are nonetheless frustrated. We are here to help you over those bumps in the road because you're not going to make perfect decisions all the time.

And you've just hit one of those bumps in the road. So I want to try to help you, but maybe you can...

LIDDY: Thank you. I need all the help I can get.

KANJORSKI: All right. This old school teacher is going to give you a little bit of advice. Pay the $165 million back. Those -- that bonus money that has been given out, circumstances understood very clearly, you have a legal question here. But you have received or have access to $197,300,000,000 of U.S. taxpayer money -- $165 million adds up to this old math teacher as less than one-tenth of 1 percent. That's not worth the aggravation, the angst that you have suffered and that this country is going through.

Give that back. Cut your losses in financial terms. It just ain't worth it. Do you think you could consider doing that and then pursue the legal options, if you wish, of litigation against the people who do not want to give it back or haven't give it back?

LIDDY: Sir, that's what I've attempted to set in motion this morning is I've asked the folks at AIGFP to, in fact, return that money, give it back, at least 50 percent of it. And for the leadership group, a hundred percent of it.

The issue -- I never got a chance a moment ago to fully explain the legal side of it, and I'm not one that hides behind the legal aspect of it. What we can't do is have a group of individuals or have an event which causes AIGFP to get into a situation of cross-default. If it does that, it will be bankruptcy, and it won't be a very good picture.

KANJORSKI: Take it out of your profit down the road. Eat it now. It's a lot sweeter now than it's going to be later because you've got legislation coming down the pike that they're going to call "I can't believe it's not water boarding."

LIDDY: What I'd like to do, sir, is see how much leadership comes from the AIGFP people in terms of returning those bonuses. My fear is the damage is done; that we will get the bulk of that money back. They will return it. But they will return it with their resignations. And we do, in fact, run the risk of that business being much more difficult to wind down than we ever anticipated.

That is not a concession of defeat. We will do everything we can to make sure that that business gets wound down professionally, quickly, and efficiently.

KANJORSKI: You are talking about the business of credit default swaps?

LIDDY: No, I am really talking about the $1.6 trillion. We're pretty much done with credit default swaps.

KANJORSKI: Is credit default swaps a bad idea?

LIDDY: No, a credit default swap is, I think, a very legitimate product. It just needs much more visibility, and you can't use the language and the...

KANJORSKI: Can I -- can I edit one of your words, "visibility," and say "transparency"? The reason this country is great and our system works better than any is because of its transparency. And our capital markets work great, better than any others, because of transparency.

And the fact that Mr. Madoff said I can't tell you the secrets of my business because they're secret; that's why I'm successful, that's what got everybody all screwed up is nobody knew what he was doing and he was just too big to fail.

The credit default industry is Madoff writ large. People are buying into what they don't understand. They can't see through it. It is completely unregulated by any agency that we know of or have been told today by the regulators. It has no finances to back it up and can't pay off on a bad debt, on a bad bet. There's people sitting around shooting craps without a wallet.

And I don't think that's a good financial investment. Do you?

LIDDY: Well, I wholeheartedly accept your edit. "Transparency" is a number word. With transparency and the right contract, a credit default swap can serve a purpose. That is not what we had. We did not have transparency, and we did not have a good contract.

KANJORSKI: My time is expired.

Mr. Price?

Mr. Castle? In that case, Mr. Castle.

REP. MICHAEL N. CASTLE (R), DELAWARE: Thank you, Mr. Chairman.

And thank you, Mr. Liddy, for being here today.

I am very interested in the events that have occurred about the time that you came to AIG and in terms of the federal government role in all of this going back to the first tranche which I understand was issued by the Fed Bank of New York, as a matter of fact. I think Mr. Geithner was heading it at that time.

Can you tell us -- and it was at that point that the federal government became the owner of 89 point some percent of AIG stock, and so we game a majority stockholder at that time.

Can you tell us what the federal government participation has been since that time in terms of meetings that have occurred either with the Fed of New York or the greater Federal Reserve here in Washington and the Treasury Department?

LIDDY: I can. Our interaction is primarily with the Federal Reserve Bank of New York. They have observer or overseer powers over us.

They've assigned an excellent cadre of people to understanding our business. That cadre of people have brought in experts from Morgan Stanley, from Ernst & Young, to supplement them, since the Federal Reserve primarily is a regulator of banks, not of -- not of insurance companies.

As I said earlier, I -- I very much view the relationship as a partnership. We do not do a single thing of strategic import without making certain that we've talked to the Federal Reserve about it and we've given them an opportunity to -- to weigh in on it.

The Federal Reserve...

CASTLE: I don't mean to interrupt you, but you said in your testimony on page four in the writing -- it says, "Working with our partners at the Federal Reserve and U.S. Treasury."

LIDDY: Well...

CASTLE: You've -- you've been talking about the Federal Reserve so far.

LIDDY: No, I really am just talking about the Federal Reserve. As -- as I've talked to the Federal Reserve, and I've talked to the U.S. Treasury, they have encouraged us to primarily deal with one regulator or one overseer, and that's been the Federal Reserve, and that's -- that's exactly what -- what we have done.

CASTLE: And the Federal Reserve has been a participant in -- at your board meetings. I'm not sure they have a vote, but they've been a participant at your board meetings and in other significant meetings in terms of reviewing policy since that time in October?

LIDDY: Yes. Absolutely, yes. And -- and it goes well beyond that. I mean, it goes -- it goes to participation in all the things that lead up to board meetings or -- or committee meetings.

CASTLE: And it's -- it's been a variety, either outsiders they brought in or people from the Federal Reserve who participated in these meetings, is that...

LIDDY: Yes, sir.

CASTLE: ... is that correct?

And you indicated that you assumed that they had shared that information earlier in testimony today. You assumed they had shared that -- that information with Treasury and -- and with other -- and with Congress, for all that matters. Is -- is -- is that correct? LIDDY: Yes. As I mentioned, I had a...

CASTLE: Not correct it happened, correct that that was an assumption you made.

LIDDY: Yes. And I had a conversation with Treasury Secretary Geithner about a week ago, and he indicated to me that -- that he had only become aware of the situation about -- about a week prior to that.

And we have tried to keep the staffs of various members of Congress apprised of all of the situation and -- and be very responsive to whatever queries you may have. I think we've done a good job of that.

CASTLE: Well, if...

LIDDY: But you're judge of that.

CASTLE: If Treasury Secretary Geithner was the head of the New York Federal Reserve and his people were participating in the meetings that you had thereafter, would -- would he not have known from them or was he even a participating in the meetings, at least until he became secretary of the treasury?

LIDDY: You know, you're really -- I don't know. You really have to ask the Federal Reserve that as to how -- how much was there in the chain of command that would have gone all the way up to Mr. Geithner. I don't know the answer to that.

CASTLE: Did he participate in any of the meetings when he was still at the Federal Reserve in New York?

LIDDY: In -- in several, yes, although once he was nominated as a -- as a potential secretary of the U.S. Treasury, he -- he recused himself from any of those situations.

CASTLE: Now, you -- you indicated that the Federal Reserve could say yea or nay at these various meetings, and I assume these are -- are probably board meetings or some subset of the board...

LIDDY: Correct.

CASTLE: ... executive committee-type meetings or whatever.

LIDDY: Right.

CASTLE: Could -- did they -- did they actually have the right to say yea or nay on -- on decisions such as bonuses or whatever, or did you just assume that they were there and they could have said something if they wanted to?

How -- how do you interpret their powers?

LIDDY: Well, I -- I generally asked them. I asked them if they're OK or if they have a comment on it, which is my way of making certain that if there's a different point of view that should be heard or should be voiced, that there's an opportunity for it to be heard.

CASTLE: And they did not say nay as far as these bonuses were concerned.

LIDDY: No, there was -- there was -- there was great angst over the payment of these bonuses, believe me, on -- on all of our parts, including the Federal Reserve, and the judgment, as I said -- I'm sorry to be repetitive -- the judgment we made was the risk was too great that we would lose all the progress we made if we didn't pay these bonuses.

CASTLE: I -- I have a request, Mr. Chairman, as I close here, and would it -- would it be possible to ask if Mr. Liddy or those working with him could submit a list and -- and the chronology of -- of the meetings that occurred in which the Fed was available there, and who was there, and the basic outline of what was discussed at that meeting?

KANJORSKI: Would you submit that in writing?

CASTLE: Could you submit that in writing? I'm not asking you to do it now.

LIDDY: We don't have it available to us right now.

(CROSSTALK)

CASTLE: No, would you submit it in writing? Could you go back and after several days be able to -- to submit...

LIDDY: Yes.

CASTLE: ... something of that nature, looking at your minutes or whatever?

LIDDY: Yes.

KANJORSKI: Thank you.

CASTLE: Yeah, from your board minutes or -- or whatever you -- other writing you might have. Thank you.

KANJORSKI: The answer was yes.

Before moving to Mr. Sherman, if the committee would indulge a quick clarification, if you could give us a yes or no, during the exchange with Chairman Frank requesting a list of those people who have accepted the bonuses or to whom bonuses were given, you also referenced the -- the fact that you were going to cooperate with Attorney General Cuomo in New York.

He has, indeed, already subpoenaed those names. Does that mean you will be cooperating with that subpoena?

LIDDY: We have not provided those names to the attorney general...

(CROSSTALK)

KANJORSKI: The question was will you cooperate with the attorney general's subpoena.

LIDDY: I -- I will talk to my -- my general counsel about it, and we will do the right thing.

KANJORSKI: Does the right thing include complying with legal requests from attorneys general?

LIDDY: We -- we -- we always comply. We do everything we're -- we are required to do and more with respect to obeying the law.

KANJORSKI: So that will be a yes, you will supply the names subpoenaed?

LIDDY: I -- I'm sorry to be so evasive. I just want to protect our employees.

KANJORSKI: No, it's easy. You don't have to be evasive.

LIDDY: I just...

KANJORSKI: It's really yes or no.

LIDDY: ... just want to protect our employees. So if someone can just assure me that what's not going to happen is a list of names, addresses, and dollars and pictures and, therefore, they're even more at risk than they are right now...

KANJORSKI: You're not giving it to a bunch of congressmen, now. You're giving it to an attorney general of...

LIDDY: No, I -- believe me, I...

KANJORSKI: ... a big state.

LIDDY: Believe me, I understand that. And it would be our intent to comply with the -- with the subpoena.

KANJORSKI: Thank you.

Mr. Sherman?

REP. BRAD SHERMAN (D), CALIFORNIA: Thank you.

Mr. Liddy, you missed the first panel. We learned in the first panel that the insurance companies and savings bank will be just fine and that U.S. consumers would be just fine if the parent company went into receivership. We heard that from the regulators of those entities.

They said that there'd be a slight reputational risk if the parent company went into receivership, but it would be maybe a thousandth of the bad press that they've gotten over the last week because you didn't go into receivership.

The second thing they told us is that there were -- they have on their staffs experts in credit default swaps that were making between 100 and $150,000 per year with no retention bonuses at all.

But of course, none of those individuals -- although they have the expertise, none of them have the experience in bringing down an entire company or a world economy.

Now, I support Chairman Frank's plan to launch a shareholder derivative suit or similar action against the overpaid executives. But I don't want to go home and tell my constituents we may have some chance of getting some of the money back.

The American people are skeptical, and so as a tax attorney, I can assure my constituents that if we pass the tax bill, we're sure to get virtually all the excess compensation back for the American taxpayers.

Now, if the Federal Reserve Board knew about the particulars of these bonuses and didn't tell us, then they should be called to account, because that calls into question not only their competence but their dedication to democracy, because they seem to have the -- they may have deliberately prevented the American people from weighing in on the decision as to whether AIG should have been put into receivership.

Mr. Liddy, can I count on you to provide the members of this committee with every document that you give the Fed, excluding those documents that have the names or other identifying information of your employees?

LIDDY: I'd like the opportunity to talk to my general counsel about that and make sure that that, in fact, is -- is -- is the right thing to do.

SHERMAN: Well, you -- if you're going to keep your shareholders informed, you've got to keep the members of this committee informed, and not just give it to a Fed that seems to have let us down.

I would ask you to provide for the record a chart showing the -- focused on future bonuses and future high compensation, which we could stop if we pushed you into receivership. At least we can stop future payments.

And in that chart, show us how many employees are getting more than $100,000 a month in salary, and how many stand under current compensation plans to get over half a million, a million, or 2 million during 2009 in bonuses. Can you furnish that for the record?

LIDDY: I believe we can.

SHERMAN: Thank you.

Now, are the employees of the company able to consult at AIG expense criminal defense lawyers, especially the high-paid, $500-an- hour, $1,000-an-hour criminal defense attorneys? Is that -- is that allowed under your policy?

LIDDY: Only if there's a -- an assertion of criminal wrongdoing.

SHERMAN: I think anybody listening to this committee would say that there is an assertion of -- of criminal wrongdoing at least being made by the American people.

You have an obligation to keep your shareholders informed. The shareholders are the 300 million American people. You can't just tell one or two shareholders. You've got to tell all the shareholders.

You knew a month ago that if we put this company into receivership, we not only would save the 300 billion -- the -- the $30 billion that was provided to the company or the risk that was taken by the federal taxpayer in providing an additional $30 billion credit line, but that we would invalidate these bonus contracts. You seem to have informed one or two people of that. You did not inform all of the shareholders.

The other issue is the contracts themselves seem to have been entered into in contemplation of huge losses. And whether there was a criminal conspiracy to conceal these losses from the shareholders that AIG had about a year ago and enter into these contracts, both of these issues raise the -- raise issues of whether there's criminal liability.

Under those circumstances, will AIG spend the money to provide criminal defense counsel to its employees and officers?

LIDDY: Yeah, I -- I really need to look at the -- at the facts, sir, in -- in much more detail than -- than what you just indicated.

SHERMAN: I would ask that you would provide for the record what your policies are, because as of -- you know, we -- you know, the Miranda rights don't entitle you to $1,000-an-hour criminal defense attorneys. They entitle you only to what is called -- what -- the rights that Miranda was given.

I believe my time has expired.

KANJORSKI: The gentleman from Illinois, Mr. Manzullo?

REP. DONALD MANZULLO (R), ILLINOIS: Thank you, Mr. Chairman.

Mr. Liddy, when did you first know about the retention contracts?

LIDDY: In October or November of 2008.

MANZULLO: Did you attempt to change any of those contracts as you did when you were at Allstate?

LIDDY: I asked that a complete analysis be done of were there ways to effectively alter those contracts, could we change them, did we have to honor them. I did do that. MANZULLO: And so you came to the conclusion that even though the taxpayers owned 80 percent of the company, and the company couldn't pay any bonuses at all unless the taxpayers had put up the money, that the contracts could not be altered. Is that what you were told?

LIDDY: It was what I was told, sir, but I -- I really started from a different place. As I mentioned earlier, I started from the basic issue of -- of risk analysis.

MANZULLO: No, I -- I -- I understand that. The -- more than -- the top seven people at your organization received more than $4 million in retention bonuses, and the top individual got $6.4 million, and individuals -- and 73 employees got a total of 1 million -- of -- of 1 million each.

Will these be considered to be key players, key figures, in the corporation?

LIDDY: Not within the corporation, but within the unit known as AIG F.P., so just to be clear, the top people in the corporation are getting no bonuses for 2008.

MANZULLO: But that's -- but that's the issue. That's -- that's the group that went sour, isn't it, the financial services division?

LIDDY: Yes.

MANZULLO: And when...

LIDDY: They -- they -- they would be some of the top people...

MANZULLO: ... when...

LIDDY: ... in AIG...

(CROSSTALK)

MANZULLO: ... when Mr. Kashkari, who's the head of TARP, testified before this committee on December 10th, he said that the top people who were involved in AIG going sour had been removed. Would he have been mistaken when he said that?

LIDDY: No, I think he was just -- I think he was really referring -- I haven't seen the testimony. I think he was referring to the corporate level, the holding company, as was indicated at the last situation, versus AIG F.P.

But...

(CROSSTALK)

MANZULLO: He -- he always not...

LIDDY: ... AIG F.P. -- we've removed those people.

MANZULLO: I understand that. LIDDY: So Mr. Cassano is gone.

MANZULLO: But I had asked him that question, because I was questioning a $3 million bonus which turned out to be $4 million, and his statement was that the key people that had made AIG go sour had been removed and that this was evidently somebody else.

And my question to you is that these people that got the 4 million and the 6.4 million -- those are the people who were in charge of the financial services division at the time that that division collapsed, isn't that correct?

LIDDY: Not -- not entirely, sir. The -- the -- the architects and builders of the AIG F.P. strategy -- they are gone, primarily Mr. Cassano and a few other names, and we are not paying them anything. Despite what the contracts say and everything else, we are not paying them.

MANZULLO: So you -- you could...

(CROSSTALK)

LIDDY: We are not paying...

(CROSSTALK)

MANZULLO: Go ahead.

LIDDY: Now what we have are people who are more executors and -- and traders, derivatives traders...

MANZULLO: Would you say an executor would get 6.4 million in bonus and seven get more than $4 million? I mean, these are not perfunctory people. These are first-class people making first-class decisions that determine the destiny of the financial services division.

LIDDY: Yes.

MANZULLO: Isn't that correct?

LIDDY: Yes, they are -- they are -- they are...

MANZULLO: And they have to bear responsibility, do they not?

LIDDY: Well, they're very talented people who are...

MANZULLO: I understand that.

LIDDY: ... executing that $1.6 trillion book.

MANZULLO: I understand that, but they have to bear the responsibility, do they not, Mr. Liddy, that they were there at the time that these financial investments went south, and they have to bear responsibility that they perhaps were at fault, also, in addition to the gentleman that you removed who was on the holding company. Isn't that correct?

LIDDY: Yes, although, sir, most of the people who are -- who were directly responsible for the credit default swaps at AIGFP, those people are gone.

MANZULLO: Well, then who are these people? I mean, did the credit swaps come out of the financial services division?

LIDDY: They did. But let me -- think of it as boxes. You had credit default swaps. You had regulatory capital. You have other derivatives trades. Many of these people are working the other derivative trades, that $1.6 billion.

The regulatory capital book, we've got that under control. And the credit default swap book, that's pretty much gone. These are the people who, for the most part, worked in the derivatives, the currency hedges, the interest rate hedges...

MANZULLO: OK, I -- I -- I understand that. But my question is the fact that your testimony is inconsistent with that of Mr. Kashkari, because he led the American people to believe -- and perhaps he was correct -- that the people who were responsible for the mess at AIG had been removed from their areas of responsibility, and all new people had -- had been put into that position. That's why the Americans are really upset over people who were at fault getting these types of outrageous bonuses.

LIDDY: Sir, I think -- I think we're in agreement. The people who were primarily responsible for credit default swaps that brought us to our knees, they're gone. The people who were responsible for regulatory capital trades that are -- have some exposure, they're gone.

But the people who still operate a $1.6 trillion trading book of business, we -- we -- we aren't losing the kinds of dollars on that that we've lost on credit default swaps. They are still there.

MANZULLO: Those are the ones that got...

LIDDY: And they're the ones that are winding that book of business down.

MANZULLO: And they got the retention bonuses?

LIDDY: Yes, they did.

MANZULLO: Even though seven of them left after they got the retention bonuses?

LIDDY: Well, again, they -- they -- they did exactly what we asked them to do. They had a book of business of several...

MANZULLO: But -- but they got paid on March 15th. This is March 18th. So they -- they didn't retain very long, did they?

LIDDY: No, they had -- they may have -- remember, these went into effect on January 1, 2008. So those people may have taken until October to November of 2008 to get rid of that book of business in a way that we felt comfortable with.

MANZULLO: OK.

LIDDY: If they did that and then their job was eliminated, they got -- they -- they earned their retention bonus.

MANZULLO: Thank you. My time is up.

Thank you.

KANJORSKI: (OFF-MIKE)

REP. MICHAEL E. CAPUANO (D), MASSACHUSETTES: Thank you, Mr. Chairman.

Mr. Liddy, I'm just curious -- first of all, thank you for working for $1 a year. Apparently Diogenes found his one good man, and you're it. I think you're about to get some more -- some more thanks.

Just curious, when you were doing these bonuses, did you expect that it would touch a nerve with the American people as it has?

LIDDY: Absolutely.

CAPUANO: All right. So you knew this was coming?

LIDDY: Yes.

CAPUANO: All right.

LIDDY: Perhaps not as -- not as severe as it is, but absolutely.

CAPUANO: Fair enough. Are there -- I understand that these people that got these bonuses may be good. And I want to be clear: I'm not against bonuses, per se. What I'm against is bonuses to people that helped cause the problem and particularly bonuses that come out of taxpayers' dollars, et cetera, et cetera.

I'm not against bonuses. We're not talking about anybody who got a $1,000 bonus; we're talking about people who got hundreds of thousands or millions of dollars.

And I just -- do you believe, honestly, in your heart, with all of the unemployment that's gone on in the financial services sector right now, right this very minute, do you really believe that these are the only people that are capable of doing this job?

LIDDY: No, I don't.

CAPUANO: So that we could -- there are other people out there that would have taken this job that maybe wouldn't have gotten this bonus, so you could have fired these people to replace them with equally capable professional people that are currently unemployed on Wall Street right this minute?

LIDDY: If I -- if you'll let me explain, each of these contracts is a complicated contract unto itself. It's not, "You've seen one, you've seen them all." They're really all unique.

And they need to be properly hedged and balanced at the end of each day, because there's so much volatility in the market.

CAPUANO: Fair enough. I -- I respect that.

LIDDY: If they're not, you get burned.

CAPUANO: Well, then let me ask a question. In your former life, you were with Allstate. I'm a policyholder of lots of insurance. That's basically a legal contract between me and my insurer. So when you were at Allstate, every person that you sold an insurance policy to had a basic contract with Allstate. Is that -- would you agree with that?

LIDDY: Yes.

CAPUANO: Did you honor every single one of those contracts as those clients saw them as they should have been honored, as they think, every single one of them? You paid it out when somebody asked?

LIDDY: No, we -- we honored them...

CAPUANO: If you had a difference of opinion on a legal contract, you went to court, based on judgment...

LIDDY: Yes.

CAPUANO: ... and let the courts decide. I'm a lawyer. I'm all for courts making decisions on legal matters, not necessarily lawyers for private companies. Our job, your job is to make decisions on the basis of what you think is best. But at the same time, in this case, you have an obligation to the general public. I can't imagine why you couldn't have followed the same policy here.

Simply, sir, let me -- let me ask you one more question I asked the previous panel. Do you believe that the current course that AIG is on, that this course will lead to stability and profitability of AIG within a reasonable period of time?

LIDDY: I do.

CAPUANO: Do you have any idea, a year, 2, 5, 10, 100 years?

LIDDY: No, the -- the plan is about a two- to three-year period...

CAPUANO: Two- to three-year period?

LIDDY: ... period of time. But it's very dependent upon what happens to market conditions around the globe.

CAPUANO: I respect that.

LIDDY: Very dependent.

CAPUANO: I respect -- as -- as we all are dependent on that. So why -- did you consider at all -- you didn't consider replacing these people because you thought the contracts were too complicated. I respect that.

Did you consider at all saying, "Look, we're not going to do this. We read it differently. We think the circumstances have changed. We think these contracts are null and void, because the circumstances have changed. And if you disagree with this, we'll see you in court," knowing, or at least believing, that, within two to three years, AIG will either be back to profitability or bankrupt and gone?

Either way, by the time those lawsuits were settled, these people would be then in a court that either was a private company with no taxpayer dollars left or a company that was bankrupt with a bankruptcy judge to decide who got what money. Did that cross your mind at all?

LIDDY: It crossed our mind. It got very serious consideration.

CAPUANO: Serious consideration. Why didn't you do it?

LIDDY: Back to the risk assessment. Had we done that, more than likely those people would have walked out the door tomorrow, or whenever, and we would have had this $1.6 trillion book of business, which needs to be managed every day, with no one to manage it.

To the extent something happens in one of those trades and it triggers a cross default, we get into a spiral that undoes all of what the government has done to help us.

CAPUANO: So do you have any plans of the people that haven't left yet, do you have any plans of firing them now? Because they've proven to me that they don't have the best interest of their employer -- namely the American taxpayer -- at heart.

Since that's the case, I understand you don't want to be without them. Just -- you don't have to tell me names. Anybody you're going to fire next week, or next month, or three months from now, and replace them quietly in a thoughtful manner?

LIDDY: No, what -- let me tell you what we've tried to do. We'd like those people -- each one has a book of business. There are 22 or 24 separate books of business. Their job, either individually or in tandem, is to wind that book of business down. It could happen by the end of April; it could happen by the end of December.

What we've also done is we've brought in some additional people to understand those books of business -- it's hard to get all the right expertise at the right time -- to understand those books of business as backstops or insurance.

CAPUANO: All right. Mr. Liddy, I think -- I think you've made a series of judgments that I obviously disagree with that you could have made other decisions and let the chips fall where they may.

It amazes me that these are the only people -- apparently, you are the only good person left on Wall Street to do this because you know the American people need it. And I appreciate your effort, and I don't mean to berate you on a personal basis. I really do appreciate what you have done.

Nonetheless, nonetheless, it would be nice if we had a couple of more people working for AIG at top-level salaries that felt the same way or anywhere near the same way. And for those who don't, the truth is, as one taxpayer, I don't want them working for me. I'd just as soon you get rid of them and take the risk with that.

LIDDY: You know, sir, there are a number -- there's a cadre of people working at AIG very hard for the American taxpayer trying to do everything we can to repay every single dollar. You would be proud of them.

CAPUANO: Not right now I'm not.

KANJORSKI: The gentlelady from Illinois, Ms. Biggert?

REP. JUDY BIGGERT (R), ILLINOIS: Thank -- thank you, Mr. Chairman.

If the taxpayers hadn't loaned AIG any money, would the executives who received the bonuses have received them?

LIDDY: Probably not, but if you'll let me explain, I think it's a matter of what would have happened. I think the company would have spiraled into bankruptcy. And in bankruptcy, a bankruptcy court judge makes a decision of, are you important and are you important, and what do we have to do in order to keep you?

So if they were determined by a bankruptcy judge to be important, they may have gotten a payment. But the basic contracts would have been voided.

BIGGERT: But because the money came from -- from the Treasury and from the Fed, they were able to get the bonuses?

LIDDY: There was no bankruptcy.

BIGGERT: OK. In my opening statement, I -- I was concerned that -- whether the taxpayers, as -- who own 80 percent of the company, got to vote on these bonuses. Was there any notification or anything?

The reason I'm asking that is because, as part of the bailout, the -- the New York Fed appointed three trustees to represent the government's nearly 80 percent ownership interest in the company. Did you ever see or hear from these trustees? Were they at the board meetings? Were they there?

LIDDY: You know, I had met with the trustees on a number of occasions. They were just appointed approximately in the middle -- the middle of February or so. I don't -- I don't remember the -- the -- the exact date.

Again, we -- we reviewed these with the Federal Reserve, and the Federal Reserve is -- is the repository gatekeeper, if you will, of the relationship with AIG.

BIGGERT: Were they appointed -- so they were appointed after the -- the decision -- well, no, the decision was in March.

LIDDY: No. No, before.

BIGGERT: So did they notify anybody? Or did you talk to them about the -- the bonuses?

LIDDY: I -- I -- I do not know if -- if they were reviewed or not.

BIGGERT: OK. Who are the trustees?

LIDDY: Oh, there are three trustees. I'm -- to be honest with you, I'm -- Doug -- Doug Fuge (ph). I can get you that list, if you will...

(CROSSTALK)

BIGGERT: I appreciate it.

LIDDY: Phil Consadine (ph), I can -- I can get you that list.

BIGGERT: All right. So did you or your staff make the Treasury aware of the bonuses, other than talking to the trustees or...

LIDDY: I'm sorry, did we make the Treasury?

BIGGERT: Did -- yes, Treasury aware?

LIDDY: No. As I said earlier, we began discussing this at our board meetings starting in -- in the middle of November, full disclosure with -- with the Federal Reserve. And I don't know. I'm not privy to what happens from the Federal Reserve up into the Treasury.

BIGGERT: OK. You know, my constituents and -- and the American taxpayers are really upset with this, as you -- as you well know, as we all know. But can you give me -- and they don't -- they don't want to see one more dime go to AIG.

Can you give me three good reasons why you should have received that money and why, if you are going to need it in the future, that -- that the taxpayer should give you support?

LIDDY: I think the payment of the bonus -- the thought process was that it would prevent a very disorderly event within the Financial Products business, which could have brought down the whole corporation. And then the roughly $80 billion that the taxpayer has already invested in AIG would have been for naught. So we did not think that the $165 million relative to putting the $80 billion that's already been invested, we thought it was wiser to err on the side of caution and -- and see if we could do everything we could to keep those -- those individuals in place at AIGFP.

BIGGERT: Do you think that it would happen that the company would need more money?

LIDDY: I believe we are -- we are adequately capitalized, particularly with the ability to draw down on the additional $30 billion of TARP. It goes back to my answer to somebody's question over here. It is very much a function of what happens with the capital markets around the globe. If -- if investment values, if asset values continue to go down, it will be a problem for everybody in the life insurance industry.

BIGGERT: Thank you.

Yield back.

KANJORSKI: Thank you very much, Ms. Biggert.

And now Mr. Baca of California?

REP. JOE BACA (D), CALIFORNIA: Thank you very much, Mr. Chairman.

Thank you very much, Mr. Libby, for being here and trying to find a solution to a major problem that -- the American people are outraged in reference to what happened to these particular bonuses.

And I want to start out by asking a couple of the questions. You indicated that you started in September, but I believe in part of your testimony you indicated that it was during the last administration that came up with these contracts that were in place. Is that correct?

LIDDY: You say the last administration, you mean my predecessors?

BACA: Yes.

LIDDY: Yes.

BACA: And that was before President Obama took office. Is that correct?

LIDDY: Yes, sir. That goes back to the end of 2007, beginning of 2008.

BACA: So it was basically under this last administration. And part of the problem that we have -- and -- and people are so much upset with those retention bonuses that we're giving out right now -- isn't retention, doesn't that mean that you stay, and a bonus means that you're getting paid for something you performed that is positive and it's turning our economy around, our crisis around? LIDDY: Yes. In this case, it meant you stayed and you made progress on a specific assignment, to wind down a portion of your responsibility within AIGFP.

BACA: And some of these retention bonuses, individuals you indicated in your testimony, that some of them have left. Is that correct?

LIDDY: Yes. If they completed their work and their responsibility was wound down to our satisfaction, they would have left probably closer to the end of the year. They would have waited until March 15th, but they would be eligible for the retention arrangement.

BACA: You know, it's -- it's appalling to me that we're giving out these bonuses and to the American people and the taxpayers.

We have teachers right now across the nation that are receiving pink slips, especially in California. I mean, they're doing an excellent job and yet they're not getting bonuses.

I mean, I wish we would have given those teachers bonuses because they're getting the pink slips and, yet, these individuals out here, when you look at the crisis that we're in, haven't gotten us out of the crisis that received the bonuses.

Isn't that a same?

LIDDY: I have -- I have teachers in my family, sir. I know that pain.

BACA: And you indicated during your testimony that you asked a lot of these AIG executives who received these bonuses to return the money. What has been the result of that survey that you conducted earlier?

LIDDY: I just asked them this morning. In response to the public outrage, in response to the suggestions of many folks that I met with yesterday, just listening to the president of the United States say, you know, we need to do something. We've attempted to amend this situation, and we've asked the people at AIGFP to demonstrate their leadership and give it back.

BACA: Isn't there any remorse or feeling by these people who are getting these bonuses when people are losing their jobs, losing their homes, the economy were it's at right now? I mean, what has been their expression and their feelings? And we're talking about human beings who have lost their jobs, have lost their homes and, yet, we're giving out $165 million that was given -- and I'm glad that the last question was asked -- you know, was it done because of the bailout? Because it was this last administration that asked us to vote for this bailout that a lot of us want to. Do they know, in fact, that we were going to have a crisis and that they were going to gain from this?

LIDDY: That's a hard one to answer, sir. There's -- I understand the intent of the question. The people at FP it's easy to paint with one brush and capture everybody. In fact, there's a lot of really good people up there. They're basic Americans. They want to do a good job for us.

The trades that were done that brought up to our knees, this was a very small number of people...

BACA: Somebody asked us to do a bailout. We gave them the bailout. They know it. They took it. They ran. They took the American people's money.

LIDDY: No, but I was really trying to be sensitive to and respond to your point. You know, don't these people have a conscience which is basically what you asked me.

You bet they do. What we asked them to do was to stay, do a specific amount of work, and if you do that, at the end of that period of time and you've done that work, we will give you a retention bonus. That's what those payments were.

So they did the work. They reduced the risk from that $2.7 trillion down to $1.6 trillion. And the American taxpayer is better off because we have less risk. But we have to keep shrinking this business dramatically, quickly, so it doesn't get away from us.

BACA: And I hope that -- and part of the comment is that we hope that, from now on, that we modify those kind of contracts, that we never, ever have these kind of contracts that the American people will have to pay for something that someone else has created, something that they didn't do, that we now are paying for that.

LIDDY: Duly noted.

BACA: Thank you very much. I yield back the balance of my time.

KANJORSKI: Thank you very much, Mr. Baca.

Mr. Hensarling from Texas?

REP. JEB HENSARLING (R), TEXAS: Thank you, Mr. Chairman.

Mr. Liddy, I have disagreed with certain thing that you've said and have disagreed with some of your conclusions but I do want to add my voice to others who state that you are one of the good guys.

You were asked to come into this position, take on a very, very tough job. And, clearly, you are doing this out of a feeling of service to your country. And I thank you for that.

On page four of your testimony, you talk about federal regulators deciding -- making the decision not to allow AIG to fail. With all due respect, Mr. Liddy, AIG has failed. Any company requiring $170 billion plus of taxpayer liability exposure has failed. It's failed in my mind. It certainly has failed in the public opinion's mind.

I mean, AIG, notwithstanding the fact that I know you have many good men and women. I know that you have profitable divisions. But it appears to many of us it is now a conduit for counterparty transfers of taxpayer money.

My first question is: Did I hear you correctly -- and I -- please, I had to step out of the room on occasion. You speak of a plan in your testimony that -- a business plan designed to maximize the value of the core businesses so that we can maximize the amount to repay the American taxpayer.

Is it your belief that this plan will make the American taxpayer whole?

LIDDY: It is, sir, with the caveat, if you will. The markets have to behave. In order to sell assets, there have to be buyers that have equity or cash or capital in order to be able to buy them. Since October, that has proven not to be the case.

We've set in motion a plan that, despite that fact, we think we can still pay back the federal government.

HENSARLING: Mr. Liddy, I spent about 12 years in the private sector before coming to Congress. And I know we've talked about the bonuses ad nauseum. But when I was in the private sector, two things had to happen to qualify for a bonus. You had to perform exceedingly well. The company had to perform exceedingly well.

Clearly, you are bullish on the future of AIG. I'm curious whether the recipients of these bonuses share your enthusiasm. And if so, let me offer a suggestion to you, sir.

What AIG does with their money is their business. What they do with taxpayer money is our business. If these people who received the bonuses share your bullish thoughts on AIG, why don't you do double or nothing on these bonuses? Let's let the taxpayer be made whole. And if the taxpayer is made whole on his debt, if the taxpayer makes a decent return on his equity position and AIG is, indeed, returned to profitability, Mr. Liddy, why don't you just double those bonuses instead if these people have skin in the game and if they believe they can work it out of trouble, then we don't have to worry about these other options.

LIDDY: Interesting idea. I would say it's probably not in the taxpayer's best interest to go there. I have much confidence in we can, in fact, rescue AIG.

It's not a failed company. It is a failing company unless we do something about it. And we in fact, have a plan to do something about it. It basically is if this aggregation of AIG...

HENSARLING: Well, Mr. Liddy, here's...

LIDDY: The sale of those businesses would pay back...

HENSARLING: Here's the challenge for many of us here. And that is -- and I voted against TARP once. I voted against it twice. I'll vote against it three times or four times in necessary. So I didn't support the underlying legislation. But if the taxpayer is being asked to, yet again, prop up this company, you know, where is the skin in the game for the individuals who are supposed to turn this around? How can I look taxpayers in the eye in the Fifth District of Texas and say, yes, invest your fifth tranche of hard-earned money into this company notwithstanding the fact that the people who receive the bonuses don't ultimately have enough confidence that you're going to get paid back.

I mean, how to we do that? How do we have any confidence? In addition, I know you talk about failure, but failure isn't necessarily chaos. I mean, that's why they have Chapter 11. That's why they have reorganization. That's why they have receivership.

LIDDY: I think you would find -- I did listen to the previous panel. I think you would find that we're regulated by 430 regulators around the globe. And if the company failed, though good insurance companies would be grabbed by whatever regulators could possibly get their hands on them to make sure that they were protected.

I don't know that the world has ever seen anything like that. My risk assessment is wind do you ever the AIGFP business as quickly as possible because it's the big exposure that we have. If we are successful in doing that, when we are successful in doing that, then we can, in fact, sell all the good insurance businesses, take those proceeds, and pay back the federal government.

That's what we're desperately trying to do.

KANJORSKI: The gentleman from Massachusetts, Mr. Lynch.

REP. STEPHEN F. LYNCH (D), MASSACHUSETTES: Thank you, Mr. Chairman.

Thank you for testifying, Mr. Liddy. I appreciate your being here.

I want to get right to the -- the employee retention plan. Do you have a copy of this in front of you?

LIDDY: I do not.

LYNCH: Can someone on staff drop off a copy here to -- can you hold my time till we get this down there?

Mr. Liddy, I'm going explain a couple of sections here. One has already been mentioned by Chairman Frank and that was the -- at page ten of this compensation agreement, it holds that the bonus pool that's available for employees will be basically capped at $67.5 million and that regardless of what happens with the company and investments, the bonuses will be given out.

So if basically anticipates losses on the part of the company, but protects the employee's bonuses from that dire circumstance. Do you think that's consistent with your fiduciary responsibility to your shareholders and to people who rely on your performance for their own benefit? LIDDY: Congressman, you'll have to forgive me. I just am not familiar with that contract. I believe that contract is the annual performance bonus arrangement.

LYNCH: Right. It is.

LIDDY: No performance bonuses were paid in AIGFP, I don't believe, for 2007.

LYNCH: I'm sorry. This is for retention. This is a -- this is a retention bonus. And while you're looking at it, the paragraph above that, Section 306, subparagraph A. This really gets me.

LIDDY: I'm sorry, sir. What page are you on?

LYNCH: Page ten of the agreement. It says the effect -- the subheading is "The Effect of Mark-to-Market Losses on the Bonus Pool." This is, again, a protection for the bonus pool for the employees.

It says the bonus pool of any compensation year beginning with 2008 compensation year will not be affected by the occurrence of any mark-to-market losses or gains or impairment changes arising from the CDO portfolio.

This is the credit default swaps. This is the underlying -- these are the underlying assets. So what you've done here is basically you've reserved the bonus pool for the employees and, not only have you done that in this agreement, but you've basically protected yourself, immunized yourself from the stupidest decisions made by AIG which, earlier in the testimony, has been admitted to that it was the credit default swaps that were really -- that, you know, by the Financial Products Division that really brought this company down to where it is right now.

And what you've done here in this agreement is basically you've immunized your own bonuses from that stupid decision. In other words, the bonus pool will not be affected by the CDOs and the credit default swaps that you were all worried about. This agreement was written in 2007. This is similar -- this is like the captain and the crew of the ship reserving the life boats saying to hell with the passengers; we're going to take the life boats for ourselves, for the crew and the captain. That's what happened here.

You know, this is -- this is a violation of fiduciary duty. When you cordon yourself off and protect yourself as the managers of this company and as the people running the ship and you say, well, we're going down so we're going to make an agreement where we're not act affected by the bad decisions we make. We're going to pass that all onto the investor and the shareholders.

You know, that amounts to, you know, malfeasance. Not just nonfeasance, but that's a complete violation of trust in the people who invested in your company. This should not have happened. And I honestly believe this is reversible. This is so outrageous that you would say we're not going to be victims of our own stupid decisions. We're not going to -- we're not going to take the heat for this on the CDOs and the credit default swaps. That is simply unbelievable. It's arrogance.

And I -- I think it's probably illegal, and I agree with Chairman Frank that we should probably try to challenge this as shareholders on behalf of the American people as well. Do you think anyone to say for yourself?

LIDDY: Yes, sir. I do.

LYNCH: Please.

LIDDY: You have generously used the word "you" in that construct. As I mentioned, these contracts were all put together before I was at AIG. I would not have done these contracts this way. And this whole arrangement would have looked -- if it existed -- would have looked a whole lot different.

So I really do -- I take offense, sir, at the use of...

LYNCH: Well, offense was intended. So you take it rightfully, sir.

LIDDY: I take...

LYNCH: What I see happened to the American people here and what's happening to $200 billion of innocent taxpayers -- I have people in my district who don't have a 401(k). They're out there working every day for a -- you know, a fixed wage. And yet they and their sons and daughters and grandchildren and great grandchildren are going to have to pay the freight here.

They don't have anything. They don't have anything to do with Wall Street. They're lucky if they can live from day to day. A lot of them are out of work right now. Think about those people, how they feel in having to pick up the tab for this.

LIDDY: I understand everything you've said, sir. I do. It's just important for me that you appreciate these were put in place before I was there. There...

LYNCH: But the decision to allocate these was made in December, sir.

LIDDY: No. No. That decision -- the decision to put this plan in place goes back to 2007.

LYNCH: No, no, no. The actual payment of the bonuses.

LIDDY: OK. There -- there were no payments then. If you'll just give me a chance to explain, the -- the arrangement you're reading from continues to be -- it's an omnibus plan that covers retention payments and an annual performance plan.

LYNCH: It says here retention bonuses.

LIDDY: Right. And if you -- if you -- I think if you read through it -- and I'd be glad to spend time with you offline and make sure that I understand your point of view, and maybe I can help you understand...

(CROSSTALK)

LYNCH: Well, look, I understand, if there's ambiguity, we can talk about it. But this says, large letters, "employee retention plan."

LIDDY: Right.

LYNCH: Look, I'm an attorney, contract attorney. You might want to try that with somebody else, but this is the plain language within the four corners of this contract that we're talking about here, sir.

LIDDY: Right. And it -- and it applies to the payment of annual performance bonuses, not to the payment of the retention plan itself.

So there were no performance bonuses; you're absolutely correct. The clauses that are on here should not be in here. I would not have put them in there. We did not pay anything in accordance with those clauses.

LYNCH: OK.

My -- my time has expired, Mr. Chairman. I -- I yield back.

KANJORSKI: Thank you.

We'll now hear from Mr. Campbell of California.

REP. JOHN CAMPBELL (R), CALIFORNIA: Thank you, Mr. Chairman.

And thank you, Mr. Liddy, for your rather thankless service.

I would like to focus on the future of this company, which is now nationalized. You talked about the, reducing the exposure in the Financial Products division from $2.7 trillion to $1.6 trillion. And I understand what you've said about -- it depends very much, the future, on what the markets are like.

If markets were as they are today, in other words, they don't get any better, they don't get any worse, and you run down that $1.6 trillion, what kind of loss would AIG expect out of the Financial Products division, once you've wound it all out?

LIDDY: Mr. Campbell, if I could, my comment about markets getting worse has more to do with selling assets. It's selling our -- our really good life insurance company in Asia or what have you.

The rundown of the book of business can happen in an orderly way. On some trades, we make money; on some trades, we lose money. The goal would be not to lose any money on -- on that business so we don't have to put more money into it from the Federal Reserve. That's entirely possible in almost any market condition, as long as there's someone there monitoring the book of business. If there's no one there, you've got a problem.

CAMPBELL: I -- I understand. So do you think it's likely that that could be run down without -- without any further loss?

LIDDY: No, I think it will probably cost -- I don't know -- maybe a couple of billion dollars, which is a large number, but that's anticipated in the borrowings that we already have from the Federal Reserve.

CAMPBELL: OK. Let me talk about -- you talked about the good businesses, and I wanted to discuss just how good perhaps they are.

My understanding -- correct me if I'm wrong on this -- is that the commercial property and casualty business was down 22 percent, I believe, in the fourth quarter. There is that anecdotal evidence out there that there's a lot of price-cutting on the part of AIG.

And so that, therefore, the profitability of that business -- that the business may be shrinking and it's both in volume and in margins. And, obviously, a business that has shrinking volume and margins has problems for the future. Is that -- is that what's going on in the property and casualty...

LIDDY: No, I don't believe it is. And I think -- as I listened to the individual from the GAO, I think what she said was, as of her testimony today, they had seen -- and Joel Ario said the same thing -- they'd seen no evidence of irresponsible price-cutting on the part of AIG.

I will tell you what's happening. What AIG does is we write really big risks, so oil rigs, and large apartment buildings, and new hotels, and tunnels, and things of that nature. That's all ground to a halt. So there's no new business that you can write insurance on.

So -- so to the extent you lose an account, there's -- there's not fertile ground that you can apply to replace that account. That is happening in spades.

The point you make is a good one. Over time, people just get AIG fatigue. A buyer of insurance just doesn't want to deal with, is AIG bankrupt? Are they solvent? Are they going to be around? Why did they pay those bonuses? You just get AIG fatigue.

And if I can't turn this situation around, we run the risk that that business does atrophy. Trying very hard not to do that. We have a plan. We're going to sell a minority interest in that business, maybe take it public, maybe get it out entirely from underneath the AIG umbrella, re-brand it, and give it a chance so we can realize some value, pay it back to the federal government.

CAMPBELL: Will that business be profitable in the first quarter of '09?

LIDDY: I just -- I just haven't seen the numbers. I'm sorry. I just -- I just don't remember what they are.

CAMPBELL: Was it profitable in the last quarter of '08?

LIDDY: If you exclude investment losses, I believe it was, yes. It was profitable and generated cash.

CAMPBELL: Talk about the life insurance subsidiary for a second. I know that in your -- I believe it was the company's evaluation of systemic risk, that that's where you believe there's a great deal of systemic risk, that there's a lot of counterparty liabilities to other life insurance companies. Is that true?

LIDDY: It's -- it's in both. You know, we -- we insure -- on the property and casualty side, we ensure 94 percent of the Fortune 500 companies. So the systemic risk idea is very real in both the property, casualty, and the life side.

CAMPBELL: OK, but in the property and casualty, I mean, they could replace that insurance with another carrier?

LIDDY: If there's enough capacity, it's -- it's a really good point.

CAMPBELL: Right.

LIDDY: And if you just give me a minute, you know, we are so large -- we have more capital than any other insurance company in the United States. In the property casualty area, if that business went away, I'm not so sure that it could all be immediately replaced. And because the market is so treacherously low right now, companies that wanted to replace it couldn't go out and raise the capital to be able to do it.

CAMPBELL: OK, because I'm running low on time. What is the status, then, of the life insurance and -- and that -- that's not -- that's a separate division from property and casualty, correct?

LIDDY: It is, multiple life divisions.

CAMPBELL: Correct.

LIDDY: Yes.

CAMPBELL: And is that -- is that business profitable? Is it shrinking in margins and -- and business? Or what is its status at the time?

LIDDY: No, it is -- it is -- it is profitable. Pieces of it are stable. If you sell variable annuities or fixed annuities right now, nobody in the industry is selling those. Industry sales are down maybe 40 percent to 50 percent on balance. So we -- we are down the same as the industry is.

But the persistency is -- has more or less stabilized since September. That business is profitable. That's part of what we want to either take public or give to the Federal Reserve to satisfy our debt.

CAMPBELL: Why can't we sell that, and that's now? And that's my final question, because my time has expired.

LIDDY: No buyers. The people that would buy that business don't have any money and their stocks are down 70 percent since October 1st, so they can't use equity to buy it, they can't go out to the capital markets and raise cash to buy it. There's no way.

We could sell it for a fraction of what it's worth. That's not a good idea. It would not enable us to pay back the money that we owe to the government.

CAMPBELL: Thank you, Mr. Chairman.

KANJORSKI: The gentleman from North Carolina, Mr. Miller?

REP. BRAD MILLER (D), NORTH CAROLINA: Thank you, Mr. Chairman.

Mr. Liddy, I'm sympathetic to your concerns about the safety of your employees, but the lack of transparency at AIG has been a great frustration to me personally, to the Congress, and to the American people.

Neel Kashkari sat right there on December -- December 10, and I asked him why -- whether we were ever going to find out who the counterparties were and, if not, why not. And he said he did not understand my question.

You said that you first learned of these performance -- rather, these retention bonuses in October or November, and you talked to lawyers, and they said there's no way out of this, you've got to pay it, and you'd have to pay twice this under Connecticut law. If you -- if you don't pay it, no questions asked.

Did your lawyers assume that AIG, the Financial Products unit, was solvent at the time of the contract, that this was an arm's-length transaction with a solvent corporation? Or did they ask you if it was possible that this was a sweetheart deal to loot an insolvent company by insiders, to leave the -- the company without sufficient -- or leave the company with even less to pay its honest debts?

LIDDY: As I mentioned, I was not there. I simply do not know the answer to that question.

MILLER: No, no, you were there. This was October, November of last year.

LIDDY: Yes. No, let me explain. The work that I asked be done in October and November of last year was, are these valid contracts? Are we required to pay them? Can we break these contracts? What will happen if we do?

MILLER: And that's what I'm asking. There's an important factual question here: Was -- was AIG solvent? Were these arm's- length transactions or were these sweetheart contracts?

LIDDY: Yes. I'm not a lawyer, sir, but I would say, at the end of 2007, 2008, when they were entered into, AIG was solvent. It was before the very substantial credit crunch of the third and fourth quarter.

MILLER: Have you seen the written questions and written answers from Joseph W. St. Denis provided in October of last year to the -- to the Government Reform and Oversight Committee as part of their investigation of AIG?

He was the vice president of accounting policy at AIG Financial Products from June 2006 to October 1, 2007. He said that he left -- he resigned because, "On multiple instances, beginning in the late summer of 2007, Mr. Cassano took actions that I believe were intended to prevent me from performing the job duties for which I was hired."

He gave several instances, one of which was the valuation of credit default swap portfolio, and said that Mr. Cassano pretty clearly admitted that he had intentionally cut or excluded Mr. St. Denis from those discussions.

Have you reviewed this?

LIDDY: I have not.

MILLER: Are you familiar with it?

LIDDY: I am familiar with it, yes.

MILLER: OK. Have you looked at whether Mr. Cassano or anyone else has any liability to your corporation for -- on any basis?

LIDDY: You know, as I said, I'm not a lawyer, but there is no evidence of -- of wrongdoing in -- in any of this.

MILLER: This isn't evidence of wrongdoing?

LIDDY: No, sir. I...

MILLER: This isn't evidence of cooking the books?

LIDDY: I have not read it, so I can't comment on it.

MILLER: You said in your testimony -- and I agree with this -- that, when you owe somebody -- someone money, you pay that money back. The United States government, the American people don't owe anyone for the debts of AIG. It's not our debt. Do you agree with that?

LIDDY: I'm not sure I understand, Mr. Miller. We owe -- we owe -- AIG owes the government, the American people $80 billion.

MILLER: Yes.

LIDDY: Full-stop.

MILLER: But what you owe your counterparties, that's not a debt of the United States government.

LIDDY: No, it's a debt of AIG.

MILLER: OK. There was a -- there has been a study of -- by economists on what works and what doesn't when a nation's banking system collapses, its financial system collapses. And one of the characteristics -- well, transparency. The second is maintaining market discipline.

And that means that shareholders bear the loss, but it also means that unsecured creditors bear the loss. Anyone who is in a position to determine the ability of the corporation they're doing business with to pay their debts should bear the loss, not, presumably, taxpayers.

Are we maintaining market discipline by continuing to give money to AIG to pay unsecured creditors, to pay the counterparties to your credit default swaps?

LIDDY: Well, that whole process is over. We -- we -- we are not -- we are not doing any of that any longer. It's -- we've walled off those liabilities, if you will.

But -- but to your -- to your basic point, we owe those people that money. I mean, it's just -- it's just a fact of life. We owe -- AIG owes those counterparties that money. If you don't pay them...

MILLER: You did. We didn't.

LIDDY: Right. But the result of not paying them is an event of default, and it forces the company into bankruptcy.

MILLER: OK. Are -- are you going to examine ever whether there is any liability by any officer, director or employee of the Financial Products unit?

LIDDY: Yes. There are ongoing investigations by the Justice Department and the SEC and the FBI and a regulatory agency in the U.K. We are cooperating fully with those investigations.

MILLER: I'm talking about civil liability to the corporation, for breach of fiduciary ability or whatever else. Are you examining whether you can sue them? You seem to be terrified they might sue you. Are you going to sue them?

LIDDY: No, we -- we -- we did examine that. And, again, the judgment was, on a risk basis, if we don't have those people, we increase the risk that something happens at AIGFP and we undo everything we've -- we've done to get to this point.

KANJORSKI: OK, gentlemen, we have eight votes on the floor. It will approximately be one hour.

We'd appreciate your indulgence, Mr. Liddy. We have arrangements for where you're to stay, and we'll take a recess for one hour.