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House Finance Committee Congressional Members Opening Remarks; Examination of How Much Money Went to Executives, Where it Came From and Whether Congress Has Any Real Avenue to Retrieve It
Aired March 18, 2009 - 10:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
HEIDI COLLINS, CNN ANCHOR: In fact, in just about an hour from now, the chief executive officer for AIG will have a whole lot of explaining to do. Edward Liddy will testify before the House Financial Services Committee. One key issue, how a company that got $170 billion in taxpayer bailout funds could pay $160 million in executive bonuses. We're going to bring the hearing to you live, right here in the CNN NEWSROOM.
And if you think increased consumer spending will rescue the economy, think again. Six in ten Americans say they have postponed a major purchase like furniture or appliances in the last six months, and that number is up ten points since the holiday shopping season in December. Not good news there.
And when Ben Bernanke speaks, the markets react, usually. We'll hear from the fed chairman this afternoon. He's expected to hold interest rates steady at near zero percent. We're hoping they could go even lower than zero.
The public outrage over AIG bonuses takes a public forum this hour. The House Financial Committee getting set to delve into the insurance company's use of its bailout money. The new CEO of AIG could be in for quite a grilling. Members of Congress also taking heat for not doing more to stop it.
Well, whether or not Congress dropped the ball, Congressman Barney Frank says the government needs to learn from this. Fix what needs to be fixed and above all, get repaid. Here's what he said on CNN's AMERICAN MORNING as he gets ready to question the head of AIG.
(BEGIN VIDEO CLIP)
REP. BARNEY FRANK (D-MA), CHAIRMAN, HOUSE FINANCIAL COMMITTEE.: We are going to ask him to be fully cooperative in our effort. But I think the federal government has to take the lead here on these lawsuits. We own this company, in effect. And we're not asking that these bonuses be rescinded because we have lent money to the company. I believe we are saying, as the owners of the company, we do not think we should be paying bonuses or should have paid bonuses to people who made mistakes, who were incompetent.
(END VIDEO CLIP)
COLLINS: So far, the governor has poured $170 billion into AIG. Here is the latest now on this developing story. Treasury Secretary Timothy Geithner says the government plans to deduct the money AIG spent on bonuses from a pending bailout. AIG's CEO says he's already working on a plan to repay every penny. And Senate democrats are talking about taxing bonuses paid to executives of companies that receive a bailout.
CNN is on top of it all. Christine Romans is tracking the money. Brianna Keilar is looking at what Congress wants, and our senior analyst Jeffrey Toobin takes a look at what the government can do.
First though this morning, to you, Christine. Let's start with these numbers. How much money, and who actually benefited? Do we even know?
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: We don't even know at this point. We know that it was a whole lot of folks sharing in this $165 million payout that happened over the weekend. That's part of a bigger payout, more than $450 million in pay out. So this is just one part of the whole bonus thing. It's something that we've been following for some time. By the numbers, $170 billion is what taxpayers have put into AIG. Putting in that money at a time in the third quarter, quite frankly, when the company lost more money, almost $62 billion. It lost more money than any company in the history of the world.
And now paying out all those bonuses, that's the outrage. I mean, it's hard to find any kind of way to sugarcoat that for the worst performance in world history...
COLLINS: How do you get a bonus?
ROMANS: How do you get a bonus like that? These numbers are, frankly, quite staggering. But look at it this way, too. $165 million in the grand scheme of that is a fraction of one percent.
COLLINS: Unfortunately, yes.
ROMANS: A very small amount of money that has now derailed the message from Washington about fixing a fragile banking system. The American public is very, very sick and tired of the bailouts and the messiness of these bailouts. A lot of people are telling me, it's going to make it this much more difficult for the Treasury Department and for the administration to do what could be painful steps in the future to shore up the banks.
COLLINS: Absolutely. Yes, we go back to those words "trust" and "confidence," it reminds me of the corporate jets, you know how much money would have been saved if they hadn't flown the corporate jets into Washington. Well, probably in the big scheme of things it wouldn't have mattered, but it messes with the message. So how, Christine is the government going to get this money back then, what's their plan?
ROMANS: Well, Secretary Geithner says the plan is to deduct the cost of the bonuses from $30 billion in aid that is due to this company. It's $30 billion that's due for now the fourth reworking of its bailout and loan guarantees, and then there would be additional penalties on the firm, as well. So essentially, they would have to pay it back twice. But keep in mind, Heidi, this company would not exist if it weren't for the American taxpayers saving it.
So the government is going to get the money back, or hopes to get the money back, but the money in the first place is ours to begin with. And to this point, just from what the Treasury Department is trying to do, the people in that unit are still contractually obligated to get their money, so they will likely as it stands now still get their bonuses.
COLLINS: All right. Well, just letting everybody know also, Christine, that we're looking at some live pictures coming in from the House Financial Committee that we're going to be looking at very, very closely today. In fact, all eyes are going to be on Capitol Hill, as the committee begins its AIG hearing.
Our Brianna Keilar is following it for us this morning. So Brianna, what are we expected to hear? Do we have any idea exactly what CEO Edward Liddy is going to say?
BRIANNA KEILAR, CNN CONGRESSIONAL CORRESPONDENT: Well, we do know, actually. We just got the testimony that he's going to give.
And keep in mind, Heidi, he's not going to be giving this testimony for a while. He's on the second panel. But part of what he says is mistakes were made at AIG on a scale few could have ever imagined possible.
The thing is, though, Edward Liddy was not in charge of AIG when it went through its financial calamity. That doesn't mean, though, he's not going to be facing tough questions. He certainly is.
Members of Congress who have been coming through the hallway here, outside the hearing room, I've been asking them, what are you going to ask him? What they want to know is why pay these bonuses? We heard Liddy say there is a contractual obligation. If you owe someone money, you have to pay them. They're going to press him on that.
They're also going to press him on why retain these executives? Because he has said that even though it is these executives who got AIG into this mess, they have a level of expertise that's required to get AIG out of the mess, and some lawmakers really have a problem with that.
The other issue, Heidi, as well, is asking him to name names. Who, by name, got these bonuses? The lawmakers want to know that. So far, AIG hasn't provided that information, Heidi.
COLLINS: Yes, what exactly are they going to do to get that money back? They're going to try to get the names and then go to those individuals and tell them to write a check, or - what do they have to have happen?
KEILAR: It's really what they're trying to do right now, and they're pursuing a couple of different things. One is just to tax it back. There's a proposal coming from the Senate, a bipartisan proposal, where these folks who got these bonuses would be taxed a big chunk by - AIG would have to pay a big tax, the employee would have to pay a big tax, they as well pay income taxes on it. Now, it's completely almost eradicate these bonuses.
And one of the other things being pursued by Barney Frank who is chairman, powerful chairman of this House Financial Services committee is, because he says the government is an 80 percent owner in AIG, right? We basically are AIG, as the government. Why don't we just sue these employees for breach of contract, if we can. Let's look at these contracts and see if we can say, you messed things up, you didn't perform, so you are not entitled to this money, and see if we can get the money back that way, Heidi.
COLLINS: All right. Well, whew! We are watching all of it very closely alongside you, Brianna Keilar, our congressional correspondent. Thanks so much.
We are looking at Paul Kanjorski, here now as we continue to look at the House Financial Services subcommittee. He is making some announcements, some things that will be happening, or actually, some things that already happened, some meetings that took place between Geithner and Bernanke. Twenty-fourth, I'm hearing. There is a lot more that is going to be happening, on March 24th.
They are asking - sorry, I'm getting this as we go, guys. Bear with me.
He has just asked that both Bernanke and Geithner go before the committee personally, a full committee. It will happen on March 24th. So far, that is something that has already been decided. Federal Reserve Chairman and Treasury Secretary will be appearing before the full committee on March 24th. Again, we will keep our eye on these live developments, as they happen right here.
And meanwhile, is there any redress for the bonus mess? Our senior legal analyst Jeffrey Toobin joining us now live with a closer look at AIG.
So Jeffrey, I have a list, a myriad of questions for you. I think everybody does. But let's - any idea of what Congress is really planning to do here? I mean, legally, you're the guy who tells us how the legal stuff works. What's the recourse? We've been hearing lawsuit, we've been hearing huge taxes. What do you see really taking place?
JEFFREY TOOBIN, CNN SENIOR LEGAL ANALYST: Well, let's think about this in two general areas.
One is taxes. Could Congress pass a tax that applies only to the people that received the bonuses in this one part of AIG, the controversial $165 million in bonuses. Could there be a really stiff tax applied to those several dozen people? Probably. But it would be very difficult to design in a way that's constitutional. There's a provision of the law - the Constitution that says you can't pass a bill of attainder, which means that you can't pass a law that says Heidi Collins is a criminal. You can't pass a law directed at a single individual.
COLLINS: Thank God.
TOOBIN: Right, I know. That got voted down in Congress, you'll be pleased to know.
COLLINS: Good.
TOOBIN: But they could perhaps do that if Congress could get its act together to vote, all together on this and get it passed and the president sign it. Not a simple thing. Because Charlie Wrangle, the chairman of the House Ways and Means Committee, has already expressed some skepticism about that idea. So there are a lot of road blocks.
So the other idea is lawsuits. Could AIG sue, could the government sue these individuals? And the answer to that is, probably not.
COLLINS: Yes.
TOOBIN: Successfully.
COLLINS: Yes, probably not.
Hey, Jeff, sorry to interrupt you, but stick around with us, if you would, because we want to dip in just a little bit here and see what Paul Kanjorski is saying.
Let's listen in for just a moment.
REP. PAUL E. KANJORSKI (D-PA), CHAIRMAN, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES: ... with Mr. Liddy to withhold $93.3 million in planned deferred compensation distributions. I had hoped that AIG might take similar action again. Unfortunately, my sound advice went unheeded.
The company hid behind legal technicalities and the outcome I predicted happened. AIG has become the subject of a considerable public storm, and the public's interest in providing ongoing, sustainable support to repair our struggling financial system has plummeted.
We will undoubtedly spend much time today discussing these retention bonuses and counterparty payments. But I must urge my colleagues to focus on the bigger picture. We need to ask what happened, why it happened, what is happening now, and what we can do going forward to prevent similar situations.
To protect the taxpayers, we must also ensure that AIG acts prudently and pays back its borrowed funds promptly. I am committing to do just that.
We'll now hear from the gentleman from New Jersey, the ranking member, Mr. Garrett.
REP. SCOTT GARRETT (R-NJ), RANKING MEMBER: (INAUDIBLE) without my glasses.
Thank you, Mr. Chairman.
There's been much outrage expressed this week, and rightfully so, from almost all quarters regarding the bonuses for employees within AIG's financial product unit.
Where was the outrage, at least from some quarters, six months ago when AIG's bailout was hastily crafted and the inaudible) American taxpayer became 80 percent owners of the company?
Where was the outrage when $40 billion in TARP money was pumped into AIG for the benefit of its counterparties last November? But we didn't find out about the identities of those counterparties until this past weekend.
And why didn't the Fed, which I understand has known about these bonuses for at least a couple months, raise this issue with us earlier?
Did it raise the issue with Secretary Geithner, who's been called the architect of the AIG bailout and from whom the -- the -- the Fed has been working so closely with the ongoing management of AIG's affairs?
And why didn't Secretary Geithner raise this issue just last week with the president? And we knew that he was briefed in detail about the bonuses from the CEO of AIG.
What about the fact that the Fed and the administration still have not outlined an exit strategy from this whole situation?
Some of us were expressing concern from the original bailout of Bear Stearns which was conducted by the Fed over a year ago, when I and 16 of my colleagues even sent a letter to Chairman Frank demanding a hearing on how the Fed was putting American taxpayers at risk (INAUDIBLE) financial institutions. But it took him over three months to schedule one.
I also sent a letter to the Fed in early December expressing concern about the Fed's lack of transparency and asking who it was (INAUDIBLE) specific counterparties with AIG and who directly benefits from AIG's government (INAUDIBLE).
Part of me wants to say some of the loudest -- to some of the loudest critics, "What did you expect? And why weren't you asking more questions before?" I would argue that the real outrage now is the $170 billion in taxpayer money that has been pumped into this company, and to what effect?
Though I realize that recent events have now, to some extent, overtaken this hearing, but there are some other issues to explore as well. We've heard repeatedly, for example, from a number of voices that AIG's financial products division wasn't even regulated.
But my understanding -- and we have the OTS here to testify -- is that the OTS was, in fact, looking at the activities in this unit, so I'd like to explore that a little further.
Also, I wish that the Fed could have joined us here today, but they have an FOMC meeting here today so they couldn't be with us, and so they've asked to be excused. But I think this basically highlights the tension, I think, between the Fed's duties relating to monetary policies and their regulatory policies.
Furthermore, we have a representative from S&P here today, and I'm hoping they can shed some light on issues relating to credit downgrades and what role they may have played with regard to AIG to come up with additional funds at the current time, and which led to the government interference in the first place and, most recently, to the restructuring.
And secondly, on this point, should Congress and the American taxpayers be bracing for further downgrades? And will that affect our responsibilities or our liabilities going forward?
So I'm sure we will spend a lot of time this morning talking about the bonus issue, very important that that is.
I also -- I hope, as I assume the chairman does, that we can get into the weeds a little bit more and talk about the current state of the company, efforts to wind down the company and the counterparty obligations, and the progress that has been made in selling off the company's assets and divisions as well.
And with that, I yield back.
KANJORSKI: Thank you very much, Mr. Garrett.
We will now hear from our full committee chairman, Mr. Frank from Massachusetts, for five minutes.
FRANK: Thank you, Mr. Chairman.
I'd hoped we could focus on the subject at hand, but I do have to respond to Mr. Garrett's complaint that (INAUDIBLE) get a hearing quick enough. Yes, Mr. Garrett did ask for a hearing on the role of the Fed. We had a number of other things going on legislatively at the time.
We did have the hearing in July of 2008. And because I was concerned with the gentleman from New Jersey's views here, I did check. At that hearing, he asked no questions about this program. He did ask a question about covered bonds.
So the gentleman was aware he could've had the hearing. We had the hearing on specifically this general subject and he declined to ask any questions about it.
I suppose -- I understand he's disturbed that we didn't give him a chance not to ask any questions a month earlier, but I am unconvinced that that would've made any difference.
We did have a hearing about the role of the Federal Reserve well in advance of the decision by the Federal Reserve to come...
(UNKNOWN): Will the gentleman yield?
FRANK: I will yield.
(UNKNOWN): My understanding is that I began on the issue of covered bonds, but then began -- went into other issues, as well.
FRANK: Well, that wasn't my reading of the transcript, which I thought might come up. But the fact is that we did have the hearing and in five minutes, I would have to say maybe at the end the gentleman touched on it. I didn't recall that.
But covered bonds hardly seem, to me, to be the major topic that the gentleman insisted on having the hearing about. And we did have the hearing and I would've thought he would've used all of his time on this topic.
Five minutes is, as we know, often too little for us to deal with it. But the point is that the committee did have a hearing on this well before the decision to go into the AIG.
The Federal Reserve came to us in September and told us that we're doing AIG. We've had subsequent hearings and I do believe it is important for us to amend that statute under which the Federal Reserve operates, although I think doing it in the midst of this current financial uncertainty would be a mistake.
But the point is we did have a hearing well in advance of the AIG situation, and I guess we'll just release the whole transcript and people can decide how vigorously these questions were pursued.
It is not my recollection. I think a number of people left their fight in the gym when it came to the actual confrontation with Mr. Bernanke.
Now, as to AIG and the subject of the hearing, I do believe that it is time for us to assert our ownership rights under this arrangement. The bonuses are wholly unjustified and they are an example of the problem with the financial incentives that the compensation gives, in general.
This is an issue that many of raised in 2006 when we were in the minority. We brought it up again in 2007 in the majority. We brought to the floor a bill on executive compensation. It was just the beginning. It was very strongly opposed by most on the other side.
The problem is not the dollar amount, but the incentive structure. It's a "heads they win, tails they break even." I look at the contract that is being invoked as unassailable, and here is what it says. "The bonus pool for any compensation year, beginning with the 2008 compensation year, will be affected by the incurrence of any realized losses arising from any source, subject to the limitations set forth in Section 3.07."
And Section 3.07 says, "Notwithstanding any other provision of the plan, for any compensation year, beginning with 2008, there shall be a $67.5 million limit per year on the extent to which the pool can be reduced."
So that it means that if, in fact, they have a net loss for the year, they still get the bonuses. This is the problem. This is the problem with those contracts and I think whoever signed these contracts ought to be called to account on the part of the company.
It's a problem with the compensation structure going forward. What it says is here given the 70/30 split of distribution income, if the losses in the year exceed $225 million, then that loss above $225 million is irrelevant to reducing the bonus pool.
$225 million turned out to be a rounding error in their losses. So they give themselves contracts which effectively insulate them from losses.
That's one of the things we have to look at, this situation in which you get a bonus when it goes up.
So what they do is they count any gain and that goes into the bonus pool. If those gains are offset by huge losses, there's a very limited effect to which they going into the bonus pool.
What I think we should be doing is exercising our rights as the owners of this company and bring lawsuits. It is one thing for the federal government to say because the Federal Reserve lent the money and then Treasury followed up, we are going to invalidate these contracts where both parties to the contracts say they want to go forward.
That causes some problems, in people's minds, the question of the federal government abrogating a contract. It's not something we should do statutorily.
But we're the effective owners of this company. What we ought to be doing is exercising our rights as the owners to bring lawsuits to say these people performed so badly, the magnitude of the losses were so great that we are justified in rescinding the bonuses.
That may be a controversial lawsuit, but it is a better one than trying to interfere under our regulatory authority, and I think it is worth trying and I think that there could be a good case made that the bonus is granted by people who, in fact, incurred great net losses by their work ought not to be granted.
We will also be asking Mr. Liddy to give us the names of the recipients. They have sent us some information under the confidentiality rules. I've spoken to Chairman Kanjorski about this. We will be asking for the names. If Mr. Liddy decline to give us the names, then I will convene the committee to vote a subpoena for the names. So we do intend to use our power to get the names of the people here.
Let me say that as you read this contract, it appears to me to have been signed in contemplation of serious losses, because it has this limitation on the amount of which -- again, it's an incentive bonus.
What it says is if you make money, you get money; but if you make money which is outweighed by losing money, you still get the bonus.
As I said, I think those are bad incentives. And as to retention, no, I do not think these are the people you want to retain. The argument is you need to have the people who made the mistakes so they know how to undo them.
Human nature being what it is, I think there's a lot to be said about having people who were not the ones who made the mistakes undo them. The natural tendency to protect your own mistakes comes into play.
So as I said, I will be urging the secretary of the treasury, I've written him a letter, let's exercise our ownership rights and let's bring a lawsuit, as the owners, against people who, in fact, did damage to the company.
I thank you, Mr. Chairman.
KANJORSKI: Thank you very much, Mr. Frank.
And now we'll hear from Mr. Bachus for two minutes.
REP. SPENCER BACHUS (R), ALABAMA: Thank you, Chairman Kanjorski.
As Chairman Kanjorski said, he and I requested the GAO to do an investigation on the motivations behind the government intervention and bailout of AIG and it was actually intended to help, and I'll be very interested to find out the results of that study.
For several weeks now and even today, we continue to play kind of a game that children used to play, pin the tail on the donkey, trying to put the blame somewhere else.
And in truth, there's plenty of blame to go around. AIG, the company, engaged in very reckless, risky behavior, and I think we all have the right to be angered that such a fine company at one time has been -- is in the mess that it's in and the effect that it's had on our economy.
That's justified anger. So we could certainly pin the donkey on AIG and those within that company, most all of them long gone who caused that.
Washington, the regulators, they failed to do their job. We ought to blame them. That's justified.
This Congress, some of our policies have contributed to some of that behavior, the failure to regulate, the failure of oversight by this Congress. We're to blame.
The one people who probably aren't to blame, but seem to be paying the tab is the American people. They're paying for all this bad behavior by the company, all this bad behavior by our failure to regulate, all the failure of us to take action in numerous different areas.
We all should bear the blame. But I think, at this point, that anger shouldn't distract us from really the true issue and our goal today, and that's to try to recover as much of the taxpayers' money as we possibly can. That ought to be our motive and the blame game needs to be secondary, because we're all to blame.
Now, the only possible successful outcome to this is to manage our way out of the current problems.
Now, how do we do that? Do you think Congress can manage AIG? I don't think so. Take a walk through the visitor center; three times over budget, five years late. We can't manage AIG.
How about the regulators? There are a lot of empty desks at Treasury. I don't think that the Fed or the Treasury has done a very good job.
How about a poll on TV? Should we just take some poll results and act from there? I don't think so.
As unpopular as it may be, I think the best opportunity that we have is to let that new team at AIG -- and we're all upset over the bonuses. The bonuses were awarded and signed as contracts in 2007, long before Mr. Liddy and the new team was in play, and we're justifiably angry at him for maybe not doing a better job of getting out of it.
But he came in after the collapse of AIG, with a $1 salary, and you can vilify this new management team if it makes you feel better, but resolving a company as large and as complex as AIG is no easy task.
It was in a mess and it will require a lot of good fortunate. It will require an economic recovery. And that's what they're doing now. They're unraveling the deals. They're shutting down this financial products division that has caused all of us heartbreak and harm, and that's going to take time.
The people who set the policies that brought AIG to the brink of total collapse are gone. We need to give this new management team the time it needs to get the job done.
They were assigned that job in September and when we did it and when the Fed did it, they said it would take two years or three years to do it. The government trying to get more involved than it is is just going to be a sad experience. We need to let -- as I say, we need to -- and I close by, again, saying the solution here is not government running this company. It's a private team and they're going to need all the help they can get.
Thank you, Mr. Chairman.
KANJORSKI: Thank you, Mr. Bachus.
And now we'll hear from the gentleman from New York, Mr. Ackerman, for one minute.
REP. GARY ACKERMAN (D), NEW YORK: I'll try to observe the time.
Mr. Chairman, there's a tidal wave of rage throughout America right now and it's building up and it's expressing itself at this latest outrage, which is really just the tip of the iceberg.
And that rage is because the taxpayer knows that they are the ultimate sucker on the list of who pays for all of the greed that has been going on in the marketplace for years and years.
And the real question that we're going to have to face here is not just these bonuses, which are minuscule compared to the outrageous sums that we really have to be talking about, but how a previously venerable company that was an icon in the industry, selling legitimate insurance products on the financial market, succumbed to this greed and figured out how to package smoke and sell it on the marketplace for billions of dollars, without any bit of supervision by any agency, regulation, and without the watchful eye of the Congress.
KANJORSKI: And now, the gentleman from Georgia, Mr. Price, for two minutes.
REP. TOM PRICE (R), GEORGIA: Thank you, Mr. Chairman.
I was remarkably disappointed to learn that Secretary Geithner declined to testify at today's hearing, considering the primary role that he played in the governmental intervention into AIG.
Make no mistake. Everyone is up in arms over the bonuses provided to AIG executives. It seems to me, however, that the outrage should more appropriately be directed at the fact that taxpayers were put in this position in the first place.
This is exactly why the federal government should not be in the business of bailing out private companies.
This is what a political economy looks like. And it's a very dangerous place to be.
Misguided past governmental intervention has put us in precisely this position. The bonus money distributed by AIG is indefensible. But the taxpayer bailout afforded to AIG by the government is remarkably more egregious. The government has already poured over 170 billion taxpayer dollars into AIG -- over 1,000 times the amount paid out in bonuses.
President Obama has said he's going to "pursue every legal avenue to block these bonuses and make the American taxpayer whole."
Well, I wish the president demonstrated the same level of outrage over the repeated taxpayer-funded bailouts that we've seen in recent months.
I wish he demonstrated the same commitment to making sure that the taxpayers were made completely whole. I wish he demonstrated the same commitment to fundamental American principles.
What we desperately need is an exit strategy that will get back the $170 billion that the taxpayers have already sacrificed to keep AIG running. To that end, we need a comprehensive strategy that is going to recoup all taxpayer subsidies, get the government out of the business of running private companies, picking winners and losers, and taking us further into a political economy.
AIG should be held accountable for every bad decision it's made. We simply must, however, restore accountability and the market discipline in the system, so that our economy will be able to grow again.
We need to make it -- recognize that most (ph) of those who still believe it ought to be the most vibrant and robust economy in the world. And the best way to accomplish that is to embrace and restore fundamental American principles that made this country great.
KANJORSKI: Thank you very much, Mr. Price. And matter of fact, it was excellent. Exactly two minutes (ph).
Now we'll recognize the gentleman from California, Mr. Sherman, for one minute.
REP. BRAD SHERMAN (D), CALIFORNIA: Mr. Chairman, at the appropriate time, I'll ask that Mr. Liddy be sworn. We should impose a high surtax on those executives who choose to retain excessive compensation, and that should apply to all the big bailed-out firms.
Securities laws require timely disclosure of material information to shareholders, and impose criminal penalties on those who conspire to withhold that information.
If the 300 million shareholders of AIG -- namely, the American people -- had been fully informed on a timely basis about these bonuses, we would not have invested $170 billion. We certainly would not have invested the additional $30 billion that was put in just two weeks ago. We would have insisted on receivership (ph).
This would have saved us tens of billions of dollars, prevented billions of dollars from being dispersed to foreign banks, prevented the bonuses from being paid, and voided the bonus contracts.
I have urged receivership. Some can argue against receivership. But no one can argue in favor of a criminal conspiracy to withhold information from the American people, so as to deprive them of the right to decide whether we should have receivership.
I yield back.
KANJORSKI: Thank you, Mr. Sherman.
And now we'll hear from the gentleman from Delaware, Mr. Castle, one-and-a-half minutes.
REP. MICHAEL N. CASTLE (R), DELAWARE: Thank you, Mr. Chairman.
While we seem to all agree that AIG employee bonuses were a poor use of taxpayer dollars at this critical point in time, I am concerned we aren't getting the full story here. The Fed and the Treasury are stewards of the American taxpayer investment (ph) in AIG, an amount approaching an 80 percent ownership share of that company since September of '08.
It is my understanding that the Treasury, Fed and AIG executives have been discussing these bonus payments amongst themselves for the last three months.
I would like to know what was said between these agencies, what options were weighed, and how the bonus decisions were ultimately made. Any details in this matter that can be provided are of utmost concern to me and the American public.
I realize Mr. Liddy is relatively new to his position. I'm sure he can describe (ph) AIG's role in these decisions. However, I am disappointed, Mr. Chairman, that we will not be hearing today from the Fed and Treasury to discuss their roles during today's hearing. And I heard you state earlier we'll hear from them in a week or so, but I think they should have been here today.
The American taxpayer is being asked to trust government now more than ever. The Treasury and the Fed are overseeing the expenditure of billions, if not trillions, of dollars to stabilize our financial infrastructure and get our economy on solid ground.
Our financial -- we understand that this role is difficult, but transparency and honesty is paramount as we work to regain fiscal stability.
I look forward to hearing from our witnesses today, and I look forward to hearing from Treasury and the Fed when they arrive here.
I yield back the balance of my time.
KANJORSKI: Thank you very much, Mr. Castle.
Now we'll hear from Mr. Capuano from Massachusetts for one minute.
REP. MICHAEL E. CAPUANO (D), MASSACHUSETTES: Thank you, Mr. Chairman.
Mr. Chairman, this first panel is made up of thrift regulators, insurance regulators and credit rating agencies. I want to know, where were you or your agency, or more importantly, some of you, your (ph) sister agencies at a different level, where were they when AIG was getting ready to do this (ph)? Not today. I want to know how we got where we are.
I want to know, do you believe that what was done so far, the path that we have taken, is it better or worse than simply declaring bankruptcy for the company and getting it over with (ph)?
I want to know whether you believe that AIG, whether they will ever return to profitability, whether the taxpayers will ever see their money back. And if so, when.
Thank you, Mr. Chairman. I return my time (ph).
KANJORSKI: Thank you, Mr. Capuano.
Now we'll hear from Mr. Manzullo of Illinois for one minute.
REP. DONALD MANZULLO (R), ILLINOIS: Mr. Chairman, I examined Mr. Kashkari from TARP on December 10th, and asked him if he was going to ask for a $3 million bonus back from one individual. He said, it could be deferred compensation (INAUDIBLE). Deferred compensation for what?
I represent Rockford, Illinois, the largest city with 14 percent unemployment. People are losing their jobs. Factories are closing. We're taking cutbacks, working odd shifts and taking late night shifts. They aren't being paid to destroy the economy. They're being paid to invigorate it.
We're sitting (ph) in this (INAUDIBLE) today, all 740,000 of them, wondering how could government do something so stupid as to allow these people to make that kind of money, and then sit back and everybody point fingers at these other.
We want some answers today.
KANJORSKI: Thank you very much, Mr. Manzullo.
Now we'll hear from Ms. Maloney from New York, for one minute.
REP. CAROYLN B. MALONEY (D), NEW YORK: American taxpayers are justifiably outraged. AIG will be remembered as one of the worst financial disasters in American corporate history.
Six months into the crisis, AIG executives still have not read the memo from the American taxpayer. It is morally reprehensible and fiscally irresponsible to expect bonus money for bringing a corporate giant to its knees and paralyzing a national economy.
There are many proposals before Congress now to address this outrage. I have offered legislation which would tax at 100 percent any bonus compensation where the U.S. taxpayer has majority ownership of the company.
This would bring back the $125 million in bonus money. Bonuses should be based on creating value, not destroying it, and a formerly great company, AIG.
KANJORSKI: And now we'll hear from Mr. Royce of California for one minute.
REP. ED ROYCE (R), CALIFORNIA: Thank you, Mr. Chairman.
I voted against the bailout of AIG, and I wrote an editorial at the time, "Bailout Plan Could Mutate Into a Gravy Train of Tax Money." Well, it has.
And rewarded in this are the counterparties around the world that made poor investments with AIG. Rewarded with bonuses are the members of the very financial products division that contributed to AIG's demise. Rewarded is AIG that now appears to be using their new systemically significant label, issued by the federal government, to charge artificially lower rates in (ph) their commercial lines, and undercut responsible small, private insurance companies in this country (ph).
Central to this discussion on AIG is what Chairman Bernanke told us. He said, 54 various state insurance regulators didn't have the capacity to deal with a global insurance company.
I've been warning about this systemic risk here since 2006. Congresswoman Melissa Bean and I have been pushing a bill that will close that gap. And until we establish a world class regulatory alternative that is able to deal with a global insurance company like this, that gap will remain.
Now, in the meantime, we should strike these bonuses.
Thank you, Mr. Chairman.
KANJORSKI: Thank you, Mr. Royce.
And now we'll hear from Mr. Hodes from New Hampshire.
REP. PAUL W. HODES (D), NEW HAMPSHIRE: Thank you, Mr. Chairman.
You know, as far as the American people are concerned, I think AIG now stands for arrogance, incompetence and greed.
It is unacceptable that TARP funds are being pocketed by AIG executives, and it must not be allowed to stand.
I agree with Chairman Frank. I think his approach is a good one. It is ridiculous to stand on these contracts as justification for paying the bonuses, given the circumstances that AIG found itself in.
As representatives of the taxpayers, I believe that the contract provisions which allow bonuses for failure are unconscionable, and should be held to be invalid or unenforceable, on the grounds of public policy. I think it's a good thing we explore that path, and I look forward to supporting any way to get this money back to the American taxpayer.
Thank you, Mr. Chairman.
KANJORSKI: Thank you.
And now we'll hear for one minute from Ms. Biggert of Illinois.
REP. JUDY BIGGERT (R), ILLINOIS: Thank you, Mr. Chairman. Thank you for holding this hearing.
Let me be clear. We want the money back. It should never have gone to the recipients in the first place. Today I want to know if the taxpayers, who own 80 percent of this company, get to vote on these bonuses.
Did anyone represent the U.S. taxpayer? While preaching transparency and accountability, did the administration and the leaders in Congress drop the ball? Did the regulators drop the ball?
I'd also like to know how much would the recipients have received in bonuses, if the federal government had not stepped in in September and October and November, and now in March. I don't think that there would have been any bonuses.
So, I think that AIG should either return the bailout money, with or without the bonuses. We need to reverse this travesty. Perhaps we need to take legal action.
This is not the direction that my hardworking, taxpaying citizens want us to go. We can do better, and we must do better.
With that, I would yield back.
KANJORSKI: Thank you, Ms. Biggert.
And now for one minute, Mr. Klein of Florida.
REP. RON KLEIN (D), FLORIDA: Thank you, Chairman Kanjorski, for holding this important hearing.
As most Americans (INAUDIBLE) were pretty disgusted by the deplorable saga of AIG. And I certainly join my constituents in their outrage about the millions of dollars in bonuses that are being awarded to AIG employees.
The American people understand that we are going through a difficult time, and are prepared to sacrifice and work together to get our country back on track.
But they will not stand for taxpayer dollars being wasted on bonuses for people who bear responsibility for this crisis, in part, and neither will I.
When I'm back in my district in South Florida, I talk to people who have lost their jobs, their health care, their homes, the value of their pension and investments.
Yet here we are sitting today, or we will be sitting, before the chairman and CEO of AIG, who distributed million-dollar bonuses to those who drove the company and possibly our economy into the ground.
There's a tremendous disconnect between the American people and the executive officers of AIG. And I'd certainly want to know, what were they thinking when they allowed these bonuses to go forward (ph).
I look forward to their testimony and a frank discussion about how to resolve this.
Thank you, Mr. Chairman.
KANJORSKI: Thank you very much, Mr. Klein.
And now, we'll hear from Mrs. Capito of West Virginia, for one minute.
REP. SHELLEY MOORE CAPITO (R), WEST VIRGINIA: Thank you, Mr. Chairman. I'd like to thank you for convening this hearing this morning.
As I was on my way to work this morning, into the office, the first person -- the first person -- I encountered looked at me and said, "Something isn't right here," in reference to the recent news of the AIG bonuses.
And to be honest, I couldn't agree more.
When this body first considered the proposal that would become the TARP program, I and others expressed significant concerns that we were moving too quickly, there was too much risk for the taxpayer and too little oversight.
News accounts from this week only reconfirm what many of us said from the beginning: there was not adequate understanding of or transparency surrounding these (ph) dollars.
All across the nation, American families and small businesses were tightening budgets, cutting back on costs, making tough decisions. And the recent news of the bonuses has just added an insult to the prudence of these small businesses and families that are making difficult decisions every day.
Whether we like it or not, or whether they like it or not, the companies that have received TARP or plan (ph), are under intense scrutiny, understandably.
The light of shining light -- the light is shining brightly on their actions. And it's my hope we can resolve the current economic challenges so that the taxpayers are no longer on the hook for this type of access -- excess.
I would like to thank the witnesses for being here today, and look forward to their testimony.
Thank you, Mr. Chairman.
KANJORSKI: Thank you, Ms. Capito.
And now we'll hear from Mr. Peters of Michigan, one minute, please.
REP. GARY PETERS (D), MICHIGAN: Thank you, Mr. Chairman. And I want to thank you for holding this hearing here today.
I'm one of the many members of the subcommittee who are outraged by the news that employees of AIG were paid $165 million in bonuses. AIG has received over $170 billion from taxpayers, and my constituents are finding it harder and harder to believe that such support is justified.
In my congressional district in Michigan, there are thousands of UAW employees who have employment contracts, and they've been told that they need to renegotiate those contracts and make concessions to justify taxpayer investments.
There are thousands of white collar employees with employment contracts, who have foregone promised bonuses and benefits, and have taken pay cuts, in order to save the companies that they work for.
People are sick of this double standard, where working- class and middle-class workers are treated differently than the financial industry executives.
What people are looking for is a sense of shared sacrifice. Wall Street does not seem to understand that yet, but they need to understand it immediately.
I know that Mr. Liddy has outlined some reductions, but I look forward to hearing more from Mr. Liddy, and again, thank you, Mr. Chairman, for this opportunity.
KANJORSKI: Thank you very much, Mr. Peters.
And now we'll hear from the gentleman from Texas, Mr. Hensarling. One minute.
REP. JEB HENSARLING (R), TEXAS: Thank you, Mr. Chairman.
With respect to the TARP program, this AIG bonus scandal is simply the outrage of the week, and the week is not yet half over.
The greater outrage should be the almost $180 billion of taxpayer exposure, and growing.
The greater outrage ought to be four bailouts later, no end in sight, and no plan of sustainability or exit strategy that has been explained to this committee.
The greater outrage ought to be taxpayer money used to sustain counterparties to make them whole, counterparties who undertook a risk versus taxpayers, who did not take the risk.
And finally, the greater outrage ought to be over a Congress and a president who could have prevented all of this. With respect to comments out of the administration, I'm reminded of that famous scene in the Humphrey Bogart movie "Casablanca," "I'm shocked to find gambling going on here," as the character stuffs the gambling winnings in his pocket.
I have two suggestions. No more taxpayer funds without the ability to place these firms in receivership. No more bonuses until the taxpayer is made whole.
KANJORSKI: Thank you very much.
And next, Mr. Scott of Georgia. One minute.
REP. DAVID SCOTT (D), GEORGIA: Thank you very much, Mr. Chairman.
I -- I just want to state how very important it is for us to quickly restore the confidence of the American people in what we're doing.
In order to do that, we've got to get to the bottom of how we got into this situation in the first place. I think it's very important, Mr. Chairman, to get to the bottom of this to look at the fraud elements of this case.
We've got to remember that this started in March of -- of 2008. How in the world could they justify putting out contracts of $450 million for a financial products department in AIG that had only 367 employees?
Also, it's very important that this $165 million at the outset is only the tip of the iceberg. What they have put forward here comes to a total of one point -- excuse me -- $1.2 billion in bonuses that have been given throughout the firms for this year.
The other point I want to make, Mr. Chairman, is in order for us to really get the confidence of the people back, we have got to put a pause button on these bailouts and get to the bottom of it. And we in Congress have that responsibility to as well, and we have a role to play.
So as we point fingers here in Congress, we've got to recall that there are three fingers pointing right back at us. We've got to make sure we're doing our job in order to have the confidence of the American people.
KANJORSKI: Thank you very much, Mr. Scott.
We will now hear from Mr. Barrett of South Carolina for one minute.
REP. J. GRESHAM BARRETT (R), SOUTH CAROLINA: Thank you, Mr. Chairman.
Last fall, President Bush asked for my help to avoid a total collapse of the economy, a collapse which would have pushed our country into greater economic peril.
Back home, small business owners and major corporations called me to let me know that if we didn't take extraordinary steps in those extraordinary times, many of the employers my constituents rely on would be forced to close their doors for good.
Now, it disappoints me to see that some of these very companies who requested taxpayer assistance have failed to change their pattern of irresponsible decision-making which undoubtedly contributed to the current economic crisis.
The Bush administration and then-Chairman of the New York Fed, Timothy Geithner, mismanaged the implementation of this program.
And the Obama administration, while assuring us they knew exactly what was going on and how the monies were being spent, have failed to bring about the necessary reforms and safeguards to protect the American taxpayer.
Panel, we need to figure out our exit strategy, how taxpayers are going to be paid back, and when we can end this toxic relationship with AIG.
KANJORSKI: Thank you very much, Mr. Barrett.
For one minute, the gentleman from Idaho, Mr. Minnick.
REP. WALT MINNICK (D), IDAHO: I opposed the TARP bill, and I opposed the bailout of AIG. I'm a business man who, when I bought companies, took due diligence seriously.
We taxpayers shouldn't buy companies for socialized businesses. Having made the mistake with AIG, we should not now throw good money after bad.
Instead, we should now withdraw taxpayer support and let AIG go bankrupt. Let a federal bankruptcy judge void these ill-advised bonus contracts, sort out the losses, and bring in new qualified management to properly manage AIG free of one more nickel of taxpayer support.
Thank you, Mr. Chairman.
KANJORSKI: Thank you very much, Mr. Minnick.
Next, Mr. Campbell of California. One minute.
REP. JOHN CAMPBELL (R), CALIFORNIA: Thank you, Mr. Chairman.
There will be lots of discussion about how we got here, but we also need to spend some time on what we're going to do next. I have a lot of concerns about whether there will be any business left from which the taxpayers can recoup any money. Questions that I would like to know some of the answers to is that in September AIG had $450 billion of exposure on credit default swaps. What is that number today?
AIG's commercial property and casualty business was down 22 percent in the fourth quarter, and there's evidence that it retained the remainder of its business by substantially reducing prices. What is happening to that property and casualty business? Is it in a -- some kind of a death spiral, as it would appear?
Have there been some -- even in the money market fund that AIG had -- some puts and other riskier assets put into that which should not have been put into that?
And if the systemic risk is in the life insurance business, where does that stand right now?
Thank you, Mr. Chairman. I yield back.
KANJORSKI: Thank -- thank you very much, Mr. Campbell.
And now, the last. From Texas, the gentleman, Mr. Neugebauer, for one minute.
REP. RANDY NEUGEBAUER (R), TEXAS: Well, thank you, Mr. Chairman.
I'm going to go ahead and tell -- say that I'm outraged as well, but what I would like to be is enlightened. What we really need to know is what the plan is. The whole problem with the TARP plan from the very beginning is nobody's ever had a plan, other than to throw taxpayers' money at a problem that nobody's able to actually -- to define.
As the previous speaker spoke, you know, what is the position in some of these CDSs today as opposed to what were they on the day that we took over, or, I guess -- I think we took over. I'm not sure what we did with AIG.
But I want -- want -- I -- what the American taxpayers want to know is what we're doing to mitigate their exposure. When are they going to get their money back? And what is the defined -- and -- and what we need -- this committee needs, if we're going to actually do oversight, is a plan that has measurable results.
In other words, here we -- here's where we are today, here's where we think we're going to be. Then we want you to come back in 30 days or 60 days or 90 days and show us whether you're making any progress or not.
You couldn't borrow money anywhere in the world on the basis that we're throwing money at -- at -- at -- at some of these entities without a plan.
So I hope we'll be enlightened today as well as hopefully get a little bit less enraged and more engaged in getting our money back for the American taxpayers. KANJORSKI: Thank you very much, Mr. Neugebauer.
And now, in response to a request and consultation with the ranking member, our witnesses today will take an oath.
Will the witnesses please stand and raise their right hands and respond "I do" after I read the oath? 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?
Thank you very much. You are now sworn in. Please be seated.
I will now -- now introduce the panel and first thank them for appearing today. We've had to make switches around because of the changes.
And in light of that, I may say, because I heard some comments in the opening remarks, initially this subcommittee hearing was scheduled six weeks ago, and at that time there was no hullabaloo in the land about the bonuses. It was a standard process we were going through to find out what's happening in AIG.
And -- but Mr. Scott and I are so attuned to what may happen in the future, we anticipated this occurrence, and therefore we were right at the right moment asking. But in reality -- I'm trying to be humorous, but I'm not very humorous.
In reality, the purpose of this hearing really is to find out what happened, how did AIG get here, what is the plan for AIG to perform, and what can we expect in the future, particularly toward when the taxpayers can expect to receive their funds back.
And, Mr. Castle, you specifically stated some disappointment that the secretary of the treasury and the secretary -- or the chairman of the Federal Reserve weren't here today. They are scheduled to be here the 24th of March. That will be the follow up for that. And I'm sure there'll be a lot of concentration on the bonuses, too.
I would just caution my fellow members on both sides of the aisle, the bonuses are important. The bonuses are shocking. But the bonuses are not the only element here. The most important element is what -- what -- what the plan is for the future, and are we going to be able...
FRANK: Will the -- will the gentleman yield? Gentleman yield...
(CROSSTALK)
FRANK: On the procedural issues, we should also note that the secretary of the treasury has also been scheduled to be here on the 26th to talk about the broader regulatory issue, the subject of our previous hearing.
And I did want to note, both of those hearings, just procedurally, will be at the full committee level. The subcommittee has been doing an excellent job of handling this, but the protocol has been, for as long as I've been here, that cabinet officers will only testify at full committees.
So the hearings with Mr. Geithner and Chairman Bernanke will be the full committee, not because there's any reason other than that's the only way you can get them to come. This will continue to be a matter on which the subcommittee is -- is taking a lead for us.
KANJORSKI: Thank you very much, Mr. Chairman. We'll take that into consideration and understand that.
Now, our witnesses are asked to summarize their testimony in five minutes, and all of your statements, written statements, will be made part of the record, without objection. Hearing no objection, that's so ordered.
First we'll hear from Mr. Scott Polakoff, acting director of the Office of Thrift Supervision.
Mr. Polakoff?
SCOTT POLAKOFF, ACCOUNTING DIRECTOR, OFFICE OF THRIFT SUPERVISION: Good morning, Chairman Kanjorski, Ranking Member Garrett, and members of the subcommittee.
Thank you for inviting me here to testify about AIG by the OTS. The scope of government intervention on behalf of AIG has created enormous public interest and acute attention by policy makers. I welcome the opportunity to present the facts available and to answer the important questions surrounding AIG.
The OTS granted a federal savings bank charter to AIG in 1999, and the bank opened for business in 2000. The OTS is the primary federal regulator for the $1 billion FDIC-insured depository institution, and the OTS was the consolidated regulator for the savings and loan holding company.
In January 2000, the OTS was informed that its holding company supervision was deemed equivalent to that required by the coordinator under the European Union's financial conglomerates directive.
OTS continued in its role as consolidated supervisor until September 16th, 2008 when, by operation of law, AIG was no longer a savings and loan holding company.
My written testimony goes into detail about OTS' oversight of AIG, including our annual examinations of the company; targeted reviews of its subsidiaries, including the AIG financial products operating business; our reports on the findings of those supervisory activities; and follow-up communications with AIG's management and board of directors to address our concerns.
In my statement today, I'd like to highlight just a few points. The rapid decline of AIG stemmed from liquidity problems in two important business lines -- number one, credit default swaps. A credit default swap is a derivative instrument that provides insurance-like protection to investors against credit losses from the underlying obligations which were typically mortgage loans.
And number two, securities lending, a business strategy implemented by a handful of AIG's state insurance subsidiaries. It is important to note that AIG stopped originating credit default swaps that were linked to subprime borrowers in 2005.
By that time, however, the company already had $50 billion of such instruments on its books. AIG halted these activities while the housing market was still going strong, but the company's model forecasted trouble ahead.
Another important point is that AIG's credit default swaps were protecting against credit losses on the highest rated, super senior, triple-A-plus-rated tranche of the collateralized debt obligations. This segment of the securitization poses the least risk of credit loss.
In fact, as of December 31st of 2008, there have been no actual realized credit losses from the underlying CDOs.
AIG's crisis resulted from the enormous sums of liquidity required to meet collateral calls triggered by one of the following three events -- a rating agency downgrade of the company, a rating agency downgrade of the underlying CDO, or a reduction in the market value of the underlying CDO.
AIG's security lending program, which began prior to 2000, lent securities from the state insurance companies to third parties, who provided cash collateral in return.
As a general theme, the cash collateral was invested in residential mortgage-backed securities.
With the turmoil in the housing and mortgage markets over the past two years, these residential mortgage-backed securities experienced sharp declines in value. When the trades expired or were unwound, the cash collateral had to be returned to the counterparty.
This created unprecedented liquidity pressure for the company. The cash requirements of the program significantly contributed to AIG's crisis.
I think these are the keys to understanding how we got to where we are today. And as to where we go from here, I see two important lessons learned.
