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House AIG Hearings; Investment Survival Guide; AIG Shares Up 44 Percent
Aired March 18, 2009 - 11:01 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
DON LEMON, CNN ANCHOR: It is the top of the hour, and you're watching testimony in Washington on what happened with AIG.
I want to tell you, it is Wednesday, March 18th, and some of the top stories here right in the CNN NEWSROOM, big bonuses, raw rage. AIG's top man will try to calm a Congress that thinks taxpayers have been looted.
We have live coverage this hour, and you're watching it right now.
Your next employer. Does the road to rescue pass through a job fair? We follow one woman's journey to see how she is coping in these very difficult days.
Good morning, everyone. I'm Don Lemon. Tony is off today, and you are in the CNN NEWSROOM.
As we pay attention to this live testimony going on, on Capitol Hill, we want to tell you about this. There is AIG outrage all over the country.
The backlash over millions of dollars in bonuses paid to AIG employees is front and center on Capitol Hill today. The CEO in the bull's eye over AIG's decision to dole out the bonuses after the company received $170 billion of your tax dollars. Edward Liddy is testifying before a House subcommittee, and lawmakers say it's time to change the way bonuses are awarded.
(BEGIN VIDEO CLIP)
REP. BARNEY FRANK (D-MA), CHAIRMAN, FINANCIAL SERVICES COMMITTEE: 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 compensation structure going forward.
(END VIDEO CLIP)
LEMON: Part of the testimony that's going on on Capitol Hill today.
And we want to get to Congressional Correspondent Brianna Keilar. She is following those hearings for us, and is she is live from Capitol Hill. Brianna, a very interesting and very busy day where you are.
BRIANNA KEILAR, CNN CONGRESSIONAL CORRESPONDENT: Very busy day. And that man you just heard making those comments there, Barney Frank, the powerful chairman of the House Financial Services Committee, he said that today, when Edward Liddy, the CEO of AIG, testifies, he's going to ask him for the names of these executives who got these bonuses, and if Liddy isn't going to give up those names, then Congress is going to use its power to subpoena those names.
I do want to show you this group of people behind me, Don. This is somewhat unique here on Capitol Hill, a hearing that is so interesting that people want to line up for it.
It's already under way. All of the seats are full. Really no sense that people are vacating those seats to allow some of these folks to get a glimpse. That isn't stopping them from waiting in case they can.
And I should tell you, Don, as well, Capitol Police came out and told them they need to be quiet, because they can be heard inside of the hearing room. It's a very busy day, and a lot of people want to see what happens here in this hearing room that we're standing outside of -- Don.
LEMON: Yes, obviously it affects a lot of people, especially with the millions and millions of dollars that were given, billions, really, of taxpayer dollars that have been given to these companies. You can understand the interest here, Brianna.
Do you have anything to look forward to? Do we know how long this is going to last, and how long these folks are going to testify here?
KEILAR: Certainly, this is expected to last a few hours. We are expecting Edward Liddy to testify in that second panel. So that would be coming up here within probably -- possibly the next hour -- Don.
LEMON: All right. CNN's Brianna Keilar, our congressional correspondent.
We appreciate it, Brianna. Thank you. We'll get back to you.
And since the bonus news broke, our phones have really been ringing nonstop. Of course, our in-boxes here, e-mails, have been flooded, and our iReports from angry taxpayers are coming in.
(BEGIN VIDEO CLIP)
JOE PUENTE, CNN IREPORTER: You come aboard my company and you screw up? I'm not giving you a bonus. And I'm sure as hell not going to be dumb enough to put it in a contract before you even start working. This is asinine.
(END VIDEO CLIP)
LEMON: Well, those are coming in from our iReporters.
We know as a group, AIG employees got $165 million in bonuses. How much did individuals pocket, and what are the chances of getting the money back?
We turn now to CNN's Christine Romans. She has been checking all of that out. She is at our business desk for us in New York.
The names are finally starting to come out, and how much money they got, right, Christine?
CHRISTINE ROMANS, CNN BUSINESS CORRESPONDENT: Well, we're still waiting to see those names, and that's something that indeed Chairman Barney Frank of that House Financial Services Committee wants to see from the AIG CEO. But we know the numbers.
We know how much money went out on Friday, $165 million. We know that one person got more than $6.4 million. A handful of people got more than $4 million. A couple of dozen got $2 million-plus, and 73 people got more than $1 million.
Also keep in mind, Don, that 11 of those people, according to the New York attorney general, 11 of those people no longer work for the company anymore. Those were, of course, billed as retention bonuses, but 11 of those people no longer work for the company.
What is the government trying to do to get the money back? The Treasury secretary, Timothy Geithner, in a letter to Congress, said that he is going to try to get the money back against -- deduct it from the bonuses -- deduct those bonuses from the pending $30 billion in aid that is slated to go or be available for AIG. And there is also what amounts to a penalty of another $165 million on there.
You ask where did does that money come from? Well, AIG, of course, was on the ropes and ready to go belly up until the United States government went in with taxpayer money and saved it to the tune of $170 billion. So where would that money come from? Well, essentially, many people are pointing out it would me American taxpayers' money that would be coming back to the American taxpayer, anyway, and it doesn't do anything to prevent those people from the financial products unit from getting the money.
Edward Liddy, you know, his prepared testimony is out. He is somebody who has been working there for six months, came out of retirement. He says that, you know, it is his duty, his honor to serve his country. But he is going to be grilled here about why those bonuses are going out anyway, why he couldn't have found a way to prevent those bonuses from going out.
LEMON: Yes, he's really getting on the PR of all of this, writing a letter in "The Washington Post" this morning, and also his testimony saying he came out of retirement, really, as a duty to his country, to help it out in this situation.
Christine, if you get some names and you get more information, we'll get back to you. ROMANS: Oh yes.
LEMON: Thank you very much for that.
And let's talk about the legal side of this.
AIG says it had a legal duty to pay the bonuses. The company signed contracts with the employees.
Our senior legal analyst, Jeffrey Toobin, joins me now from New York.
Jeffrey, aren't some of the contracts made to be broken? Especially, these are extenuating circumstances and unusual circumstances. Are they made to be broken here?
JEFFREY TOOBIN, CNN SENIOR LEGAL ANALYST: Well, they're certainly made to be litigated, and I think that's the real key here. When you have a contract -- and this applies to any sort of contract -- you always have two choices.
One is, pay, execute the contract, do what it says, or litigate, sue. Decide -- have a court decide what a contract means. And what AIG here did is they simply gave this money to the executives in this tainted part of this tainted company, and they didn't say to these executives, look, circumstances have changed so much, your performance has been so terrible, that you are not entitled to this contract, and if you want to sue, fine.
But they didn't do that. They simply paid out the money, and they deprived the courts of the chance to resolve this before the money was paid. Now, there is a theory that you can maybe go back to these executives and get the money that was paid to them, but that's a much harder situation.
LEMON: OK, Jeff. I have to ask you this, because if they signed contracts -- and, you know, these folks were supposed to get bonuses -- I mean, is all of this for naught? I mean, legally, is that a sound argument -- we were supposed to get this money, therefore, we had to pay it? And so are we doing all of this, making all of this -- is this much ado about nothing, because these people were legally supposed to have this money?
TOOBIN: Well, I haven't seen the contracts. The contracts are not public. But I do know that the courts are full every day of lawsuits about what contracts mean. They often have ambiguities in them that courts have to resolve.
So what AIG did here was simply roll over these employees. They simply said, here, take your $6 million, take your $2 million, and we feel we don't have a right to it. Given the extraordinary circumstances here, given the fact that this money is now the taxpayers' money, it's not AIG's money -- this is part of the enormous amount of money that the taxpayers have put into this company -- I think AIG very easily could have said to these employees, look, you want your money? Sue us. LEMON: Right.
TOOBIN: Take us to court. And that would have been a very different scenario. And AIG would have been in a much more politically defensible position than it is now had they done that.
LEMON: Yes, during these times, these economic times now, that would be a tough argument to fight against.
Jeffrey Toobin, always appreciate your input. Thank you very much for that.
TOOBIN: OK, Don.
LEMON: And as we mentioned, we've received a flood of your iReports expressing outage over the AIG bonuses. Some of you say it is ridiculous for the company to be handing out rewards for failure.
(BEGIN VIDEO CLIP)
MANNY DORADO, CNN IREPORTER: AIG, you need to actually take the money you have and improve your corporation, help your customers, and not help those executives who are just going to go on vacation, get private jets. It's ridiculous. The contract that you need to pay is ours.
(END VIDEO CLIP)
LEMON: And let's talk about where the buck stops.
The man who is getting the grilling today on Capitol Hill, Edward Liddy, stepped in as AIG's chief executive in September, three days after it got its first taxpayer money and well after the bonus contracts were signed. Liddy reminds Americans of that in a letter to "The Washington Post" today, and here's what he writes.
He says, "The anger is understandable, and I share it." Liddy goes on to say, "We weigh decisions with one priority. Will this action help or hurt our ability to pay money back to the government?" That is a question Liddy says -- points out his annual salary is $1, and "My only stake is my own reputation."
That's what's happening right now on Capitol Hill. We're following the developments here. You won't miss anything. As soon as Liddy starts to testify, we'll bring that to you.
Good morning, California. You're in the midst of a financial fallout, and today you're gearing up for a presidential visit.
(COMMERCIAL BREAK)
LEMON: All right. We're following live developments happening on several fronts here.
On the left of your screen, you see those subcommittee hearings. AIG officers and Edward Liddy, the head of that company, being grilled today on Capitol Hill, trying to answer questions. Exactly how did AIG get to this point? And also, how did they pay out -- why are they paying out hundreds of millions of dollars in bonuses after they received your taxpayer dollars.
On the right of your screen, you see we're watching the stock market, and the Dow down some 86 points now. Dow down, as we are following these hearings on Capitol Hill today.
We'll follow up on that. Our Susan Lisovicz will be at the New York Stock Exchange all day, and she will let you know what's going on.
Meantime, let's talk politics here.
Live pictures from the White House, where President Barack Obama will be leaving next hour on a trip to California. People started camping out yesterday, hoping to get tickets to see the president, but our affiliate, KABC, says not everyone who waited overnight got a ticket.
Want to take a closer look at the president's schedule right now.
He received his economic daily briefing earlier. He makes remarks from the south lawn of the White House next hour. And later, he holds a town hall meeting in California.
You can see the president's town hall meeting life from Costa Mesa, California, on CNN and CNN.com. It's set to begin 7:00 p.m. Eastern, 4:00 Pacific.
Your portfolios and your retirement funds have probably gotten a good bit smaller in this recession. Probably taken a real hit here. But don't lose hope. Our Personal finance Editor Gerri Willis has her top tips, next.
(COMMERCIAL BREAK)
LEMON: Now it's time to get some help, some practical advice from Gerri Willis. But I want to tell you about our retirement.
You know, it may seem like a fantasy if you have watched your 401(k) tank over the last year. The average retirement portfolio has -- I hope you're sitting down -- lost 27 percent by the end of the year. That's the average, 27 percent down. But whatever you do, don't stop investing.
CNN's Personal finance Editor Gerri Willis is live from New York with an investment survival guide.
Gerri, so many people just want to throw in the towel.
GERRI WILLIS, CNN PERSONAL FINANCE EDITOR: That's right.
LEMON: You know, I don't even look at mine anymore, and I hear lots of people saying the same thing -- I can't take it.
WILLIS: Right. Well, let me give you one other shocking number here, OK?
LEMON: Yes.
WILLIS: The median balance in a 401(k) in this country, guess what it is?
LEMON: What? I have no idea.
WILLIS: Fifteen thousand dollars.
LEMON: Oh, my gosh.
WILLIS: That's not enough.
LEMON: Are you kidding me?
WILLIS: You need more money than that.
LEMON: To retire on. I mean...
WILLIS: I don't care how old you are. You've got to start saving, right?
LEMON: That's like a couple weeks -- for the average American, that's probably a couple months. You know, they can only survive on that a couple of months.
WILLIS: It's not going to keep you a year.
LEMON: Yes.
WILLIS: That's right.
Well, OK, so what do we do about it? Don't throw in the towel.
You definitely want to know what you own right now. Information is power. Look at what is in your 401(k).
And listen to this, a little bright spot amid the gloom. Money management firm Leuthold Group reports that stocks return no less than 72 percent, and as much as 15.6 percent each year in the decade following a long-term decline. And let me tell you, we have just been through a massive long-term decline. So once this market actually does turn around, you're really going to see some strength.
LEMON: Well, we certainly hope so. OK.
Those are the do's, Gerri, but I'm sure you have some don'ts, yes?
WILLIS: Well, let's talk more about do's here, because I think there are things people are missing.
LEMON: OK.
WILLIS: You've got to keep investing, as we say, putting away money for retirement. In fact, if your -- let's say your employer has said, I'm not going to invest in your 401(k), I'm killing the match. That means you have to invest even more.
Get diversified. Keep in mind that 401(k) investing doesn't just mean stock investing. I think we have lost sight of that. You need bonds, a mix. And, of course, right now, you probably have to fix the mix.
Most of us have seen the portion of our portfolio dedicated to stocks. It's tanked. So now you need to put more in the stocks to make up the difference. Asset allocation is the key to being successful in the long run.
LEMON: And you know, even before this, Gerri, listening to you and all of our money team, I mean, everyone -- even, you know, advisers, brokers -- diversify, diversify, diversify.
WILLIS: Right.
LEMON: But stocks were doing so well in some places, that people just put it in that and said, oh, it's going split, so I'll do that.
WILLIS: That's right.
LEMON: And now they're feeling it.
All right. So I asked about the don'ts now. Those are the do's. You said diversify.
WILLIS: Right.
LEMON: But the don'ts now.
WILLIS: Right, OK.
OK, well, don't go into the 401(k) if you don't have to.
LEMON: OK.
WILLIS: The cost of using your retirement money before retirement, it's crazy. Look, if you're less than 59.5 years old, you take a hardship withdrawal, you'll pay a 10 percent penalty, plus you'll pay income tax on what you took out. If you take out a loan against your 401(k), let's say you lose your job, you're laid off, it's not your fault, you have to pay that entire loan back pronto, and you'll be on the hook for a 10 percent penalty, unless you're 59.5 years old.
Don't leave that 401(k) behind. If you lose your job, roll it over to an IRA.
And finally, Don, don't lose heart. You know, the market is going to recover eventually. There are lots of ways to make it in retirement.
You use your savings, you use Social Security, you'll probably maybe work special projects, maybe do some consulting. There are lots of pots of money that the typical retiree calls on when they're retired to pay the bills. And all of us are probably going to be about the same.
And I just want to remind people, as always, send me your e-mails and iReports. Just head to CNN.com/helpdesk and click on the "iReport" link to upload your question.
LEMON: Gerri, your advice is always very good. But you know when you were saying don't go into your 401(k) money, but when that money is there, you're saying it's mine. It's immediate, and you're in trouble, you know, your home may be going in foreclosure.
WILLIS: Right.
LEMON: You know what I mean? It just seems like it's so easy just to grab that money and use it.
WILLIS: That's right. You know, one more point here. So many people trying to tap it to save themselves from big debt. You know, if you can't afford that house, you need to unload it.
LEMON: Then don't buy it. Yes. Yes.
WILLIS: You need to get rid of it. I think people need to have a reality check here and see if the debt they have, is it for stuff they really need or they only wanted?
LEMON: Yes. And it's just a house. There are memories there, but...
WILLIS: That's right.
LEMON: Yes, it's just a house.
WILLIS: That's right.
LEMON: And you paid the money, you've enjoyed it while you were there. Now it's time to get rid of it if you can't afford it.
Good advice, Gerri Willis. Thank you very much.
WILLIS: My pleasure.
LEMON: Appreciate it.
Make sure you check out our special report, "America's Money Crisis." That's at CNNMoney.com.
Let's take a trip to CNN.com's iReport desk and check in now with producer Tyson Wheatley, who people have been, you know, sending their iReports in. A lot of people are outraged by this AIG. And also asking questions about how they can help. Because, you know, we have this road to rescue that we're doing this week.
What are you hearing? TYSON WHEATLEY, CNN.COM PRODUCER: Yes, that's right.
Well, you know, all week long, we've been giving our iReporters some fun and thrifty challenges. And today, our challenge is to take something old and turn it into something new.
And let's go ahead and start right here with a thrift store bench that's been reinvented. This comes to us from Sherry and John Petersik of Richmond, Virginia.
They have a blog called "This Young House," and they have transformed this old bench that they purchased at a thrift store for $7.00 into a gleaming new one. This one here is now a new addition in their home.
Now, they have been teaching themselves how to do these low- budget projects and they've been blogging about it. They re-sanded, repainted, upholstered this. The entire project cost $30, and Sherry says it could have been a lot cheaper if they had chosen a cheaper fabric.
All right. Now, I want to show you another one. This one is actually really cool.
This is a dartboard that's been turned into a jewelry vanity. And this comes to us from a Georgia State University art student named Cherry DelRosario. And she really rose to the challenge.
So she spotted this empty dartboard at a local thrift store, and basically unusable. So she picked it up for a few bucks, decided to make something out of it.
Thanks to her own creativity, maybe a little inspiration from Martha Stewart, she turned it into a nice place to keep her jewelry. Yes.
Here is the final result. See, it opens up, she's got the mirror there, and all her jewelry. It's really clever, really creative.
LEMON: Very nice.
WHEATLEY: Now, for step-by-step instructions on how to do these projects, the ones by Sherry and Cherry, you can go to ireport.com. And as a reminder, all this week we're rolling out these fun and thrifty and thriving projects.
And I want to give you a sneak peek about tomorrow, because tomorrow is really awesome. We're going to ask for lessons from grandma.
So, you know, grandma has been there, she has been there before, she's been through some tough economic times. What are the lessons that she has told you and taught you? We want you to share those with us tomorrow at ireport.com.
LEMON: And Tyson, lessons from designers that I've learned. I can count on one hand the number of new items I have in my home. Most of them are vintage items that you buy and redo, just like those folks.
WHEATLEY: Oh, yes?
LEMON: Yes. And you save a lot of money.
WHEATLEY: Yes, that's really cool.
LEMON: So very good.
Hey, I look forward to lessons to grandma. Grandma always has good advice, huh?
WHEATLEY: Always.
LEMON: As does Tyson Wheatley.
Thank you, Tyson. We appreciate it.
WHEATLEY: All right. Take care, Don.
LEMON: We're monitoring the testimony from AIG officials on Capitol Hill, and one state's attorney general is following this case very closely. We'll tell you what he's doing.
(COMMERCIAL BREAK)
LEMON: All right. We are monitoring developments today on Capitol Hill.
There you see to the right of your screen, testimony on Capitol Hill from those in charge of AIG. They are getting questioned, really grilled, by lawmakers about how AIG got to this point, and what of that $160 million, $170 million in bonus money that are going to AIG employees -- that is going to AIG employees, because -- why did it happen?
AIG got millions and millions of dollars in taxpayer money. Taxpayer money because of the bailout. So we're following that to see what happens.
The outrage over the bonuses at AIG sweeping the nation. That is no doubt about that. But on Wall Street, investors are reacting in a very different way of.
Susan Lisovicz at the New York Stock Exchange with a look at AIG's shares.
Susan, the shares are up?
SUSAN LISOVICZ, CNN BUSINESS CORRESPONDENT: The shares are soaring, Don. AIG shares...
LEMON: What is that all about?
LISOVICZ: Well, they're up 44 percent right now. That translates into about 44 cents. AIG shares right now are about $1.40.
LEMON: Can you say that's soaring, though? I mean, I guess from where they were.
LISOVICZ: Well, that's a very good point.
LEMON: Yes.
LISOVICZ: I mean, when you're talking about a gain of 44 cents, I suppose you do have to put a little asterisk or a footnote next to it.
The fact is, AIG shares were trading well under $1.00, just days ago. So the stock is more than doubled this week. It's been one of the beneficiaries of the rally that we've seen.
But having said that, whether you say it's soaring or not, they're much higher today. You have to remember, this is a stock that was trading at $70.00 just a few years ago. But then again, it reported the largest quarterly loss in U.S. history.
Overall, check out the Big Board. The Dow Industrial has given back some of the gains we've seen in the last week, but a nice sprint it was. Blue chips up. They were about 850 points in five of the last six sessions, Don.
LEMON: All right, Susan Lisovicz.
Hey, Susan, thank you very much.
LISOVICZ: You're welcome.
LEMON: We're going to check in with Susan in just a little bit. We want to get back to Capitol Hill where Congressman Barney Frank has been doing some questions to executives at AIG.
Let's listen in.
FRANK: Now, I -- this may be beyond the scope of what the GAO got involved in, but you know, Ms. Williams, that the rationale for the intervention by the Federal Reserve was to prevent systemic risk, if there was a total collapse.
Does the GAO have any opinion on whether or not that was about fear (ph)? Or was that beyond the scope of your mandate?
ORICE WILLIAMS, DIRECTOR, FINANCIAL MARKETS, COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE: It really is beyond the scope. We were attempting to identify what the goal was...
FRANK: I appreciate it. That's valid. I -- there's no question, you know, it's fair.
I would just note -- and it's clear that there should have been some conditions.
But I was rereading the transcripts, probably to remind myself of what had happened. We should note that the Federal Reserve and the secretary of the Treasury at that time, Secretary Paulson and Mr. Bernanke, were being criticized, because they had not intervened to stop Lehman Brothers from falling apart and not paying off.
So, they are, to a certain extent, damned if they did and damned when they didn't, because there was a consensus forming -- well, first, Bear Stearns. There was intervention for Bear Stearns, and there was a lot of criticism. And people said, this is capitalism; you've go to let people go belly-up.
And then Lehman Brothers went belly-up, and it turned out bellies didn't look so good to people. So, when the next one came up, which was Merrill -- the AIG -- they intervened. Now, that doesn't mean they did it right or wrong. But we ought to give that context.
And there was a significant consensus that letting Lehman Brothers fail with no intervention was a problem.
But this is the question I want to ask our various witnesses. And it's not exactly what they were asked about, but we do, in addition to doing everything we can to get the money back, an important part of our job is to minimize this kind of damage, and in particular, not to have either the Bush administration or the Obama administration -- any administration -- forced with the choice: either you let Lehman Brothers go completely under and have a problem, or you bail out AIG's counterparties and have a problem.
We have under the law reasonable means for reacting when a bank is going bad. It's called resolving (ph) -- one of those nice antiseptic words. We can resolve banks.
Wachovia went under during this period, Washington Mutual. Neither of those and other banks caused the kind of disruption one way or the other that we saw from Bear Stearns or Merrill Lynch being bought by the Bank of America, et cetera.
What Secretary Geithner has asked for in a recent to the speaker -- and Mr. Paulson was for this, and he's testified about it, Mr. Bernanke has. An argument is, I think, very strong, that there should be a statutory framework, so that regulators can step in and unwind an institution, and not be faced with the all-or-nothing choice that they had with regard to -- I think people would find both the Lehman Brothers outcome and the AIG outcome somewhat unsatisfactory.
I'm wondering -- again, it wasn't on your agenda. It may be beyond the scope for some. But on the other hand, from OTS and others. Do you have opinions as to whether or not we ought to be moving towards some statutory framework, so that you can unwind these troubled institutions without the kind of choices we've had?
And Mr. Polakoff, I want to begin with you.
SCOTT POLAKOFF, ACCONTING DIRECTOR, OFFICE OF THRIFT SUPERVISION: Yes, sir. We do believe that there should be that statutory process. We do believe that, if there is sufficient discussion and debate within Congress and a decision to move forward with the systemic regulator, that the power should fall within the systemic regulator to examine, and, if necessary, for receivership activities.
Yes, sir.
FRANK: Anyone else? Yes, commissioner?
JOEL ARIO, INSURANCE COMMISSIONER, PENNSYLVANIA INSURANCE DEPARTMENT, ON BEHALF OF NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS: Yes. Within the insurance subsidiaries, there's a clear process, too, for unwinding, just like there is with the banks.
FRANK: Right.
ARIO: And two things would happen with AIG in this kind of situation. One, most of their business would go to competitors, so there'd be a smooth transition for policyholders. And, to the extent that didn't happen, there would be a guarantee fund protection behind it (ph).
So, we would think, as part of any -- we agree with OTS that there ought to be a systemic approach to this. And we would think if...
FRANK: And let me just say, one of the advantages of a guarantee fund is it can come with limits, so that people are not rewarded un- ended (ph) -- with open-ended funds. But in the guarantee funds, there are usually limits, which is a guide to prudent investing.
I have -- my time has expired, Mr. Chairman.
If either one has a brief comment, but I think it's probably not a GAO issue.
WILLIAMS: Well, actually, I would just like to comment. The framework that GAO rolled out in January of this year for the financial regulatory system, has an element that directly...
FRANK: Well, thank you.
WILLIAMS: ... speaks to that. And that's the provision to make sure that the exposure to taxpayers is limited in any framework going forward.
So, this would fall into that category.
FRANK: I thank you. That's something this committee will have to focus on.
REP. PAUL E. KANJORSKI (D-PA), CHAIRMAN: Thank you very much, Mr. Chairman.
And now the gentleman from Alabama, Mr. Bachus, five minutes.
REP. SPENCER BACHUS (R), ALABAMA: Thank you.
Ms. Williams, Chairman Kanjorski and I, part of our request to you is to determine whether there had been any measurable progress in recouping the taxpayer dollars.
Have you seen anything, any optimistic signs or positive signs?
And one of the things I will ask you in that question, or even choose to use this or not. But in the Fed's special purpose vehicle, Maiden Lane, I notice that those assets, or those contracts and credit default swaps, may be performing, at least apparently, at a higher level than when they were acquired.
But would you comment on the broader question, and maybe that detail question?
WILLIAMS: Our work in this area is going on and on an ongoing basis, in terms of the status. We looked at where they are, and we noted the challenges. And that's kind of -- at this point, we see a number of challenges that AIG continues to face in terms of restructuring itself.
So, you know, I would say at this point, we're kind of neutral until we continue to do some more work in terms of the outlook.
BACHUS: OK. Thank you.
And Mr. Polakoff, you acknowledged that, I believe, that you were somewhat aware of the worsening situations of the financial products subsidiary. But you had, I think admit that OTS didn't foresee the extent of the risk to AIG. Is that correct?
POLAKOFF: We did -- yes, sir, we did not foresee the extent that mortgage market would deteriorate and the impact on the liquidity of AIG-FP.
BACHUS: Did you understand the complicated use of the credit default swaps? Did you -- and the exposure that they were creating for the company, the amount of risk -- was there an appreciation of that?
POLAKOFF: Yes, sir, absolutely. We reviewed the models. We understood the models. We worked...
LEMON: All right. You have been watching and listening to what's happening on Capitol Hill today. Really, testimony of -that's going to come up from the head of AIG as to why these bonuses are being paid out, why exactly this happened.
What you were listening to mostly was Congressman Barry Frank questioning members. This is really the group that oversaw the bailout money, the money that was given to AIG.
The people that you saw there, the African-American woman, her name is Orice Williams, she's the director of Financial Markets and Community Investment and Government Accountability Office. Also, the Honorable Joel Ario, insurance commissioner of Pennsylvania, also the Insurance Department on behalf of the National Association of Insurance commissioner, explaining to the politicians here exactly what went on, and why it ended up this way. And the person who heads that is Scott Polakoff, he is the acting director of the office of Thrift Supervision.
Two different panels here. This is the first panel. The second panel will be the more interesting panel, because that's when Edward Liddy, who is chief executive officer of AIG, the American International Group, is going to take questions from these folks.
Let's move on now. We're going to monitor that and if any news comes out, we'll bring it back to you.
Another politician on the forefront of bonus rage is New York Attorney General Andrew Cuomo.
And CNN Radio's Steve Kastenbaum is live in New York now.
Steve, I was reading this letter - reading the letter from - that he wrote Mr. Cuomo, to Barney Frank. And he's saying, his office reviewed the legal opinion that AIG obtained from its own counsel, and it is not all that clear that the lawyers even considered the argument that the only -only by grace of the American taxpayers, that members of the financial products even have jobs, let alone a pool of retention bonus money. He feels that these - this bonus money should not have been paid out.
STEVE KASTENBAUM, CNN RADIO CORRESPONDENT: That's true, Don. And it's really interesting to read this letter and see where New York's attorney general is going here.
He believes that that would be a fraudulent conveyance. He thinks that if AIG officials made a commitment to pay the bonuses, knowing full well that the company was going down the tubes and wouldn't be financially capable of making those payments without aid from the government, that that would be a fraudulent conveyance. He told this to reporters in a conference call just a few days ago. And that would be his angle, if he were to pursue this in court.
The New York attorney general's office has a history of going after businesses on Wall Street, so it's not unusual for the attorney general of New York to get involved in cases like this.
LEMON: And he goes on to say that we know that AIG was able to bargain with its financial products employees, since these employees have agreed to take salaries for $1.00 for 2009 in exchange for receiving their retention bonus packages.
So he's saying, all of this is negotiable and it's not set in stone. Just because you have a contract doesn't mean you have to pay that money.
KASTENBAUM: That's right. That's his argument.
Although, you know, I spoke to guys who work in the financial sector on Wall Street who get bonuses every year. And they say that these bonuses are not directly tied to the financial health of the company, but rather to the amount of business each individual brings into the company. Not surprising that guys on Wall Street would be defending...
LEMON: But Steve, don't you think that the two would go hand-in- hand? If you're bringing in business, that's performance? Wouldn't that bring in more money into the company?
KASTENBAUM: You would think so, right? Yes, exactly. But some of guys I have spoken to, they say that, you know, they signed the contracts, they bring in the money. What the folks investing the money -what the folks who invest the money do with it, it's their fault that the money doesn't earn them more.
So, you know, they bring in the business, and then it's handed off to somebody else. You know, that's the argument they're making. Whether or not that holds water with the American public, probably not right now.
LEMON: Yes, and you know, the interesting thing was that - as I pointed out earlier, if it were the worker bees who were getting bonuses for all of this, if it were people who were not making that much money, then I think the American people would say, OK, these people, you know, are in dire straits, as well. But these are already people who are getting huge salaries and now getting millions in bonuses.
Very quickly, Steve, go ahead.
KASTENBAUM: Yes, and it's hard to find sympathy for them here in New York.
The attorney general, there's some questions about why Andrew Cuomo is going after them in a case that appears to be national in scope. There is a history of the A.G.'s office going after Wall Street businesses - sure, Don.
LEMON: Yes, I'm going have to get back to the hearing. Hate to cut you off...
KASTENBAUM: No problem.
LEMON: ... but we want to get Representative Ackerman from New York taking questions now on New York. Of course, Mr. Cuomo there, as well.
So, let's listen in.
REP. GARY ACKERMAN (D), NEW YORK: So, there's two guys out on a life raft. And they're adrift at sea, and a storm blows up. And their raft is surrounded by sharks, and the waves are 10 feet high.
And the first guy says, "I'm scared."
So, the second guy sells him a policy. That's a credit default swap.
You're selling something with absolutely nothing to back you up. You have no money, possibly, in your pocket or your wallet. And if everything goes right, you're collecting a premium. And if everything goes wrong, so what.
It makes no sense. It's like snake oil salesmen selling you jars of snake oil. And they don't even have the oil in the jar.
I mean, there's a great company called I Can't Believe It's Not Butter. You know, at least they have the decency to tell you it's not butter.
(LAUGHTER)
I mean, this is insurance without being insurance, because if they called it insurance, they'd have to have money to pay you off. But they don't have the money to pay you off. And they're calling it credit default swaps, because if they called it I Can't Believe It's Not Insurance...
(LAUGHTER)
... maybe nobody would buy it.
This is exactly -- I mean, it's a funny joke I made up, but this is exactly what's happening. And it's not funny, because all of us who are laughing are crying, and getting angry and getting enraged.
How is this suddenly an industry? I mean, these brilliant people figured this out. It's really very simple. Call yourself something else, and sell something that you're saying isn't insurance, that people think is. And the biggest companies, the most sophisticated investment minds on Wall Street and all over the world are buying this stuff, thinking that they are almost insured -- almost.
And as long as they don't put in a claim, they're fine. But as soon as the tide goes out, there's a lot of people trying to cover their bare assets. And they don't have the wherewithal to do it.
How do we allow this to happen?
I mean, some people think that -- that -- that we're the regulators and the Congress is the watch dogs. We're not that agency. We make the laws. We have oversight.
And -- and we rely on the regulators, we rely on the rating agencies and you at the table to sound the bells and whistles and alarms and tell us, "Hey, there's something going on out there that we can't regulate, that we can't observe, that we can't figure out, but it's going on."
There's billions of dollars -- AIG is -- is the biggest, I suppose. How large is it? How many other people are involved in this? What is the -- the risk to the American people? I mean, otherwise, you're playing "I can't believe we're not regulators," and we're pretending to be "I can't believe we're doing oversight."
Take a shot.
ARIO: I'll give you an answer from the insurance perspective, as a downstream recipient of the risk that was created here. AIG's essentially on top of the pyramid. AIG's the one that everybody else looks at this stuff and says, "We're not quite sure if this is going to perform or not. We better hedge on it."
You buy the policy from AIG, and AIG -- and then people -- like Mr. Garrett said, even people who bought policies from AIG then hedged in case AIG couldn't pay.
ACKERMAN: They went to AIG because these guys...
ARIO: But AIG...
(CROSSTALK)
ACKERMAN: ... rated -- these guys rated AIG AAA, and so everybody assumes that -- that their subsidiary's AAA which you haven't rated. It's like -- it's like -- it's like if I have an 800 credit score you're going to lend my kid money because you think he has an 800 credit score.
ARIO: Congressman, if I could offer a -- a couple points for your consideration, of the bailout that's occurred -- and -- and AIG recently did a press release breaking down the money -- 52 billion went for credit-default-swap-related issue. Forty billion went for security lending issues.
So there are multiple issues associated with AIG. There are many large financial institutions in the United States today that underwrite credit default swaps. The -- the issue is not the product. We do recommend that credit default...
ACKERMAN: So they're underwriting the underwriters that are doing the underwriting?
ARIO: No. No, they're issuing or selling credit default swaps on various products. It -- it -- it's a -- it's a well-known, well- respected product if done properly.
ACKERMAN: If it were regulated.
ARIO: Well, I do agree with you, sir, that the product itself should be a regulated product.
(CROSSTALK)
ACKERMAN: Well, bingo. That's -- that's the whole problem. Why don't we -- why don't we say that it has to be regulated? Otherwise it can't be insurance. ARIO: We agree on that.
POLAKOFF: Well, the -- yeah, the CFTC commissioner a number of years ago came before Congress to ask that, indeed, credit default swaps become regulated, and -- and I think many members at this table would endorse that it should be a regulated product.
ACKERMAN: The New York -- the New York state insurance supervisor, Eric Dinallo, came before a different committee of Congress back in October and -- and -- and said that.
I mean, where's the guy on television that does the bells and whistles and gongs? We need all these things going off here. Otherwise there's nobody getting our attention.
The thing that -- that we have to be doing, Mr. Chairman, I think, is taking a look at how we regulate a completely runaway financial giant that's going on so that when people buy -- I think I'm buying insurance -- are buying insurance and not something else.
I yield back the balance of my time.
KANJORSKI: Thank you very much, Mr. Ackerman.
Gentlemen, as you know, we have some votes on. We have probably eight minutes left, seven minutes left -- seven and a half minutes left.
Are you a fast talker even though you're from Georgia, Mr. Price?
REP. TOM PRICE (R), GEORGIA: (OFF-MIKE)
KANJORSKI: In two and a half you can do five? OK. We'll -- we'll recognize Mr. Price for his five minutes reduced to two and a half.
PRICE: Thank -- the -- the -- the first vote will go for a while, so I appreciate that, Mr. Chairman.
I think I -- I'm pleased to hear the chairman of the committee announce that Mr. Geithner will be here before our committee within a couple weeks. I think that there are a lot of questions that we would like to ask him today.
I want to thank the panel for -- for their perspective.
Ms. Williams, one of the most pivotal roles that we can play is oversight. And so I think it comes as a surprise to some members of our committee that the GAO is prohibited by law from certain reviews of certain federal financial activities.
Would you elaborate on that? And -- and -- and I know you responded to Mr. Garrett on this, but what -- what is it specifically that GAO cannot do?
WILLIAMS: The -- this is an area that we actually have a prohibition, and it's quite unusual, and it's in the Bank Audit Agency Act. And it articulates the -- the limits of our authority in this area, and there are specific areas prohibited.
And one of -- and I think there are four. One of the four articulated in the act is we are prohibited from looking at the Federal Reserve's monetary policy activities, and...
PRICE: And you -- you -- you mentioned that you'd be happy to do that if we gave you the authority to do so. Would it be helpful for you to be able to do that?
WILLIAMS: In -- in this current environment, I would say yes.
PRICE: So you'd be able to give us and the American people a better sense of what has happened and what's going on if you were able to look at that.
PRICE: We would be able -- we currently in our conversations with the Fed are limited to the information they've provided publicly. We don't have the same prohibition, for example, with their supervisory and regulatory activities. We can actually go in and look at what they're doing.
GAO does appreciate the fact that, you know, the reason the Fed has the -- the protections that it has is to ensure its independence.
PRICE: Sure.
WILLIAMS: But I think we're in extraordinary times, so when the Fed has evoked activities under their emergency powers, that's an area that -- that perhaps it would make sense...
(CROSSTALK)
WILLIAMS: ... for GAO to have more...
PRICE: Thank you.
WILLIAMS: ... Visibility.
PRICE: I want to address your report, and -- and I just got it this morning, so I -- it -- it's -- I'm trying to digest it all.
But in -- I didn't see any sense of an exit strategy that AIG has reported by GAO in -- in -- in -- in your report. Would you -- is that an accurate assessment of -- of what's going on over there?
WILLIAMS: I mean, at this point, the plan is for restructuring. I think given the assistance that the government's provided so far, and kind of the ongoing restructuring that has happened, there are real questions about what the exit strategy is.
But our work in this area is ongoing.
PRICE: But -- but the American people can't look at it and say, "There's an exit strategy that's in place." Is that an accurate statement?
WILLIAMS: Not that we have seen.
PRICE: OK. Thank you.
Now, Mr. Polakoff, you mentioned that -- that OTS should have stopped the whole book of business back in '04, and I think you responded to a couple members saying that -- that you -- OTS didn't appreciate how bad liquidity was going to get in '08. Was there any -- any change in the assessment between '04 and '08?
POLAKOFF: Yes, sir. Yes, sir. What we didn't understand or -- or appreciate significantly with our analysis was how bad the real estate market was going to get from 2004 to 2008...
LEMON: Listening to testimony on Capitol Hill today talking about AIG, the insurance giant that got millions and millions of your tax dollars and then gave bonuses - millions and millions - to its employees.
They've been doing a lot of talking about unregulated credit default swaps. Exactly what is that? We'll explain seconds away.
(COMMERCIAL BREAK)
LEMON: Following all the live developments for you on Capitol Hill as it concerns AIG and this testimony in front of this subcommittee. Right now they're taking a break because they're voting on a volunteer services bill, volunteer services bill. As soon as they get back to their testimony, we will bring that back to you live.
But we've been hearing a lot of talk this morning - a lot of talk - pointing to lawmakers, and many things that you have never heard of. One, unregulated credit default swaps, unregulated credit default swaps.
I want to get to Josh Levs, CNN's Josh Levs, because Josh has been checking into this. Here's what, this morning, the guy whose head of this committee said, the director said, in prepared testimony to a House panel, "no one predicted the amount of money AIG would need to meet the demands of the unregulated credit default swaps that it engaged in."
What are they?
JOSH LEVS, CNN CORRESPONDENT: We just heard it called, "I can't believe it's not insurance."
LEMON: I can't believe it's not insurance, yes.
LEVS: Representative Ackerman was being funny, but this is a really important issue. I'm glad we're doing this now, because we want to help you understand.
We have some simple pictures that should boil down the basic concept of what this is all about. In fact, we're going to start off with this screen right over here. That's about credit default swaps. Let's go to this.
This is the first picture I want you to see. This talks you through - now, there you go.
This talks you through how it works. Now, let's say you're a bank, right? And you want to invest in a security. Well, there are securities that a lot of banks were investing in called subprime, because these were built with mortgages, subprime mortgages, right? And these could pay off really well for the bank stocks. So a lot of banks were buying these.
But here's the problem. What if people default on their mortgages? And what if what the bank has invested in suddenly defaults? What's the bank supposed to do?
Next screen. This is where you get to a credit default swap. What the bank does is it buys a credit default swap from a third party, an insurer. Let's say, I don't know, AIG, right? And that's what the credit default swap does. If this over here defaults, then this right here will pay the investor so they don't lose their money.
So what happened in this case is you had all these things that did ultimately defaulted. And all of a sudden AIG, or whoever is over here, has to start paying all that money to the banks or whoever it is that ultimately bought those in the first place.
One more thing, to show you. Let's go to the last graphic. You can show this full it's - there you go. The buyer receives credit protection, the seller guarantees the creditworthiness of the product.
So Don, that's the idea right here. AIG, in this case, had what's thought of as virtually being insurance because they were backing up those investments which then defaulted.
LEMON: OK. Hey, Josh, thank you very much for that.
You mentioned "I can't believe it's not insurance," right? It has been getting hot. Just in the last couple minutes, before they took this break, one man said - Gary Ackerman, who is known for, you know, just saying whatever he wants and grilling people, "snake oil salesman," "I can't believe it's not insurance."
We are waiting. The CEO of AIG to testify before the congressional committee panel here. And we will bring that to you live right here on CNN.
The CEO of AIG to testify before the Congressional committee panel here. We will bring that to you live right here on CNN.
