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S. HRG. 111–809

TARP AND OTHER GOVERNMENT ASSISTANCE
FOR AIG

HEARING
BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

MAY 26, 2010

Printed for the use of the Congressional Oversight Panel

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TARP AND OTHER GOVERNMENT ASSISTANCE FOR AIG

S. HRG. 111–809

TARP AND OTHER GOVERNMENT ASSISTANCE
FOR AIG

HEARING
BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

MAY 26, 2010

Printed for the use of the Congressional Oversight Panel

(

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

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63–515

:

2010

For sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
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CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
ELIZABETH WARREN, Chair
J. MARK MCWATTERS
KENNETH TROSKE
RICHARD H. NEIMAN

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DAMON SILVERS

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

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HEARING ON TARP AND OTHER
GOVERNMENT ASSISTANCE FOR AIG
WEDNESDAY, MAY 26, 2010

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

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OPENING STATEMENT OF ELIZABETH WARREN, CHAIR,
CONGRESSIONAL OVERSIGHT PANEL

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

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5
Chair WARREN. Before we proceed with the testimony, I’d like to
offer my colleagues on the panel an opportunity to make their own
opening remarks.
Mr. McWatters.

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

Mr. MCWATTERS. Thank you, Professor Warren. I very much appreciate the attendance of the witnesses and I look forward to
hearing their testimony.
The rescue of AIG has required the allocation of more taxpayerfunded resources than any other bailout undertaken by the Government since the inception of the current economic crisis.
The Congressional Budget Office has estimated that the TARP
investment in AIG will cost the taxpayers $36 billion out of $70 billion committed or disbursed, and the Office of Management and
Budget has projected that the investment will cost the taxpayers
$50 billion.
Since our national resources are limited, the bailout of AIG will
unfortunately require the Government to reduce the expenditures,
increase tax revenue, or both. The American taxpayers were told
in the last quarter of 2008 that they had no choice but to bail out
AIG because, absent such action, the world financial system might
very well collapse due to the systemic risk presented by and the financial interconnectedness of AIG.
That may indeed have been an accurate assessment, but it’s critical to note that the world financial system does not consist of a
single monolithic institution but, instead, is comprised of an array
of too-big-to-fail financial institutions, many of which, interestingly,
were also counterparties on AIG credit default swaps and securities
lending transactions.
In other words, the concept of a world financial system is really
just another term for the biggest of the big financial institutions
and there remains little doubt to me that the principal purpose in
bailing out AIG was to save these institutions as well as AIG’s insurance business from bankruptcy or liquidation.
It is ironic that although the bailout of AIG may have rescued
many of its counterparties, none of these institutions are willing to
share the pain of the bailout with the taxpayers and accept a discount on the termination payments.
Instead, they left the American taxpayers with the full burden of
the bailout. It is likewise intriguing that these too-big-to-fail institutions were paid at par, that is, 100 cents on the dollar, at the
same time the average American’s 401(k) and IRA accounts were
in free fall, unemployment rates were skyrocketing, and home values were plummeting.
It is also critical to recall at this time that many of the AIG
counterparties were most likely experiencing their own severe liquidity and insolvency challenges and were under attack from
short sellers and purchasers of credit default swaps over their debt
instruments. By receiving payment at par, some of the counterparties were able to convert illiquid and perhaps mismarked CDOs
and other securities into cash during the worst liquidity crisis in
generations.

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In addition, by avoiding the inherent risk in an AIG bankruptcy
and the issues regarding debtor-in-possession financing, some of
the counterparties were also able to accelerate the conversion of
their AIG contracts into cash and in late 2008 cash was king. Although some counterparties may argue that they held contractual
rights to receive payment at par and were the beneficiaries of favorable provisions of the Bankruptcy Code, such rights and benefits
would have been of diminished assistance since, in late 2008, AIG
was out of cash.
It also appears problematic that AIG would have been able to obtain sufficient post-petition financing following the implosion of the
financial system that, according to the wisdom of the day, would
have followed the bankruptcy of AIG.
Thus, without the taxpayer-funded bailout, AIG would have held
insufficient cash to honor in full its contractual obligations, notwithstanding the special rights and benefits afforded the counterparties.
In light of this reality, it does not appear inappropriate for the
taxpayers to expect a discount to par upon the termination of AIG’s
contracts with those counterparties who held the referenced securities but were not otherwise fully hedged against AIG-related risk
with posted cash collateral.
I appreciate that senior management and counsel of some of the
AIG counterparties may cite standards of fiduciary duty as a defense to their unwillingness to accept a discount to par. It is quite
possible, however, that these officers owed a higher fiduciary duty
which was to save their institution from the very real threat of
bankruptcy or liquidation that existed in the final quarter of 2008.
After all, who can forget the photograph of the $2 bill taped to
the door of Bear Stearns’ New York office? That image, like
Charles Dickens’ ‘‘Ghost of Christmas Future,’’ told the story of
what would come to pass for other financial institutions, such as
AIG and its counterparties, absent the intercession of the American
taxpayers.
In the dark days of late 2008, when AIG faltered, the American
taxpayers, not the New York Fed, not Treasury, stood as the last
safe harbor for many of these financial Institutions and much of today’s Main Street versus Wall Street debate would have never arisen if Wall Street had properly acknowledged the American taxpayers as its sole benefactor.
As such, after the bailouts, it has become exceedingly difficult for
many Americans to accept that what’s good for Wall Street is necessarily good for Main Street.
Thank you for joining us today, and I look forward to our discussion.
[The prepared statement of Mr. McWatters follows:]

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10
Chair WARREN. Thank you, Mr. McWatters. Deputy Chair Silvers.

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STATEMENT OF DAMON SILVERS, MEMBER, CONGRESSIONAL
OVERSIGHT PANEL

Mr. SILVERS. Thank you, Chair Warren. Good morning.
This is the third hearing that our panel has held on assistance
provided to a particular firm. Before I discuss the firm itself, I
want to note, together with my fellow panelists, our gratitude to
both this panel and the panels that follow for being with us today.
I think we have an extraordinarily comprehensive set of witnesses
in relation to the events we are interested in.
I want to particularly note that this panel is comprised of individuals whom have spent a tremendous amount of time with our
oversight panel in helping us understand these events and lest I
be misunderstood in what I’m going to say following these remarks,
I want to be clear that I believe that the United States owes a
great debt of gratitude to the individuals before us who have dedicated their careers, for decades in some cases, to serving the public
in the context of the financial sector where, obviously, great rewards await those who serve themselves only. And these individuals were faced in this matter of AIG with a profound crisis outside
of their experience and outside of really the experience of the institutions they were helping to lead.
And in the course of our oversight work, I think it’s very important that nothing that we say or I say be understood to be in any
sense anything other than our doing our job in the context we’re
doing it. There’s no doubt that these individuals, and I note here
that these are individuals whose names are not famous and who
do a lot of work that doesn’t often get a lot of credit, that these individuals have served their country admirably and it gives me
great pleasure to have the opportunity to say that.
Now, there are a lot of good reasons for us to focus on AIG. AIG
received more TARP funds, as my colleague Mr. McWatters notes,
AIG received more TARP funds than any other beneficiary and is
the largest continuing holder of TARP funds in the financial system, but it’s not really the size of the AIG bailout that has, I think,
driven the continuing controversy associated with it.
That controversy is really driven by several factors. One is the
complexity and opacity associated with the collapse and bailout of
AIG, and the way in which AIG was at the center of—and I think
Mr. McWatters talked about this in a very compelling way—at the
center of a web of relationships among large financial institutions,
including, notably, the firm of Goldman Sachs and a group of
French banks.
Another reason that the AIG bailout looms large over the TARP
are the implications of the bailout in terms of the degree that the
public turns out to have been guaranteeing the shadow banking
system, an outcome that I think ex ante, sort of before the fact,
would appear to be completely inappropriate.
I think we’ve heard about how the central facts in the collapse
of AIG were AIG’s collateral obligations under credit default swaps,
a kind of unregulated bond insurance, and AIG’s obligations under
some securities lending transactions.

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11
The public made good on these obligations, arguably signaling
that these completely unregulated markets had a better quality
government guarantee than an FDIC-insured bank account which,
after all, has a relatively low limit of insurance, or a PBGC-insured
pension, again which has a very low limit, not running into the billions of dollars.
These are two of the most heavily-regulated financial obligations
in our system. They’re only partially guaranteed. It turns out that
a credit default swap, at least in the AIG context, turned out to be
a 100 percent guarantee.
Now, I have a further interest, and I think the Congress and the
public ought to have a further interest in AIG for a completely different and sort of ironically opposed reason, and that is that the
AIG bailout represented a model for how to at least significantly
impair equity, if not, as our chair has pointed out, wipe it out, in
that the Government, in exchange for rescuing AIG, took 80 percent of the equity of the firm upfront.
It has been a continuing puzzlement to me in my capacity in this
oversight panel that that was not the model for dealing with, shall
we say, systemically-significant failing institutions going forward.
Now, so I think there are four questions that need to be addressed in our work here and in doing so, I want to make clear that
I just do not agree with and think it is inconsistent with any meaningful oversight to accept the proposition that in this matter, or
any other matter, the choices facing the Government were to do exactly what the Government actually did or do nothing. I do not believe that is an adequate way to think about either AIG or any
other matter in which our Government takes action.
So I’ll run through the four questions quickly. The first question
is, why did it turn out not to occur? Why did a private bailout of
AIG not occur under the leadership of the New York Fed?
Two, and this has been discussed by my fellow panelists, why did
it turn out not to occur that there was any haircut asked of those
parties who were substantially rescued by the public?
Third, and this question we may be in the midst of being answered today, third, where are the legal documents and why has
the public not had access to the legal documents embodying the
transactions that the public bailed out?
I understand that we are in the process, the Panel is in the process, of receiving these documents from AIG today. I hope that turns
out to be true and complete.
Fourth, and I mentioned this earlier, why was the AIG model in
relation to the equity taken, not the model for other failed institutions?
And finally, obviously, we need to address, and we will address,
what course of action from here going forward is likely to produce
the best risk-adjusted return to the public for our funds we have
invested in AIG, and to what extent does AIG remain a threat to
the financial system?
We have set aside an entire day for this hearing which hopefully
will allow us to explore these questions in some depth, and I look
forward to hearing from our witnesses.
Thank you.
[The prepared statement of Mr. Silvers follows:]

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14
Chair WARREN. Thank you. And now we will hear from our
fourth panelist, Professor Troske.

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STATEMENT OF KENNETH TROSKE, MEMBER,
CONGRESSIONAL OVERSIGHT PANEL

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

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solvent private firms because of the fear that the economy will collapse if the firms fail.
While I am not naive enough to believe that the Government or
any organization, for that matter, can prevent future recessions, I
do believe that by learning from the past mistakes we can be better
prepared to deal with future crises.
Let me conclude by thanking the witnesses who are joining us
today. I appreciate you taking your time to come and help us better
understand the events surrounding the Government’s decision to
provide financial assistance to AIG.
[The prepared statement of Dr. Troske follows:]

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18
Chair WARREN. Thank you, Professor. So we will start with our
first panel. I’m going to introduce everyone.
Scott Alvarez is general counsel of the Board of Governors of the
Federal Reserve. Tom Baxter is general counsel and executive vice
president of the Legal Group of the Federal Reserve Bank of New
York. Sarah Dahlgren is executive vice president and head of Special Investments Management and the AIG Monitoring Group of
the Federal Reserve Bank of New York. Michael Finn is the northeast regional director of the Office of Thrift Supervision. Robert
Willumstad served as CEO of AIG from June 2008 until September
2008.
Thank you all for being here with us today. I’m going to ask each
of you to make opening remarks and I’m going to ask you to hold
them to five minutes. I’m going to be fairly rigid on that just so
that we can get all the way through the panel and have time for
questions and for the panels that follow.
So thank you all for being here. Mr. Alvarez, would you like to
start?

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

Mr. ALVAREZ. Thank you, Chair Warren and distinguished members of the Panel, for the opportunity to discuss the authority and
role of the Federal Reserve with regard to AIG.
Section 13(3) of the Federal Reserve Act empowers the Board to
authorize a Federal Reserve bank to extend credit to any individual, partnership, or corporation. Section 13(3) requires that,
first, the Board find that unusual and exigent circumstances exist,
(2) that the loan be authorized by an affirmative vote of not less
than five members of the Board, (3) that the loan be secured to the
satisfaction of the Reserve Bank, (4) that the Reserve Bank obtain
evidence that the borrower is unable to obtain adequate credit accommodations from other banking institutions, and, finally, that
the interest rate be determined by the Reserve Bank and approved
by the Board.
This authority was granted by Congress during the Great Depression in 1932 precisely to allow the Federal Reserve to lend to
individuals and non-banking entities to relieve financial pressures
that might otherwise lead to financial disaster. This type of lending
authority is common among central banks worldwide and is considered an essential tool of central banks for providing liquidity during times of economic and financial stress in order to mitigate the
effects of illiquidity and failure on broader markets and the economy.
Each of the conditions established by Section 13(3) was met in
the case of the loans extended by the Federal Reserve to AIG and
to the two related Maiden Lane facilities. In particular, the economic conditions at the time of the lending were unusual and required expedited action.
During the summer and fall of 2008, the U.S. economy and financial system were confronting substantial challenges. Labor markets
were weakening and stresses in financial markets were high and
intensifying significantly. Falling home prices and rising mortgage
delinquencies had led to major losses at many financial institu-

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19
tions, strained conditions in financial markets and the slowdown of
the broader economy. Equity prices dropped sharply. The cost of
short-term credit where it was available spiked upwards, and liquidity dried up in many markets. Tight credit conditions, the ongoing housing contraction, and elevated energy prices were seen as
likely to weigh on economic growth for the foreseeable future.
In early September 2008, Fannie Mae and Freddie Mac were
placed into conservatorship. A little over a week later, Lehman
Brothers, one of the largest investment banking firms in the
United States, collapsed. The failure of Lehman ended any chance
of securing a private sector solution for AIG within the time needed
to address its critical funding needs.
So on September 16th, one day after the collapse of Lehman and
during this period of tremendous economic instability and financial
turmoil, the Federal Reserve, in coordination with the Treasury
Department, made a secured loan to AIG in order to avoid the potentially devastating and destabilizing effects on the economy and
the financial system that would have attended the collapse of AIG.
In the Board’s judgment and given the fragile economic conditions at the time, an AIG default during this period would have
posed unacceptable risks for our economy as well as to the millions
of individuals and businesses that were counterparties to AIG, including individuals who were insurance policyholders, state and
local governments, workers with 401(k) plans, money market mutual fund holders, and commercial paper investors, as well as
banks and investment banks in the United States and worldwide.
With the financial system already teetering on the brink of collapse, the disorderly failure of AIG, the world’s largest insurance
company, would have undoubtedly led to even greater financial
chaos, further contractions in the flow of credit to businesses and
consumers, and a far deeper economic slump than the very severe
one we are experiencing today.
As detailed in my written testimony, the other conditions required by Section 13(3) were also met for the revolving line of credit and for the loans to the two Maiden Lane facilities.
In particular, the credits were each fully secured at the time they
were made. Importantly, the loans are being repaid as AIG winds
down and sells its businesses in an orderly fashion. Currently, the
revolving line of credit has been reduced from a maximum of $85
billion to $35 billion. The outstanding balance on the loan to Maiden Lane II has been reduced from $19.5 billion to $14.5 billion, and
the outstanding balance on the loan to Maiden Lane III has been
reduced from $24 billion to about $16 billion.
We expect the Federal Reserve will be fully repaid on each extension of credit involving AIG.
While the conditions for use of Section 13(3) were met, a better
option in our view, but an option that was not available to the U.S.
Government at the time, would have been for the U.S. Government
to have the authority to unwind systemically important non-bank
financial firms.
[The prepared statement of Mr. Alvarez follows:]

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40
Chair WARREN. Mr. Alvarez, I’m going to have to stop you there,
but your entire statement will be made part of the record.
Mr. ALVAREZ. Thank you very much.
Ms. WARREN Thank you very much. I made a mistake. Before we
go to Mr. Baxter, I should have paused to note the absence of Panel
Member Richard Neiman.
All of us who serve on this panel do so in addition to our other
responsibilities and for Mr. Neiman those responsibilities include
serving as the Superintendent of Banks for the State of New York.
Mr. Neiman felt that it would not be appropriate for him to be
involved in our Oversight Report on AIG because this report will
include an examination of AIG’s relationship with its financial
counterparties and a number of those counterparties are regulated
by the State of New York Banking Department.
We miss his good counsel, but we understand that he is working
to protect the integrity of the process.
So my apologies for not mentioning that at the end of our last
statement. We miss Mr. Neiman and will be glad when he can rejoin us on subsequent reports.
With that, Mr. Baxter, could I ask you to give your opening remarks?

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

Mr. BAXTER. Chair Warren and Members of the Panel, thank you
for the opportunity to testify about the role of the Federal Reserve
Bank of New York with respect to American International Group
or AIG.
Since September of 2008, the Federal Reserve has provided liquidity assistance to AIG in the form of an $85 billion revolving
credit facility. Then, as market and economic circumstances
changed and as we developed a deeper understanding of AIG’s
unique and complex problems, we restructured that facility in a
number of ways.
Throughout this process, our goals have remained the same: to
protect the financial system by stabilizing AIG and to prevent a
loss to the taxpayer.
Today, we are positioned to begin thinking of the day, hopefully
not too far from now, when we will be fully repaid principal and
interest and have no further role as a creditor of AIG.
Many Federal Reserve and Treasury officials have testified about
this general subject matter, including me. Today, I will focus on the
crisis management decision faced by policymakers on September
16th, 2008. In my nearly 30 years as a Federal Reserve lawyer, I
have been privileged to work on a number of different crises, including the Iranian Hostage Crisis, the Thrift Crisis, the so-called
1987 Market Break, the failure of the Bank of Credit and Commerce International, the near bankruptcy of Solomon Brothers, the
private sector rescue of Long-Term Capital Management, and the
terrorist attacks of September 11th, which stand in a category all
their own.
My experience across three decades gives me a perspective on the
context in which Federal Reserve policymakers needed to make

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41
their decision concerning AIG. You cannot understand the decision
without an appreciation of the crisis context.
AIG came before Federal Reserve policymakers in the midst of
the greatest financial crisis we have experienced since our Great
Depression. In testimony on January 27th, 2010, before the House
Committee on Government Oversight, Secretary Geithner described
the policy choice as ‘‘whether to rescue AIG by putting billions of
taxpayer dollars at risk or to let AIG fail and accept potentially
catastrophic damage to the economy.’’
On the morning of September 16th, 2008, there were no other realistic options. Congress had provided the Federal Reserve with the
ability to lend to a non-bank in exigent and unusual circumstances,
provided the putative borrower had no other credit resources.
If ever there was a situation where the circumstances were exigent and unusual, this was it, and the evidence that AIG had no
alternative source of private sector credit was simply indisputable.
Secretary Geithner also outlined some of the key crisis management features. He said that ‘‘action was required. The world was
watching and the Government did not have the luxury of time.’’ He
spoke metaphorically of the Federal Reserve as a kind of fire station and the decision was to put out the fire before it spread.
On September 16th, 2008, to pick up the Secretary’s fire station
metaphor, we had several major fires burning. The flames ignited
in the U.S. financial system with the conservatorships of Fannie
and Freddie, were burning fiercely when the Lehman fire ball exploded. When AIG came for a decision the day after Lehman’s
bankruptcy, as Mr. Alvarez has pointed out, many neighborhoods
were on fire and burning embers filled the air.
This is the principal reason why the Federal Reserve needed to
take action with AIG. In the unique time and context of September
of 2008, it would have been unconscionable to allow another major
blaze when you had a reasonable alternative. Our alternative was
the revolving credit facility.
Had the problems of AIG unfolded more slowly and apart from
a broad market crisis, policymakers might have pursued additional
information and solutions. They could have asked for more granular information about AIG creditors. They could have dispatched
the Federal Reserve’s lawyers to explore a prepackaged bankruptcy
or perhaps even asked us to begin contacting the largest creditors
to see if they would consider some kind of voluntary restructuring
of AIG debt, but these tasks would have consumed considerable
time and, given the actual situation on September 16th, would
have meant the immediate default of AIG and certain bankruptcy
with all of its systemic consequences.
Chair WARREN. Mr. Baxter, I’m going to have to stop you there,
but your entire remarks will be part of the record.
Mr. BAXTER. Thank you.
Chair WARREN. Thank you. Ms. Dahlgren.

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

Ms. DAHLGREN. Good morning, Chair Warren and Members of
the Panel. Thank you for inviting me to appear here today.

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42
As the executive vice president of the Federal Reserve Bank of
New York responsible for the management of the Federal Reserve’s
work to stabilize AIG, I welcome the opportunity to share with you
some thoughts on those efforts.
As my friend and colleague Tom Baxter just explained, beginning
on September 16th, 2008, policymakers made the courageous choice
to provide AIG with the liquidity that enabled its survival.
As a result of that decision and the actions taken by the Federal
Reserve and Treasury, we avoided the catastrophic consequences of
a trillion dollar conglomerate’s bankruptcy.
As the Congressional Budget Office noted in its May 2010 report,
‘‘If the Federal Reserve had not strategically provided credit and
enhanced liquidity, the financial crisis probably would have been
deeper and more protracted and the damages to the rest of the
economy more severe.’’
Going forward from September 16th, as we learned more about
AIG and as Congress provided the Treasury and the Federal Reserve with additional tools to stabilize the company through the
passage of EESA, we took steps to restructure AIG’s debt so as to
stop the increasing liquidity drain on the company. We altered the
terms of our revolving credit facility and entered into the much-discussed and analyzed Maiden Lane II and Maiden Lane III transactions.
We were motivated by two goals: financial stability and protecting the American taxpayers. Both of those goals required AIG
to remain a going concern and AIG could not remain a going concern unless it retained an investment grade credit rating.
Some have questioned our focus on AIG’s credit rating, but that
focus is easy to explain when you consider the nature of AIG’s business. Financial firms like AIG are particularly dependent on the
confidence of their customers. Customer confidence in an insurance
company is based on reputation and credit ratings. Parents will not
put their child’s future at risk by purchasing a life insurance policy
from a poorly-rated company. A municipality will not trust its
teachers’ retirement monies to a company with questionable credit,
and a homeowner will not purchase a property insurance policy
from a company unless the homeowner is confident the company
will be able to pay a claim.
No amount of liquidity can save an insurance company whose
customers are fleeing. We needed to maintain AIG’s credit rating
so that it could retain its customers and the value of its businesses.
Two of those businesses, AIA and Alico, are currently under contract for sale for $51 billion. The cash proceeds of that sale and the
cash AIG generates as it monetizes the non-cash proceeds of that
sale will go directly to paying down AIG’s loans from the Federal
Reserve. Those proceeds would not be available if we had not ensured that AIA and Alico remained going concerns.
We fully expect to recover our principal and interest on the loans
we made to the Maiden Lane II and III LLCs and on the revolving
credit facility, and we are not alone in our expectations. The Congressional Budget Office estimates that the Federal Reserve will
earn over $12 billion in interest over the life of the loans made to
AIG under the revolving credit facility and that the losses on the

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facility will be negligible because the Federal Reserve is fully
collateralized.
The CBO also estimates that the Fed will gain two billion each
from its investments in the Maiden Lane II and III LLCs and notes
that it expects positive returns because the Federal Reserve bought
the Maiden Lane II and III assets at fair value. To date, the Maiden Lane II and III LLCs have repaid approximately 13.1 billion of
the loans made to them by the Federal Reserve.
What we set out to do on September 16th, 2008, stabilize AIG
and protect the American taxpayer, we are doing. We are accomplishing our goals.
I thank you again for inviting me to appear here today, and I
look forward to answering your questions.
[The joint prepared statement of Mr. Baxter and Ms. Dahlgren
follows:]

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58
Chair WARREN. Thank you, Ms. Dahlgren. Mr. Finn.

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

Mr. FINN. Chair Warren, Members of the Congressional Oversight Panel, thank you for the opportunity to testify today about
the OTS Supervision of AIG.
I am Michael Finn, regional director for the OTS Northeast Region.
From January 2004 to August 2004, I served as OTS assistant
managing director in Washington, D.C., for the newly-formed unit
called Complex and International Organizations. This unit had responsibility for developing programs to coordinate the supervision
of internationally active OTS-regulated holding companies, including AIG, that were subject to the European Union’s Conglomerate
Directive.
After my departure from Washington in August of 2004, the OTS
continued to manage and supervise AIG from Washington until
July of 2008 when the responsibility was transferred to the OTS
Northeast Region where I reside today.
My responsibility for AIG supervision ended two months later, in
September of 2008, when the Federal Government made its ownership investment in AIG. Although the OTS no longer supervises
the AIG parent company, the agency continues to supervise AIG’s
thrift subsidiary, AIG Federal Savings Bank, which operates with
$1.1 billion in assets today.
My testimony includes details about the legislative history of
OTS supervision of savings and loan holding companies, OTS supervision of AIG specifically, and OTS’s recommendations for holding company regulation in the future.
In the time I have this morning, I’d like to just touch on a few
points about AIG and its collapse. First, the legal framework for
OTS authority to regulate holding companies was designed to ensure the safety and soundness of the underlying thrift institution,
not primarily to protect holding companies from their problems.
Although the consensus has developed that the United States
needs a systemic risk regulator, the OTS never had that authority.
To measure OTS’s performance as a systemic risk regulator would
be to apply a yardstick that never existed.
The supervision—that supervisory authority will not exist unless
Congress establishes it. The OTS strongly supports the proposals
in Congress to establish a systemic risk regulator.
AIG Financial Products is the second point. It was a subsidiary
of AIG that originated the credit default swaps that were part of
AIG’s problems. It was operating long before OTS had any responsibility for AIG. AIG Financial Products began its operations in
1990. OTS became the regulator of AIG after the company applied
for and received a federal savings bank charter in 1999. The bank,
AIG Federal Savings Bank, opened for business in the year 2000.
The third point is credit default swaps were and continue to be
today unregulated products that lack transparency. As you know,
Congress is considering proposals to require regulation of such derivative products and to improve transparency. The OTS strongly

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supports federal regulation of derivatives and a greater transparency across this market.
A fourth point. AIG Financial Products never had any business
dealings with the OTS-regulated AIG Federal Savings Bank and
had no relation beyond sharing the same corporate parent. Despite
AIG’s near failure, the OTS-regulated savings bank today continues to operate as a well-capitalized thrift.
The last point I would like to make today is that, based on our
experiences with AIG, the OTS recommends the establishment of
a federal insurance regulator for holding companies that are predominantly engaged in insurance activities, whether or not they be
deemed systemic. We think it is prudent to align regulatory oversight with each holding company enterprise’s primary activities
and to ensure clear authority to supervise risk across the consolidated insurance entity.
Thank you again for having me here today, and I’m happy to respond to questions.
[The prepared statement of Mr. Finn follows:]

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76
Chair WARREN. Thank you, Mr. Finn. Mr. Willumstad is the only
non-government official on this panel. We appreciate your being
here because you have something important to say about that very
same time period that we’re focused on.
Your opening remarks, sir.

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

Mr. WILLUMSTAD. Thank you. Chair Warren and Members of the
Congressional Oversight Panel, thank you for the opportunity to
meet with you this morning.
My name is Robert Willumstad, and from June 16 through September 16, 2008, I served as Chief Executive Officer of American
International Group.
In June 2008, when the Board asked me to replace Martin Sullivan as CEO, I was initially reluctant to do so. However, the
Board ultimately persuaded me to accept this responsibility and I
felt that my experience in the financial services industry, including
my time as president and chief operating officer of Citigroup, put
me in the position to successfully lead AIG in a difficult period.
On my first day as CEO, I publicly announced I would present
my long-term strategic plan for AIG in 90 days. This was an ambitious time frame for a strategic review of a company that in 2007
had one trillion in assets, a 110 billion in revenue, and which employed more than a 100,000 people in more than 100 countries and
included a diverse array of businesses operating under scores of
different regulatory regimes.
To meet that schedule, the AIG team worked tirelessly and the
plan began to come together. While we were formulating the plan,
I took immediate actions. The markets declined further and it became apparent that if the decline continued and AIG were again
downgraded by the rating agencies, AIG could potentially face a liquidity problem.
The week after I became CEO, I retained a preeminent financial
services firm, Blackrock, to provide an outsider’s view of AIG’s financial products exposure to mortgage-backed securities. I met
with the rating agencies in July and they told me they would not
review AIG’s ratings until after I announced our strategic plan
which was then scheduled for September 25th.
Even so, to be prudent, we immediately put in place a number
of additional measures to protect AIG in the event of a liquidity
problem. We worked through July and August to further strengthen AIG’s balance sheet should a crisis arise. We identified non-strategic businesses, retained financial advisors, and began the process
of selling those businesses to raise cash.
To conserve cash, we stopped discussions relating to a number of
acquisitions. We developed and implemented an aggressive plan to
further reduce expenses. We were negotiating a transaction with
Berkshire Hathaway that would have protected billions of dollars
of AIG’s liquidity. We were working with JPMorgan and other
banks to obtain additional credit lines. These were precautionary
steps.

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Through the first week of September we believed AIG could
weather the difficulties in the financial markets and we believed
we’d be able to announce and implement a new strategic plan on
September 25th.
In late July and again on September 9th, I met with the President of the Federal Reserve Bank of New York to apprise him of
the situation and discuss ways in which AIG and the Federal Reserve might work together in the event that a liquidity problem did
arise.
With the market melting down during the week of September
8th, the counterparties with whom we had been negotiating became unwilling to complete those deals. In addition, as the markets
spiraled downward with Lehman and others under increasing pressure, the rating agencies indicated they would no longer wait to review AIG’s ratings until the investor meeting on September 25th.
AIG was caught in a vicious circle. The potential for downgrades
from the rating agencies and the market fears caused AIG counterparties on a securities lending program and other transactions, not
just those related to the credit default swaps, to require AIG to
post additional collateral or demand the return of cash or investments, further increasing the need for liquidity.
We worked around the clock during the week of September 8th
to take measures that would provide AIG the liquidity needed to
make it through the crisis. We worked with potential private investors and new lenders. With the assistance of the New York and
Pennsylvania Departments of Insurance and the Governor of New
York, we were able to make available as much as 20 billion of additional liquidity but the private markets, even with the help of New
York and Pennsylvania, simply could not provide enough liquidity.
On September 9th, I met again with Tim Geithner and during
the rest of the week I stayed in contact with the Federal Reserve
and the Treasury Department. On Tuesday, September 16, 2008,
AIG was preparing for the unthinkable: bankruptcy.
That afternoon, we met again with representatives of the Federal
Reserve Bank of New York and the Treasury Department. The regulators said they would provide the necessary liquidity because an
AIG bankruptcy would have massive negative effects on the stability of the entire financial system.
The terms of the offer were non-negotiable. After a long and detailed debate and with the advice of counsel and financial advisors,
the AIG Board of Directors accepted the plan offered by the Federal Reserve and Treasury Department as the best available option. As part of that plan, I was informed by Secretary Paulson
that I would be terminated as CEO. Though I would have liked to
have continued to work for AIG and its shareholders, I complied
with this requirement two days later.
Due to my departure from the company, I do not have any
knowledge of AIG’s subsequent business activities or of the manner
in which AIG utilized the funds provided by the Government.
I’m happy to answer questions, any additional questions the
Panel may have.
[The prepared statement of Mr. Willumstad follows:]

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Chair WARREN. Thank you, Mr. Willumstad. Thank you all again
for being here.
I’d like to start with my questions. Ms. Dahlgren, I’ve read the
joint testimony that you and Mr. Baxter submitted and it starts
with September 16 and the crisis that you faced with AIG, but
what I’d like to do is—I note in your testimony you say you knew
precious little about AIG on September 16. I think those are the
words in the testimony.
When did the Federal Reserve Bank of New York understand
that AIG posed some kind of threat to the economy? When did that
occur?
Ms. DAHLGREN. Going into the weekend of Lehman Brothers, on
that Friday before the weekend——
Chair WARREN. I’m sorry. Let me just back up because I want
to make sure, maybe my question’s not clear.
Was there no sense that AIG posed a threat before the weekend
of Lehman Brothers, before September 14?
Ms. DAHLGREN. We understood—my position prior to taking on
responsibility for the AIG Monitoring Team was in the Bank Supervision Group. We had, through discussions, been looking at the
exposures to a broad set of counterparties of the institutions that,
at that time, we supervised.
We had a sense that there were things going on with AIG
through those discussions but for the institutions that we supervised, AIG was not one of the top 10 exposures for those——
Chair WARREN. So you didn’t even think AIG was on the top 10
list of those that might be in serious financial trouble as of two
days before it collapsed or faced imminent collapse?
Ms. DAHLGREN. As it related to the institutions that we were supervising at the time, it was not the threat that you’re describing.
Chair WARREN. All right. So there were—and you hadn’t heard—
you collectively, the Federal Reserve Bank of New York had not
heard from Mr. Willumstad at that point about any challenges facing AIG?
Ms. DAHLGREN. I personally was not involved in that conversation.
Chair WARREN. Well, do you know if others at the Federal Reserve Bank of New York were? Mr. Baxter, feel free to join in.
Mr. BAXTER. During Lehman weekend, which began——
Chair WARREN. I’m still trying to get back before Lehman weekend. I want to find out whether or not—what kind of assessment
of a problem there was before the 14th of September.
Mr. BAXTER. Well, as Mr. Willumstad said, it began the week of
September 8th which was the week that led up to what we at the
Fed and the Treasury refer to as Lehman weekend.
Chair WARREN. So the first inkling you had that AIG might pose
a serious problem was a week before it faced collapse?
Mr. BAXTER. Well, with respect to your question, you asked what
you had, and I’ll answer from my own personal participation in this
matter. My awareness of AIG’s problems began on or about September 12th.
Chair WARREN. Okay. On or about September 12th.
Mr. BAXTER. Which when——
Chair WARREN. Do you know——

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Mr. BAXTER [continuing]. Lehman weekend began.
Chair WARREN. Do you know about the awareness of others, such
as the president of the Federal Reserve Bank of New York or others within the organization?
Mr. BAXTER. I know that President Geithner was also concerned
on September 12th because he had asked some of the staff to
begin——
Chair WARREN. But you don’t know about——
Mr. BAXTER [continuing]. Looking at the AIG situation.
Chair WARREN [continuing]. The concerns prior to September
12th?
Mr. BAXTER. I’m not aware of any concerns.
Chair WARREN. You’re not aware of any phone calls that Mr.
Willumstad made or others made?
Mr. BAXTER. I’m aware that Mr. Willumstad testified today and
in his prior appearance that there was a meeting in July which I
was not present for and that he also had contact with President
Geithner earlier in the week of Lehman.
Chair WARREN. But you never verified any of that——
Mr. BAXTER. I did not.
Chair WARREN [continuing]. Through the Federal Reserve Board?
Okay. You’ve described this binary choice, either it must be bankruptcy and collapse, as you describe it, or a 100 percent bailout.
Mr. Willumstad said they were preparing papers for bankruptcy.
When did you consult bankruptcy counsel to discuss alternatives
for AIG? Either one of you.
Mr. BAXTER. And I’m the one who should answer that question.
If I can back up because you need to have some context for an understanding of the answer to that question?
Over the course of Lehman weekend, we were working aggressively at the Fed in New York and also in Washington to try to find
a solution for Lehman Brothers and, over the course of that weekend, we had called together a number of large financial institutions. Some of those financial institutions were involved in providing what was to be a private sector solution to AIG’s liquidity
problems.
Chair WARREN. Okay. So AIG, at least from the point of view of
the Fed, the Fed now knew that there was a serious problem with
AIG, but believed there was going to be a private bailout.
Was the Fed a party to the negotiations over this private bailout?
Mr. BAXTER. In the course of the discussions about Lehman
Brothers, several of the senior officers of the so-called private sector consortium had said when Lehman came up—when AIG came
up, that they were working on a solution to AIG’s liquidity problems. So those who were in the room at the time and heard those
words, and I was one of those people, were mindful that there was
a solution being fashioned for AIG’s liquidity problems.
Chair WARREN. So let me just—you switched that to the passive
voice. My question was the active voice.
Was the Federal Reserve Bank involved in those negotiations for
a private solution?
Mr. BAXTER. We were not involved in the negotiations. We were
mindful that they were going on——
Chair WARREN. All right. So your——

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Mr. BAXTER [continuing]. Because there were conversations in
our presence about those negotiations.
Chair WARREN. So your plan was that the private—the creditors,
others, would take care of AIG, and did you have a Plan B in place
in case that failed?
Mr. BAXTER. Let me add to that, in addition, we had been informed by the insurance departments in New York and Pennsylvania, as well as by representatives of the Office of Thrift Supervision, that the private sector solution to AIG’s liquidity problems
was not only underway but there was confidence that it would
come to pass.
Chair WARREN. So I take it that means there was no Plan B?
Mr. BAXTER. Well, some would say that the Federal Reserve became the Plan B.
Chair WARREN. I’ve got that part.
Mr. BAXTER. Now, you asked me, Chair Warren, and I want to
be responsive to your question——
Chair WARREN. Sure.
Mr. BAXTER [continuing]. About when we involved bankruptcy
counsel. Bankruptcy counsel, and I’m speaking about Davis Polk,
had been engaged by the private sector consortium, along with
Morgan Stanley, to work on the terms of that private sector solution.
Chair WARREN. I’m sorry. Were they engaged as bankruptcy
counsel?
Mr. BAXTER. They were engaged to—not as bankruptcy counsel
but engaged to——
Chair WARREN. They were engaged by creditors, is that right?
Lenders to AIG?
Mr. BAXTER. By JPMorgan Chase——
Chair WARREN. Right. And wouldn’t the last——
Mr. BAXTER [continuing]. Specifically.
Chair WARREN [continuing]. Thing they would have wanted
would have been bankruptcy?
Mr. BAXTER. Well, I’m trying again to be responsive to your question. Davis Polk was working on the private sector solution. Davis
Polk is a firm not only with banking expertise but also bankruptcy
expertise.
Chair WARREN. Did you ask them for bankruptcy advice?
Mr. BAXTER. And at a later point, when we had engaged Davis
Polk to take over and to work with the Fed on coming up with the
revolving credit facility, among the professionals from Davis Polk
who served us were not only banking experts and lending experts
in the form of Brad Smith but also a bankruptcy expert who is
Marshall Huebner.
Chair WARREN. So let me make sure I understand this. So there
were creditors, about to be creditors of AIG and, so far as you
know, potential counterparties or counterparties to the counterparties who were trying to negotiate an arrangement with AIG and
when that failed, and you used their lawyer in order to advise the
Federal Reserve on what path to take forward?
Mr. BAXTER. Well, the way I would answer that is, first, there
were multiple creditors, 100,000 employees, and 106 million Amer-

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ican policyholders who would be impacted if AIG should file for
bankruptcy. So we were mindful of those situations.
When we turned to Davis Polk, we had a matter of hours to deal
with this decision of either lend to AIG to resolve its liquidity problems, avoid the catastrophic systemic consequences and the implications for literally hundreds of millions of Americans, that was
one choice, or the alternative was AIG was going to file for bankruptcy.
Chair WARREN. So let me ask just one more and then I will stop
on this about bankruptcy, but Mr. Willumstad said that obviously
AIG was talking with attorneys about the possibility of bankruptcy.
Did you talk with the attorneys that AIG was talking with about
the advice they were receiving on bankruptcy and as an alternative?
Mr. BAXTER. We were talking to lawyers representing AIG at
Sullivan and Cromwell, at Weil Gotshal. We were also talking to
the lawyers we had newly retained at Davis Polk to get our own
advice.
Chair WARREN. So the answer is yes, you did, you talked with
AIG’s bankruptcy lawyers to seek their views on whether bankruptcy or a negotiated arrangement was possible?
Mr. BAXTER. I wouldn’t limit it, Chair Warren, to bankruptcy. I
mean, we were in open dialogue with the lawyers.
Chair WARREN. Fair enough. On many fronts.
Mr. BAXTER. On many fronts.
Chair WARREN. Bankruptcy was certainly one of the things you
discussed with AIG’s lawyers?
Mr. BAXTER. We understood that AIG’s Board had been assembled on September 16 and that Board was going to consider the options as they appeared on the——
Chair WARREN. I’m sorry, Mr. Baxter. That wasn’t my question.
My question was did you speak with AIG’s lawyers about their advice about the possibility of bankruptcy or a negotiated settlement?
Mr. BAXTER. And I personally spoke to lawyers at Sullivan and
Cromwell about the board meeting that AIG was going to have and
the decisions taken at that board meeting.
Now one of those potential decisions, Chair Warren, could have
been to file for bankruptcy. So to be clear, I had conversations with
Sullivan and Cromwell lawyers about the board meeting and what
might happen at that board meeting, including this prospect of a
bankruptcy filing.
Chair WARREN. All right. Thank you. Mr. McWatters.
Mr. MCWATTERS. Thank you. Let me follow up on that a bit.
Mr. Willumstad, when did you first advise the President of the
New York Fed or someone else at the New York Fed regarding the
problems at AIG?
There’s a book by Andrew Ross Sorkin, ‘‘Too Big to Fail,’’ that
says that President Geithner received an early warning.
Mr. WILLUMSTAD. I want to put in context my conversations with
Mr. Geithner. When I took over in the middle of June, I started in
terms of preparation for a solution to the company’s problems.
They were basically to deleverage and de-risk the company and as
I kind of dug into a lot of the financial issues related to doing that,
the securities lending program actually concerned me.

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The securities lending program, if there were a failure of confidence in AIG and AIG had had significant losses in the three previous quarters, I felt that we were really facing potentially a liquidity crisis and I went to see him on the basis of just good risk management and planning. I didn’t anticipate that we would have to
use it, but I knew when and if a real crisis came about, it would
be very hard in a short period of time for a very complex company
like AIG, with the losses it was having, to raise capital in the private markets.
So on July 29th, I went to see Tim Geithner and I explained to
him what I had been doing at AIG and gave him a sense that I
was just doing good risk management planning and that since the
Fed had made the Fed window available to—after Bear Stearns to
Lehman and Goldman Sachs and Morgan Stanley, institutions that
they traditionally had not regulated, would it be possible, if need
be, could the Fed make its Fed window available in a time of crisis
to AIG.
We had a meaningful conversation. We talked a lot about issues
and concerns. He indicated to me that he thought if there were a
formal allowance by the Fed to allow AIG to go to the Fed window
that it would in fact exacerbate what I was trying to avoid, which
would have been the prospective run on the bank which is what
the securities lending program effectively would have been if all of
the lenders wanted their cash back.
So I took that under advisement. He asked me to keep him apprised of how things were going and I left. So that was my first
encounter with him on AIG’s issues.
Mr. MCWATTERS. You know, I assume that the CEO of a publicly-traded company does not have a discussion with the President
of the New York Fed unless something fairly serious is happening.
So is it fair to say that on July 29th, 2008, that the President
of the New York Fed knew that AIG had serious issues?
Mr. WILLUMSTAD. Again, I want to position this properly. I would
not have described to him that AIG was facing serious issues. I
tried to explain to him that a series of events—and again AIG’s
credit default spreads were widening. We had, as I said, suffered
multi-billion dollar losses for several quarters. It’s not unreasonable to be concerned about what the longer-term prospects of AIG
would be in terms of the environment that we were operating in
and we certainly anticipated that we would have further losses.
Mr. MCWATTERS. Okay. Mr. Alvarez, Mr. Baxter, in the view of
the Federal Reserve Bank, in the view of the Federal Reserve Bank
of New York, is AIG today a solvent entity?
Mr. ALVAREZ. So AIG does not have negative net worth.
It has a positive cash capital. It is meeting the demand for loans
as they come due.
Mr. MCWATTERS. Okay.
Mr. ALVAREZ. So it does meet the traditional definition of solvency. It is repaying the Federal Reserve from the liquidation of
assets in the Maiden Lane II and III facilities and also from the
sale of its companies to repay the revolving line of credit.
Mr. MCWATTERS. Okay. So may I assume from that, and please
correct me if I’m wrong, that AIG will not need any additional
TARP funds?

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Mr. ALVAREZ. So the question you’re asking there is whether we
can predict in the future what might happen there. I’m not able to
do that.
Mr. MCWATTERS. Just what you think.
Mr. ALVAREZ. I think right now they are on a path of sustainability, a path of repayment. That is the goal of the management
of AIG. They’re working very hard in that direction and they are
accomplishing the goals that we’ve set out for repayment of the facilities to the Federal Reserve.
Mr. MCWATTERS. Okay. So I gather your answer is you’re not
sure, it might, but hopefully will not?
Mr. ALVAREZ. No, I have no expectation that they will need additional funds. They certainly have not requested additional funds
from the Federal Reserve. Our line of credit is set right now at a
maximum amount of $35 billion.
They have not drawn that full amount and, as I mentioned,
they’re repaying the loan.
Mr. MCWATTERS. Okay, okay. I think my time is up.
Chair WARREN. Thank you. Mr. Silvers.
Mr. SILVERS. Mr. Baxter, is it correct in your judgment that the
critical—that in light of what I think many have commented is the
critical sort of characteristic of successful central banking and bank
regulation, that there should be consistency over time, is it correct
then to view the critical decisions in relation to the structuring of
the rescue of AIG to have been those decisions that we were discussing a few moments ago, the decisions made over what you referred to as Lehman weekend and the few days that followed?
Mr. BAXTER. First, Mr. Silvers, I would rather be right than consistent, and let me embellish on this.
We made, as I pointed out in my opening statement, decisions in
the context of an incredible crisis to provide liquidity assistance to
AIG, and in furtherance of that decision to provide liquidity assistance to AIG in order to avoid the systemic consequences of failure
to the American people, we would do it through a revolving credit
facility along the lines of a term sheet that had been fashioned by
the private sector consortium that was going to do that loan until
Lehman failed on September 15th.
When we got to know AIG better and while we got to experience
the deepening crisis through the last two weeks of September and
into October and, of course, everyone here will remember another
significant development in early October was the enactment by the
Congress of the Emergency Economic Stabilization Act, as we faced
additional problems in our economy and as we got to know AIG,
an institution that we never supervised, but as we got to know
AIG, we started to think about ways that we could structure our
credit assistance to AIG to better accomplish our objectives, which
were to foster financial stability by stabilizing AIG and protect the
taxpayers, and that led to Maiden Lane II and Maiden Lane III in
November and it led to the additional transactions with AIA and
Alico in March of 2009, as Ms. Dahlgren has pointed out.
Mr. SILVERS. What I was getting at really was not that you
didn’t make some changes in the structure of the rescue going forward but, rather, that—because there’s been some criticism about

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not going back and re-examining the fundamental decision to ensure that the counterparties were paid 100 percent.
There’s been some criticism of that not going back later in November and, you know, this panel has heard in the course of our
work leading up to this hearing the assertion that really—that
there’s a consistency that’s a fundamental value in these processes.
Obviously getting it right is, as well, and that as a result, you kind
of locked in on things, on fundamental decisions in September.
Now this is—I just want to confirm that that’s the right way to
think about this because it’s central to how we as a panel look at
what decisions mattered and I think, in a sense, either that question of the 100 percent making whole is either opened later or it’s
not and if it’s not opened later, then we have to look at the context
it was made in September. Do you disagree?
Mr. BAXTER. Well, I think you have to evaluate the decisions
made on September 16 in light of the time available and the context made.
Mr. SILVERS. Absolutely.
Mr. BAXTER. Then if we go to later points in time and let’s take
November 10th of 2008 as an example, when we restructured
Maiden Lane III and we acquired into the vehicle at fair value the
CDOs from a number of counter-parties, if you look at that decision
today, and there’s information in the joint statement by Ms. Dahlgren and I on this very issue, the CDOs are now worth between
six and seven billion more than the loan balance.
Mr. SILVERS. Mr. Baxter, can I stop you right there?
I want to look——
Mr. BAXTER. That’s a savings to the American taxpayer.
Mr. SILVERS. I want to look then—I want to take your point and
go back to September, to those circumstances, and the morning of
September 16, all right, and by the morning, I don’t mean what
most of us think of as the morning but I mean about two o’clock
in the morning. All right.
It’s my understanding that that is when the Federal Reserve
Bank of New York learned that the private consortium was not
prepared to fund, is that correct?
Mr. BAXTER. I have to tell you that I did not arrive at the New
York Fed until seven in the morning. I had been at the New York
Fed through the weekend and went home to sleep Monday night.
I arrived at seven in the morning. I don’t know of my own knowledge what happened at two.
My belief, as I sit here before you, is that——
Mr. SILVERS. Yes.
Mr. BAXTER [continuing]. The final confirmation with the private
sector consortium, that they would not lend, they would not go forward with their term sheet—that occurred around that time, seven
in the morning, on September 16.
Mr. SILVERS. All right. You or Ms. Dahlgren or Mr. Alvarez, you
may not know the answer to this question, based on what you just
said, but exactly who delivered that information and to whom?
Mr. ALVAREZ. I do not know the answer to that question.
Mr. BAXTER. I know because I was at a conference call that took
place at eight in the morning and by eight in the morning on Sep-

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tember 16, 2008, we knew that the private sector consortium was
not going to go forward.
Mr. SILVERS. But it seemed—but you do not—you’re saying you
do not know who delivered that information and to whom?
Mr. BAXTER. I believe the information was delivered by Mr.
Huebner.
Mr. SILVERS. And who is that?
Mr. BAXTER. Mr. Huebner is the Davis Polk lawyer that I mentioned earlier in an answer to the chair’s question.
Mr. SILVERS. And this was a lawyer whom at that moment was
representing the private sector lending consortium, correct?
Mr. BAXTER. Yes, and was in the process of being reassigned to
work on a new consortium.
Mr. SILVERS. A lawyer with clients with potentially conflicting interests at that moment.
Mr. BAXTER. And the conflicts were all waived, Mr. Silvers.
Mr. SILVERS. Who were the two—am I correct in understanding
that the leaders of this private sector lending consortium were
JPMorgan Chase and Goldman Sachs?
Mr. BAXTER. That’s correct.
Mr. SILVERS. And who were the other participants?
Mr. BAXTER. I don’t think they had gotten far enough to figure
out who they were going to syndicate the loan to, but there was
certainly going to be a syndicate given the size, $75 billion.
Mr. SILVERS. So when you talk about a private sector lending
group, during this period over the weekend when, as I think has
been said several times this morning, there was a belief that such
a lending consortium was coming together, it was a consortium of
two? I mean, who else did you think was going to be in on something that you appeared to be counting on?
Mr. BAXTER. My understanding was there would be others. I
don’t know who Goldman Sachs and JPMorgan Chase intended to
reach out to. The belief that this consortium was going to go forward was based in my mind on words that I heard from the chief
executive officers of both of those institutions, on information coming to us by the state insurance departments, and the OTS, and
confirmation from our own people that due diligence was being
done by private sector representatives of this consortium on this liquidity facility.
Mr. SILVERS. The chair has been kind enough to not interrupt
me. I want to ask one more question.
When Mr. Huebner contacted the Federal Reserve Bank of New
York on behalf of JPMorgan Chase and Goldman Sachs and said,
sorry, fellows, no money from us, was there any further communication with those institutions about that decision?
Mr. BAXTER. And I can only speak for myself. I had no communication with those institutions about that decision.
Mr. SILVERS. To your knowledge, Mr. Baxter or Mr. Alvarez, Ms.
Dahlgren, did anyone else?
Ms. DAHLGREN. Not to my knowledge.
Mr. ALVAREZ. Not to my knowledge.
Mr. SILVERS. Mr. Baxter, you talked about your long experience
in dealing with the number of financial crises on behalf of the Fed-

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eral Reserve Bank of New York and in a certain sense on behalf
of the public.
In your experience in those contexts, is—when you’re trying to—
when you’re pulling together the private sector to solve a problem
that they’ve created of the type that AIG represented, is it typical
to accept no as an answer?
Mr. BAXTER. Well, I started out by saying there was nothing typical about the crisis——
Mr. SILVERS. Understood.
Mr. BAXTER [continuing]. We were experiencing in September of
2008.
Mr. SILVERS. But still, you have a lot of history with failing financial institutions that represent systemic risks. You gave a long
list of them.
Is accepting no what the Fed does?
Mr. BAXTER. What is typical of a crisis situation in my experience, and I should always add that my experience has always been
as a lawyer, so I always had the easy job in crisis situations of advising on the law, not having to make the substantive policy call,
but let me say that the difficult decision in a crisis is to act on the
basis of imperfect information and to act in sufficient time as to
remedy the problem before you because you can always find a reason to wait. You can always find some basis to get more information, but the best crisis decision-makers are the ones who can act
quickly.
Mr. SILVERS. I wasn’t suggesting waiting.
Mr. ALVAREZ. Could I add?
Chair WARREN. We are very much over but 15 seconds, Mr. Alvarez.
Mr. ALVAREZ. Thank you. I think it should not be understated
how at the time folks were hoarding their cash, moving away from
investments. The Federal Reserve has often been able to talk people into understanding risks and have them move forward. This
was an unusual time. There was very strong pressure against what
we were saying.
We had no legal authority to force anyone to take actions they
did not want to take and at this time in this economic circumstance, they did not want to provide assistance to a struggling
firm. So there was nothing more that we could do, other than use
the statutory authority Congress had already given to us.
Mr. SILVERS. You all have been very kind and responsive to my
questions. Thank you.
Chair WARREN. Professor Troske.
Dr. TROSKE. Thank you. I guess I have a question for Mr. Baxter
or Ms. Dahlgren.
You made the statement that—Mr. Alvarez, you made the statement that it appears that the Maiden Lane vehicles are going to
in the end—GAO expects you to turn a profit from this, is that correct?
Mr. ALVAREZ. I think it would be——
Dr. TROSKE. A substantial profit, a fairly——
Ms. DAHLGREN. Yes, and again that was the Congressional Budget Office.

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Dr. TROSKE. Okay. Excuse me. CBO. So then is it—presumably
had the private sector created this vehicle themselves, they themselves would be sitting on a profit right now.
So to the extent that they’re profit-maximizing enterprises and
would like to make profit whenever possible, can we conclude that
they made a mistake?
Mr. ALVAREZ. So, of course, they made an assessment at the time
about what was more important to them, having cash then, going
into a very difficult and troubled time where they weren’t sure
what the value of the assets would be, or selling the assets to the
Maiden Lane facilities.
The Federal Reserve has the luxury of being able to provide credit over an extended period of time to bridge from the difficult times
to a better time and allow the asset value to come back. So they
made an estimation. Whether it’s a mistake or not is——
Dr. TROSKE. So I guess my question is ex post. After the fact,
would they have been better off using the money to fund this? Because in one of your testimonies you indicate that, you know, with
Long-Term Capital Management you had to pull them in kicking
and screaming, but in the end, they came out the other side better
off and there’s—I mean, the Federal Reserve was actually founded
as a result of private sector individuals intervening, JP Morgan intervening in a financial crisis, and I guess one of the things I’m
struggling with throughout this is these private sector individuals
are supposed to be sophisticated investors who I recognize were
under a lot of pressure and there’s a lot of uncertainty. There’s no
question about that. There was a lot of uncertainty and perhaps
the Fed was better able to deal with that uncertainty.
But it seems like in the past dealings, they had succeeded when
they listened to you.
Mr. ALVAREZ. And at this time they valued cash and reducing
their exposure to AIG more than they valued the CDOs that they
sold to us.
Dr. TROSKE. I guess, Mr. Baxter, you mentioned that, you know,
you didn’t have the luxury of time. What would you have done if
you had the luxury of time?
Mr. BAXTER. Time and tools. First, with respect to time, had we
known of the liquidity problems being experienced by AIG at an
earlier point and let’s say we had effective systemic risk supervision which hopefully we will have if the congressional legislation
passes that’s before the Congress right now, but let’s say we had
that kind of vision and we could see the problems emerging at AIG
in, say, a year in advance, then you could have taken steps to provide for liquidity for AIG at that earlier point in time.
So that’s one thing you could do, if you had the vision of the systemic risk off the bow at sufficient time so that you could steer the
ship in a way that would avoid hitting the proverbial iceberg.
That’s one thing.
Another thing would be to have a special resolution regime, such
as also before the Congress right now, that would enable us to effect an orderly wind-down of a systemically significant financial institution like AIG.
So another thing is to have additional tools in the toolbox so that
you could bring those tools to bear on a systemically-significant or-

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ganization like AIG and deal with some of the fundamental problems that we had and we saw on September 16, addressing problems that we saw in AIG Financial Products and the linkage to the
parent through the parent guarantee.
If you had powers to deal with that, and hopefully in the new
special resolution regime we will have those powers, then you could
have additional choices. We didn’t have them on September 16.
Dr. TROSKE. And so if tomorrow an AIG arises, tomorrow or two
days from now, three days from now, would you do anything differently? Do you have the ability to do anything differently if another AIG—I mean, have you put in—given the current state of the
world, has the Fed changed processes, something along those lines,
that if another AIG arose very quickly, you would do the same
thing, something different? Do you know how you’d handle it if
that occurred?
Mr. BAXTER. Well, the difficulty today is, and I’ll come back to
the point I made earlier, that the Federal Reserve did not supervise AIG in any way. So it is possible tomorrow for an institution
that we don’t supervise to also present a problem similar to the
problem presented by AIG.
Hopefully, though, whoever the supervisor is for that institution,
as a result of some of the lessons learned during this financial crisis, has been focused on capital, focused on liquidity, focused on
risk management, and is taking the steps needed to identify problems like we found in AIG in sufficient time to resolve them.
Dr. TROSKE. I think I’m out of time.
Chair WARREN. Mr. Finn, when did the OTS first understand
that AIG was in some serious difficulty?
Mr. FINN. AIG had been experiencing an adverse market reaction
probably from back in the December time frame when they——
Chair WARREN. December of 2007?
Mr. FINN. December of 2007. I believe it was that time frame
when they reported that there were material deficiencies in their
valuation of credit default swaps and there became increasing market concern about their practices.
Chair WARREN. So that was the first clue that the OTS had that
there was something wrong, was December of 2007?
Mr. FINN. That was, I think, the first time that the market——
Chair WARREN. No. I’m asking the OTS. I can read the market.
I want to know about the OTS.
Mr. FINN. Yes. Well, that heightened the concern because we had
done work throughout the course of that year looking at AIGFP,
the financial products division, valuation practices. We became concerned that they were not where they needed to be with regard to
the market values.
Part of that is counterparties were seeking collateral based on
their own valuation analysis of the collateral that backed those positions.
Chair WARREN. So you thought there were at least signs that
there was significant trouble with AIG throughout or some large
part of 2007?
Mr. FINN. So the troubles, I guess I’m alluding to here, are in
the valuation practices in assessing the values of the underlying
assets.

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Chair WARREN. Right.
Mr. FINN. The CDOs behind the credit default swaps.
Chair WARREN. Right.
Mr. FINN. The liquidity concerns grew much more later into 2008
and really the focus there became more not so much on the value
of the CDOs, that was part of it, but more the focus on the stability
of AIG as a group. They did a capital raise in the May time frame,
raising roughly $20 billion to satisfy the market concerns and for
a time that was satisfying in terms of reducing the likelihood of a
downgrade, but the events of the summer continued to progress
and the market concerns continued to grow at AIG as well as many
other firms.
Chair WARREN. So you had valuation concerns and then liquidity
concerns as we start moving into the spring/summer of 2008?
Mr. FINN. I would say the liquidity was much more in the summer.
Chair WARREN. In the summer of 2008?
Mr. FINN. Yes.
Chair WARREN. Okay. And what did the OTS do about it?
Mr. FINN. At that time we had people onsite looking at their contingency planning. As part of our supervisory work from the latter
end of the year that I had mentioned, we issued a supervisory letter to the parent company that downgraded the firm to a less than
satisfactory rating, is the way that we describe it in our holding
company supervision, and we directed them to undertake a series
of corrective actions.
Chair WARREN. So I just want to ask you. Now is this only for
the financial—for the thrift, not for the larger——
Mr. FINN. No. This is directly to the AIG parent. So again, March
of 2008 we downgraded the institution, the holding company, and
issued a series of corrective actions that required them to work on
those issues that we had identified later in 2007.
Chair WARREN. Right. Now you say in your written testimony,
I’ve gone through your written testimony, you talk about not having the regulatory tools that you needed during this time period,
is that right? That you didn’t have large enough supervisory powers, is that right?
Mr. FINN. There are, I would say, two aspects here. The supervision framework for thrift holding companies, as well as bank
holding company regulation, is governed by GLBA which requires
a respect for functional supervision.
So we did not have the authority to go in and examine insurance
companies that were regulated by other regulators. We did not
have the authority to directly supervise the activities that were unregulated, like credit default swaps.
Chair WARREN. So then let me understand because actually our
staff pulled out the OTS, your, Holding Company Handbook and it
directs your examiners to conduct, and I’m quoting here, ‘‘comprehensive assessment from the perspective of the consolidated regulator at the parent top tier organization within the conglomerate.’’
Now, I presume that means you do this on a regular basis and
if I’m understanding your written testimony correctly, you’re saying the reason you couldn’t do this in the case of AIG is because

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it was primarily an insurance company, is that—am I understanding this correctly?
Mr. FINN. I guess I’m trying to describe the difference. If it was
purely a banking firm that was owned by a thrift holding company,
we would regulate both—we would regulate the entire entity on a
consolidated basis.
In an organization——
Chair WARREN. And that’s what this language would refer to?
Mr. FINN. Correct. Well, no. It does require the OTS taking a
view as a consolidated supervisor from the top down, but when
there are diversified financial services companies, there are a multitude of regulators.
In a situation like AIG, those regulators are both domestic and
foreign. We would not have the ability to go examine the individual
regulated entities that are underneath that. So we would rely on
information coming from the respective insurers.
Chair WARREN. So knowing that there were some difficulties,
knowing that you did not have the capacity to see into AIG the way
you could see into a bank holding company, when did you sound
the alarm about what you knew you couldn’t see?
Mr. FINN. Discussions were going on with the firm again
throughout the——
Chair WARREN. Publicly or with other regulators. When did you
make it clear that there was a problem here, that there was no one
regulating this behemoth company?
Mr. FINN. We at staff level, OTS staff that had done work on
AIG had conversations during the—I guess it was the July/August
time frame.
Chair WARREN. July/August of 2008?
Mr. FINN. July/August of 2008.
Chair WARREN. With whom? With the Treasury?
Mr. FINN. No, not with the Treasury.
Chair WARREN. With the Federal Reserve Bank of New
York?
Mr. FINN. With the Federal Reserve at the staff level.
Chair WARREN. So you were telling the Federal Reserve Bank of
New York about this problem in July?
Mr. FINN. There was an inquiry by an individual, I think it was
an examining officer, that, you know, has relationships with other
counterparties of AIG as to what was happening at AIG with regard to the credit default swaps.
We arranged for a meeting in August, the early part of August,
August 11th.
Chair WARREN. This is a meeting with the Federal Reserve Bank
of New York?
Mr. FINN. On the staff to staff level, yes.
Chair WARREN. In August of 2008?
Mr. FINN. August of 2008.
Chair WARREN. To raise your concerns about AIG and what it
was that you could not see?
Mr. FINN. What we shared with them were our views with regard to the liquidity situation and the capital situation at AIG because again the market across—the whole market at that time was
becoming increasingly stressed.

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Chair WARREN. Right. And if you’ll permit me just one more so
I can just wrap this up?
Mr. FINN. Sure.
Chair WARREN. And that is, were you or anyone at OTS a party
to the negotiations of this private bailout that was being arranged
through JPMorgan Chase and Goldman Sachs?
Mr. FINN. We had no involvement.
Chair WARREN. Did you have any knowledge of it?
Mr. FINN. We were informed at several points over the course of
that weekend.
Chair WARREN. That weekend, meaning September 14 to 15?
Mr. FINN. The Lehman weekend, yes.
Chair WARREN. Yes.
Mr. FINN. So we knew that the Board was meeting with AIG
over the weekend late through Sunday night to try to arrange a
private transaction.
Chair WARREN. Okay. So you were the principal regulator, but
you were not party to the discussions, you simply knew that they
were occurring and believed there was going to be a private bailout?
Mr. FINN. We—again, up through Sunday night, AIG was still
working on a private solution. We got word late Sunday night that
that fell through.
Chair WARREN. And from whom did you get—did you receive
word?
Mr. FINN. From the regulatory contact at AIG.
Chair WARREN. All right. So the—your contact at AIG called you
and said that the deal’s off. Do you remember when that was?
Mr. FINN. It was probably around 11 p.m. that Sunday.
Chair WARREN. On Sunday night?
Mr. FINN. Again, Lehman, I think, if not, announced—was preparing to announce right at that time.
Chair WARREN. Fair enough. And the call went to whom in your
organization?
Mr. FINN. That call came to me——
Chair WARREN. Came to you.
Mr. FINN [continuing]. From the regulatory counsel.
Chair WARREN. Okay. Thank you very much. Mr. McWatters.
Mr. MCWATTERS. Thank you. Mr. Alvarez, Mr. Baxter, when the
private sector bailout attempt broke down, was there any attempt
to, let’s say, get the Secretary of Treasury, the President of the
New York Fed involved in this process, to actually walk into the
room and say, okay, guys, you’re at an impasse here, you must
have two or three points, let’s see if we can resolve those? Was that
attempt made or did that happen?
Mr. BAXTER. First, with respect to Lehman weekend, which
began at 6 p.m. on September 12, 2008—and that was a Friday
evening—and it began with a meeting of a number of financial institutions, approximately 12, with the Secretary of the Treasury at
the time, Hank Paulson, the Chairman of the SEC, and Tim
Geithner, and those financial institution representatives, and they
were represented at the highest level by their CEO in most cases,
continued and stayed at the New York Fed through Saturday and
Sunday. So that group was together. They were together for a spe-

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cific purpose and that was to work on what was hoped to be the
rescue of Lehman Brothers.
Now in the course of those meetings, AIG did come up and in the
course of those meetings, we had heard from two of the CEOs that
a private sector solution was going to be done.
Events changed dramatically when Lehman filed for bankruptcy
shortly after midnight on Sunday, September 14, and when I say
changed dramatically, I mean changed dramatically not only for
Lehman Brothers, but the implications for the markets and for
market participants were such that they were all protecting their
balance sheets.
Mr. MCWATTERS. Okay.
Mr. BAXTER. But the sense was it was futile at that point to call
them back in to talk about a potential deal they had already rejected.
Mr. MCWATTERS. Or how about a hybrid approach? What if the
Secretary of Treasury walked in and said, look, let’s split the difference, there will be some government money, there will be some
private money? Were those attempts made?
Mr. BAXTER. Again, the problem as we saw it was a liquidity
problem at AIG. We at the Fed had a specific tool, Section 13(3)
which——
Mr. MCWATTERS. Sure, sure.
Mr. BAXTER [continuing]. My friend and colleague has spoken
about this morning——
Mr. MCWATTERS. I understand.
Mr. BAXTER [continuing]. To address that liquidity problem.
Mr. MCWATTERS. But there was no attempt to do a hybrid approach with the Government and the private sector, private/public?
Mr. BAXTER. There was no time and there was—it was also felt
that that could be counterproductive, given what we were seeing in
the markets at the time.
Mr. ALVAREZ. Mr. McWatters, if I could add quickly here?
Mr. MCWATTERS. Yes.
Mr. ALVAREZ. You know, we didn’t like being in this position any
more than anybody else likes us having been in that position. We
were not anxious. We were not interested. We were not looking to
lend to AIG. In fact, that’s one of the reasons that we’ve been calling for a new resolution authority.
It would have changed the dynamic if we had had the kind of authority that is now being considered by the Congress. We could
then have been more forceful. We could have taken over the company ourselves and then the—not us, the resolver, would have been
able to structure the losses across the creditors and across the
shareholders in a better way.
Mr. MCWATTERS. Well, what about a bridge loan, an $85 billion
bridge loan for a 180 days with a 180 days to work out a prepackage bankruptcy of AIG, plenty of time to work with all the insurance regulators, put a private sector deal together, but like you
said, not let the world fall apart?
Mr. ALVAREZ. We did in fact provide a bridge loan, a two-year
loan, for up to $85 billion, $60 billion of which was drawn down
within the first two weeks. So it was not—they had a very severe

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liquidity need, not just a $5 billion or a $10 billion liquidity need.
They had an immediate need within 14 days of roughly $60 billion.
They still—our loan did not prevent the private sector from subsequently coming in and restructuring AIG, making another loan
and taking us out of the position. That was always a possibility.
Our loan did not remove that possibility.
Mr. MCWATTERS. But after September 16, did you then immediately shift and go into prepackaged bankruptcy mode, hire counsel, fire it up?
Mr. ALVAREZ. That requires the creditors, of which there are
thousands for AIG, to come to agreement and be willing to——
Mr. MCWATTERS. I know.
Mr. ALVAREZ [continuing]. Do that and——
Mr. MCWATTERS. I know.
Mr. ALVAREZ [continuing]. That’s not an easy task, as you know.
Mr. MCWATTERS. It’s not easy, but it’s hardly impossible because
it happens on a fairly frequent basis.
Mr. BAXTER. And if I may point out that after September 16, my
colleagues and I were quite busy with respect to other facilities,
market-wide facilities that we had to bring to bear to deal with
other market problems, like the problems in the commercial paper
market, the problems that we were seeing with money market mutual funds.
So the experience we were having between September 16 and
year-end was we were dealing with a panic, and in dealing with a
panic we had to do a number of things with—roll out a number of
programs in very short amounts of time to deal with the implications of what we were seeing in the American economy during that
period, things like the TALF, the commercial paper funding facility.
Mr. MCWATTERS. Sure. I understand that.
Mr. BAXTER. Money market mutual funding facility. We were
rolling them out as quickly as we could.
Mr. MCWATTERS. No. I also understand if you hire the right
counsel, the right accounting firm, you turn them lose, interesting
stuff can happen on a pre-pack. They might very well have been
able to put one together.
Let me shift a little bit to a question concerning the credit default swaps, and did the New York Fed press AIG not to release
the names of the counterparties, Mr. Baxter?
Mr. BAXTER. We did not.
Mr. MCWATTERS. At all?
Mr. BAXTER. There was never an intention to disclose the names
of AIG customers and that’s what the counter-parties were.
Mr. MCWATTERS. Right.
Mr. BAXTER. These were customers of AIG. AIG never had an intention to disclose the names of those customers. What we were
doing is we were commenting on AIG’s securities disclosures. AIG
continues to be a public company today. It was a public company
then. It had its own disclosure obligations.
So when we looked at AIG’s draft disclosures on transactions we
were doing with AIG, we had two purposes in mind. One was to
assure accuracy, the other was to protect the taxpayer interest
where we saw that interest at stake.

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Now, with respect to the counterparty names, there was never an
intention to disclose those customer names and that was the starting position and so as we proceeded to deal with common thing on
AIG securities disclosures, our perception was always—our perspective was always as I described it: assure accuracy, protect the
taxpayer interest but not to conceal or hide.
Mr. MCWATTERS. That may have been your intent, but it’s possible it was communicated in a way that was somewhat ambiguous
and was construed and implemented in a different way.
Mr. BAXTER. And Panel Member McWatters, I agree with you
and one of the things that I take away as a lesson learned for Tom
Baxter here is that if we should go through this again, we need to
be more mindful of how our actions can be perceived, that our actions were done for the reasons I described, but I understand that
it can be perceived as if we’re trying to hide and the lesson learned
for me personally here is that we need to be mindful of that and
perhaps change our behavior as a result of the perception, not the
actuality.
Mr. MCWATTERS. Okay. I’m over my time. I have one other question.
Would you release to this panel the copy of the minutes of the
New York Fed which has to do with the recommendation by the
New York Fed to the Federal Reserve Bank to extend $85 billion
of credit?
Mr. BAXTER. If I can ask for a clarification? The way the law
reads, and the law is Section 13(3) of the Federal Reserve Act, is
the Federal Reserve Board provides authorization to the Federal
Reserve Bank of New York to make the loan.
So with respect, I think the issue is the minutes of the Board of
Governors deliberation on authorizing the New York Fed to make
that $85 billion credit facility available to AIG.
Mr. MCWATTERS. Well, let me ask you this. Was there a recommendation by the New York Fed to the Federal Reserve Board
of Governors to extend the $85 billion loan? If there was a recommendation, who made that recommendation? Was it the President alone or was it the Board of the Federal Reserve Bank of New
York? If it was the Board of the Federal Reserve Bank of New
York, I would like to see the minutes. If it was the President alone,
I question whether or not the President had the power to do that,
but that’s a different issue.
Mr. BAXTER. At eight o’clock on the morning of September 16,
2008, in a conference call at which I was present, Tim Geithner,
our President, in conversations with Chairman Bernanke and Secretary Paulson, recommended that the Board of Governors later in
the day proceed to meet and authorize an $85 billion credit facility
along the lines that we actually did. That took place orally. It took
place in my presence. It happened.
But later in the day, for legal reasons, the Board of Governors
needed to meet and they needed to authorize in a vote as described
by my friend and colleague Mr. Alvarez.
Mr. ALVAREZ. Two quick points here.
Mr. MCWATTERS. But as General Counsel of the New York Fed,
does the President of the New York Fed have authority to make
that recommendation alone?

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Mr. BAXTER. Yes, there is a delegation from the Board of Directors to the President of the New York Fed enabling him to make
discount window loans, so that the directors of the New York Fed
do not get advance notice of particular lending decisions, and we
can make available to you and to the Panel a copy of that delegation on which Mr. Geithner relied to make his oral recommendation
to the Board of Governors on September 16 of 2008.
Mr. MCWATTERS. Okay. Fair enough.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. Mr. Baxter, I just want to follow that up and just
get to the last step.
All right. So then-New York Fed President Geithner makes a recommendation to the Board of Governors. The Board of Governors
votes to authorize the loan. The terms of the loan and the actual
entering into the loan through the discount window under 13(3),
how were those decisions made as a legal matter?
Mr. BAXTER. As a legal matter, we had a term sheet and the
term sheet was the one that was to be used by the private sector
consortium. We took that term sheet and worked with it as the
basic terms that we were going to request authorization on.
One of them was changed and that is the amount of liquidity assistance went from $75 billion to $85 billion. Another issue for us
in the course of the day of September 16 was the equity participation, the 79.9 percent equity stake in AIG. We had to talk through
different avenues as to how we could take that.
Mr. SILVERS. Mr. Baxter, I had a much simpler question. What
is the legal act that enters into that contract? Who—is that an authority that the President of the New York Fed had? Did the New
York Fed’s Board do it? Did the Board of Governors of the Federal
Reserve System do it? Who had the authority to enter into the loan
contract?
Mr. BAXTER. Well, the ultimate revolving credit facility was between the Federal Reserve Bank of New York and AIG, but the
New York Fed could only do that, could only enter into a contract
with a non-banking organization to make this kind of extraordinary
loan if it had expressed authorization from the Board of Governors.
Mr. SILVERS. Did the Board of Governors authorize the details of
the loan or did it authorize—did it give you a general authority to
enter into a loan?
Mr. ALVAREZ. The Board of Governors, and this is reflected in
minutes that I believe——
Mr. SILVERS. Yes.
Mr. ALVAREZ [continuing]. We provided to your staff, authorized
an $85 billion revolving credit facility with certain terms that were
enumerated in a term sheet that was provided to the Board.
The actual contracts, though, the details about that are negotiated by the New York Reserve Bank and the document, the actual loan document is entered into between the New York Reserve
Bank and——
Mr. SILVERS. And Mr. Alvarez or Mr. Baxter, who at the New
York Reserve Bank has the authority to enter into that contract?
Mr. BAXTER. The president of the bank.
Mr. SILVERS. Okay. That’s what I wanted to understand.

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Mr. Alvarez, just to move from the very small to the very
large——
Mr. ALVAREZ. Yes.
Mr. SILVERS [continuing]. In the view of the Federal Reserve, is
it a bad thing that market participants perceive that OTC derivatives are essentially guaranteed by the Federal Government? Is
that a bad thing? Let’s hypothesize that people assume that after
this sequence of events.
Mr. ALVAREZ. Well, I think it’s a little broad to say that we guarantee OTC derivatives. That’s an entire market——
Mr. SILVERS. I’m not saying—I’m not saying that—I’m saying hypothesize that such a perception exists among some people. Is that
a bad thing that such a perception exists?
Mr. ALVAREZ. I do not want to disagree with you on the idea that
too big to fail is a very bad idea. It is an idea that we at the Federal Reserve do not think is the right approach to have entering
into a crisis and that’s why we’re trying very hard to get that
changed.
Mr. SILVERS. Understood. But I’m asking in a sense not about an
institution but about a market, the OTC derivative markets, and
am I fair to extrapolate from your comment that you think that
should a person—should market participants believe that an OTC
derivative is essentially a safe or safer than, say, an insured bank
account, that that’s a bad thing, we don’t want people thinking
that?
Mr. ALVAREZ. Well, we’re not—nothing that we have done guaranteed OTC derivatives as a class. We did provide liquidity to AIG
which was engaged in that.
Mr. SILVERS. So, Mr. Alvarez, you agree that that would be a bad
idea to guarantee OTC derivatives——
Mr. ALVAREZ. Yes.
Mr. SILVERS [continuing]. As a class?
Mr. ALVAREZ. I think it would be a bad idea. I do think—if I
could quickly? I do think that there are markets where we think
liquidity should be provided to allow the markets to continue to
function. For example, the commercial paper market and other
markets, money market mutual fund market, things—places where
we have provided liquidity.
Mr. SILVERS. Right.
Mr. ALVAREZ. They’re different than guaranteeing the instrument.
Mr. SILVERS. Yeah. Well, perhaps it’s different. I mean, but let’s
establish that that would be a problem. Not if.
Mr. Baxter, Ms. Dahlgren, Mr. Alvarez, in each of your testimonies you talked about essentially the contagion effect from AIG’s
parent and AIG Financial Products to AIG subsidiaries whose obligations are in part guaranteed by state insurance funds.
Does it—and the necessity of rescuing obligations of AIG’s parent
which include the collateral payment obligations under OTC derivatives contracts, the necessity of doing so to avoid essentially a
potential run on or a disintermediation of these guaranteed subsidiaries with, as you pointed out, millions of policyholders and
pension funds and the like.

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If you take these two statements together, are they not a powerful and profound argument for ensuring that nobody who has that
type of guaranteed obligation—an insurance company, a bank, nobody—has a large unguaranteed derivatives business on top of
them that would provoke this type of choice in the future?
Mr. ALVAREZ. You are exactly describing the moral hazard that
comes with providing credit to an institution like AIG, and it does
send the impression that large institutions that are organized in
this way are going to receive government assistance. That’s something that we think should be—the government should be provided
tools so that that does not happen again.
Mr. SILVERS. But, Mr. Alvarez, I’m not describing that. I’m describing the pairing of these large Federal Government-guaranteed
obligations, insurance contracts, you know, individual insurance
contracts we all hold, bank accounts and the like, the pairing of
those obligations with large OTC derivatives books. All right. This
is a matter immediately in front of Congress and I just can’t see
any way of reading the story you all have told, other than as a
powerful brief for disaggregating those two businesses as is provided in section 716 of the bill in front of Congress.
Mr. ALVAREZ. So I guess I don’t see the connection that you’re
trying to draw. The connection——
Mr. SILVERS. Mr. Alvarez——
Mr. ALVAREZ. [continuing]. Between AIG and——
Mr. SILVERS [continuing]. Do I need to quote your testimony back
to you about the necessity of rescuing these financial—the parties
to the OTC contracts in order to save the insurance businesses?
Mr. ALVAREZ. The difficulty I’m trying to connect is between your
view of 716 and what happened in AIG. I don’t think those two are
connected. In AIG there was——
Mr. SILVERS. Should I disregard your testimony and the testimony of your colleagues from the New York Fed that a primary
reason for your sense that you had to pay a 100 percent on those
contracts was to avoid the collapse of the guaranteed insurance
businesses? Is that part of your testimony to be disregarded?
Mr. ALVAREZ. No, sir. But 716 stops insured institutions from engaging in swaps activities. That isn’t what caused the contagion in
AIG as it relates to its insurance subsidiaries. There were guarantees——
Mr. SILVERS. So you wouldn’t have a problem——
Mr. ALVAREZ [continuing]. Of AIG of obligations of the AIG insurance subsidiary.
Mr. SILVERS. So you wouldn’t have a problem then——
Mr. ALVAREZ. The swaps would have been prohibited by 716.
Mr. SILVERS. You wouldn’t have a problem then with a measure
that essentially disaggregated federally-insured financial activities
from swaps activities on the scale that AIG was engaged in?
Mr. ALVAREZ. So I think that swaps activities can safely and
should be safely done within depository institutions. They——
Mr. SILVERS. Then how do we not end up back in this situation
where we have to rescue swap participants and treat their obligations as though they were guaranteed, as though they were better
than, you know, the average individuals’ guaranteed bank account

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in order to avoid having an unraveling and thus a problem with
an individual’s guaranteed bank account or insurance policy?
Why is it that we are not faced with that exact problem today
should another firm be so foolish as to behave in the fashion that
AIG did and should regulators choose to look the other way while
they did so?
Mr. ALVAREZ. Because swap activities can safely be done and are
important as a hedging mechanism for depository institutions.
Mr. SILVERS. I don’t see how that statement is at all consistent
with your testimony or that of your colleagues.
Mr. ALVAREZ. Perhaps——
Chair WARREN. Perhaps we should stop here. Thank you.
Mr. ALVAREZ. I’m happy to talk with you further about this because this is a very important issue.
Chair WARREN. Thank you. Right. Dr. Troske.
Dr. TROSKE. Thank you. So let me start along a related line and
go back to the statement Mr. Baxter made about the importance
of consistency.
It has been the case that the Federal Government has stepped
in and bailed out institutions, starting with Continental Illinois
and Long-Term Capital Management and a variety of institutions.
It’s potentially the case that when Lehman Brothers was allowed
to fail that was a surprise to the market and they priced that accordingly.
Given that, that the market already figured out, okay, what the
Government was doing previously has now ended and we can’t expect to be bailed out any more, it’s entirely—I want you to speculate on the possibility that had AIG then subsequently been allowed to enter bankruptcy, that the market wouldn’t have been all
that surprised because you had allowed Lehman Brothers to enter
bankruptcy.
What’s your reaction to that sort of hypothesis? I’ll call it that.
Mr. ALVAREZ. Sure. And others, I’m sure, will have a view on
this, but there’s several significant differences between what happened with Lehman and what happened with AIG.
One is Lehman—the market had a long time to prepare for Lehman. They knew Lehman was struggling and so there was a longer
lead time than I think there was with AIG. Also, Lehman had pretty dramatic effects on the market. There were dramatic effects in
the commercial paper market, in the money market mutual fund
market, in state and local municipalities that held various kinds of
Lehman instruments.
A follow-on failure of AIG 48 hours after Lehman would have
been, especially without time to prepare—without the markets
being really in a position to understand what would have happened
and prepare for that—would have been a tremendously jolting effect.
So I think they were different situations. I don’t think the market was as prepared for AIG, and I do think also with the failure
of Lehman, things changed. People became more conscious about
cash. They became more worried about their own financial condition and the condition of everyone else. There was a real possibility
markets would have frozen up very dramatically with the second
follow-on failure.

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Dr. TROSKE. Okay. Mr. Willumstad, you’ve sat over there so patiently. I thought——
Mr. WILLUMSTAD. I don’t have much choice, do I?
Dr. TROSKE. Yeah. And I guess you’re the financial expert and
so in reading about this situation, there are a number of questions
or things that confuse me as a lowly economist, one of which was
in your testimony. You made the statement that the accounting necessity on mark-to-market caused AIG to experience losses, accounting losses without any fundamental change in the profit—in
the long run value of the company.
Now, again, we’re in a market in which presumably we’re dealing
with traders that are reasonably sophisticated and reasonably
bright people and should be able to see through accounting rules
that force you to do something as accounting rules sometimes do.
Sometimes they’re valuable. Other times they’re not, but occasionally they force you to do something that doesn’t reflect the true underlying value of the company.
So if the value of the company really hasn’t changed any, why
can a simple accounting rule cause a problem in the way the market treats the company? Help me try to understand that, drawing
from your experience, not simply at AIG.
Mr. WILLUMSTAD. Yeah. I’ll try. The mark-to-market accounting,
which I think is certainly a valid accounting process, the problem,
of course, at the time, there was no market. So we really weren’t
marking to market. We were marking to some hypothetical
formulaic approach and a number of different areas.
Dr. TROSKE. But again, that’s something that everybody knew. I
mean, presumably anybody could—I could look at that and say,
well, there’s not really a market here. So they’re just making it up.
Mr. WILLUMSTAD. Right.
Dr. TROSKE. Not to be too flip.
Mr. WILLUMSTAD. No. But from an accounting point of view, we
were required——
Dr. TROSKE. Yes.
Mr. WILLUMSTAD [continuing]. On that basis to take losses and
they were substantial. They were unrealized. There was no sale of
securities and in fact the securities at the time, throughout this
whole period of time, were still rated AAA or AA and there were
virtually no defaults. The securities were being paid and again I
understand mark-to-market.
The point I was trying to make is that in temporary market situations, these significant write-downs that the company had to take
impaired its capital and on the basis that the securities actually
over the long-term maturity of the securities would come back and
that was obviously a judgment call, based on different individuals,
was a belief that those securities had much more value than the
market had given them in this mark to market process. That was
my only point. I’m not sure I understand your question beyond
that.
Dr. TROSKE. Okay. There’s a lot of discussion about lack of access
to debt. Can you explain to me why AIG didn’t try to raise capital
through an equity market?
Mr. WILLUMSTAD. It did. Going back in May of 2008, AIG raised
$20 billion of capital which at the time I think was the largest cap-

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ital raise ever done. The subsequent losses in the second quarter,
which were announced in August, ate into a lot of that and again
it wasn’t so much an issue of pure capital. This was liquidity that
was the crisis that came about and so at probably the recommendation of my lawyers not do this, I would say to clarify some of the
things that happened, because I think there’s a little mixture of
capital-raising and liquidity issues that have gone on here, the private solution that was attempted on Friday, the 12th, the 13th,
and the 14th, was an AIG private solution.
The Fed had not entered into any of those discussions. I had reported to the Fed on Saturday evening that we had made some
progress towards raising capital from both secured lending facilities as well as new equity investments from private equity participants and that’s where the New York State Insurance Commissioner came into play.
But the number we were looking for was getting bigger, mostly
in anticipation of what would happen to the markets on the Monday after Lehman Brothers. We started looking for 20, we found
20. The number then escalated by Saturday evening to 40 and I remember going to the Fed and explaining to both Tim Geithner and
Secretary Paulson that we thought we could probably raise $30 billion this weekend, but the investors and New York State Insurance
Commission would not go ahead unless they would be assured that
the company would survive after receiving that money which was
only, obviously, sound judgment.
We continued to work all day Sunday with investors and, of
course, the news kept getting worse about what was going to happen to the markets on Monday and by Sunday evening at five
o’clock, I went back to the Fed and told them that we had essentially failed to raise any capital. The markets had withdrawn any
effort and, oh, by the way, the number was getting bigger, as much
as $60 billion.
Dr. TROSKE. So let me—you seem to have just said that you had
a deal for 20 and then you had a deal for 30.
Mr. WILLUMSTAD. No.
Dr. TROSKE. Okay. That’s what I heard you say, so I wanted to
make sure, because you seemed to indicate that you could have gotten 30 billion.
Mr. WILLUMSTAD. We believe we could have. The New York State
Insurance Commission had released $20 billion of securities which
previous to that approval process was not available. Banks had indicated they would lend us $20 billion. These were government securities. So there was no real collateral risk. So we assumed that
we could raise $20 billion based on what we got as collateral and
from the banks.
The private equity investors that were there Saturday had indicated they’d be willing to put up $10 billion on the assumption that
this would be a viable company coming out the end. There was no
way of doing that under the circumstances, knowing that the markets were going to be in very serious condition on Monday.
I went to the Fed on Saturday and explained this to them and
asked for both a bridge loan and/or a guarantee that I could take
back to the lenders and the private equity investors that would
give them some assurance that AIG would be viable after they put

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up this capital. I was told that was not going to happen. There
would be no government solution for AIG, and we went back to
work on Sunday trying to find more capital.
On Sunday evening, by this time we concluded that we couldn’t
raise any capital because we couldn’t guarantee——
Dr. TROSKE. So I know I’m running over, but this seems to address some points that have been asked before.
You seem to be suggesting from what you just said that when
you went to the New York Fed you had the possibility to put together a partially private/partially public deal that would have allowed you to continue to exist, that you had $30 billion in promises
from the private sector, conditional on the New York Fed guaranteeing the survival of the company or providing some additional
support. So it didn’t have to be all one, you believed you had a deal
that would allow both a private and a public component to it, is
that correct?
Mr. WILLUMSTAD. I believe that we had a commitment, a verbal
commitment, at least under the circumstances, for approximately
$30 billion, but without some further guarantees of liquidity from
someone, in this case the Fed, we were not going to be able to complete that deal.
Dr. TROSKE. Thank you very much.
Mr. WILLUMSTAD. If I could?
Dr. TROSKE. Yes.
Mr. WILLUMSTAD. Just one more point. It wasn’t until Monday
morning of the 15th when I received a call from Tim Geithner that
the Fed was going to—he actually asked me for permission for
JPMorgan and Goldman Sachs to represent or to attempt to work
on a ‘‘private’’ solution with a syndicate of banks to provide the
capital. That didn’t start until 11 o’clock on Monday morning. We
were all summoned over to the Fed at 11 o’clock on Monday, the
15th, and that’s when there was a discussion and Tim Geithner
said at that meeting to everybody, and there were probably 40 people in the room, that there would be no government resources
available to AIG and that was that Monday at 11 a.m. and, then,
of course, there was no solution.
Dr. TROSKE. Okay. Thank you.
Chair WARREN. I just want to make sure I’m following the
timeline here. So the people you were working with, the creditors
you were working with over the weekend, who was that? That was
not JPMorgan Chase and Goldman Sachs?
Mr. WILLUMSTAD. No, and again——
Chair WARREN. Over the weekend?
Mr. WILLUMSTAD [continuing]. Apples and oranges.
Chair WARREN. I understand that. Who was it?
Mr. WILLUMSTAD. Well, JPMorgan was our advisor to AIG over
the weekend. They were acting as AIG’s advisor in helping us raise
capital. We had a number of private equity investors and we had
the New York State Insurance Commission—that was a big help.
So that was purely AIG-driven with our advisor, JPMorgan, and
Citibank, by the way. Citigroup were also co-managers through
that process.
We were talking to large private equity firms and I had had conversation with Warren Buffett, as well, in terms of trying to raise

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110
capital. That was unrelated to what’s been referred to as the
JPMorgan/Goldman Sachs effort. That didn’t start until Monday at
11 a.m.
Chair WARREN. I see, and so when Mr. Baxter is referring to the
Lehman weekend, we keep hearing that AIG’s going to be taken
care of, they’ve got the money they need, there’s going to be adequate funding, it’s this private deal you were——
Mr. WILLUMSTAD. That was our effort.
Chair WARREN [continuing]. Working on, that collapsed Sunday
night at five o’clock.
Mr. WILLUMSTAD. Well, I informed them that Sunday.
Chair WARREN. Who did you inform?
Mr. WILLUMSTAD. Well, we were summoned back over to the Fed.
There were a number of people there. Tim Geithner was there. My
recollection is that Secretary Paulson was not in that meeting, but
I could be wrong about that.
Chair WARREN. So that’s Sunday at five o’clock. It’s now clear
that that effort has failed. A new effort starts at 11 o’clock on Monday morning but is evidently gone——
Mr. WILLUMSTAD. Well, just again to fill in some of the timeline,
after Sunday evening a phone call was received from the Fed and
JPMorgan was asked to go back to the Fed on Sunday evening.
Chair WARREN. But you were not?
Mr. WILLUMSTAD. We were not. As a matter of fact, we were—
I specifically asked whether we could be there and we were told no,
we were not invited, and so I can’t tell you exactly what happened
Sunday evening, but I did receive this call on Monday morning
from Tim Geithner saying that both JPMorgan and Goldman would
work on a syndicated private solution with my authorization. Of
course, I gave it to them.
Chair WARREN. Yes, and that started at 11 o’clock on Monday
and then——
Mr. WILLUMSTAD. So that was a conversation that we had had.
Everybody was summoned to the Fed——
Chair WARREN. That’s right.
Mr. WILLUMSTAD [continuing]. At 11 on Monday.
Chair WARREN. And that failed then at what time?
Mr. WILLUMSTAD. Well, everybody’s timeline is a little different.
I had the suspicion Sunday evening—Monday evening that there
was going to be no solution and that was just from some of the
feedback from some of the people who had attended some of the
meetings.
On Tuesday morning, I called Tim Geithner because it was clear
in the absence of a private solution on Tuesday we were going to
have to file bankruptcy by Wednesday morning.
Chair WARREN. I see. Good. Of course. Please.
Mr. MCWATTERS. It sounds like you had a deal that was fairly
close to being struck but it fell apart. What needed to be done or
who needed to do what to keep that deal alive, the deal that you
were working on over the weekend?
Mr. WILLUMSTAD. Well, again, we had potential people—potentially people willing to put in, in my estimation, as much as $30
billion into AIG, but as I said, no thoughtful person would put

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money in if they thought the company would file bankruptcy two
or three days later, or a week later, even two weeks later.
So they needed some form of guarantee that the company was
viable going forward after they made their investment. It was my
judgment that the only person who could give a guarantee like that
that would be credible would be the Fed.
Mr. MCWATTERS. What if the Fed, instead of giving a guarantee,
instead of making an $85 billion loan, made, let’s say, a $30–40 billion loan? Do you think you could have had a deal on those terms?
Mr. WILLUMSTAD. It certainly would have been much more attractive. It’s hard to know whether at that time, especially given
what was going on over the weekend, that a specific number would
have satisfied it.
Remember, all the lenders that were going to put capital in were
going to take collateral from AIG. So they would have been secured
in the event of some form of bankruptcy.
Mr. MCWATTERS. Right. And the Fed would have also, but since
the Fed’s loan was not 85, it was 30 or 40, presumably they would
take less collateral and leave more collateral for your bank syndicate or your syndicate of lenders.
Okay. Thanks.
Chair WARREN. And I just want to make sure I have this. 11 a.m.
Monday meeting, this was a meeting called by the Fed?
Mr. WILLUMSTAD. Yes.
Chair WARREN. All right. And then President Geithner was
there. You said you think Secretary Paulson was not, but you’re
not entirely sure?
Mr. WILLUMSTAD. Secretary Paulson was clearly not there.
Chair WARREN. Clearly not there.
Mr. WILLUMSTAD. I said I don’t think he was there Sunday
evening.
Chair WARREN. Got it. Okay. Anyone else you remember in this
meeting on Monday morning?
Mr. WILLUMSTAD. On——
Chair WARREN. Who was there on the Monday morning at 11
o’clock?
Mr. WILLUMSTAD. Representatives from JPMorgan, a large contingent from Goldman Sachs, including Lloyd Blankfein. There
were representatives representing the Fed from Morgan Stanley
and, of course, each one of these firms had its assumed number of
lawyers with them. I think the lawyers outnumbered the bankers
at the time.
Chair WARREN. Not probably for the first time. Okay. Good, good.
Another one, Damon?
Mr. SILVERS. One clarifying thing about this. Did the—was
there—and I don’t know.
Mr. Baxter, were you at this meeting?
Mr. BAXTER. Not to my recollection.
Mr. SILVERS. All right. So, Mr. Willumstad,—Ms. Dahlgren, were
you there?
Ms. DAHLGREN. No, I was not.
Mr. SILVERS. Okay. Mr. Willumstad, did then President Geithner
and his team remain for the entirety of the meeting? Were they
sort of—were they running that meeting?

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Mr. WILLUMSTAD. Well, that’s hard to answer. Mr. Geithner
stayed, I’d say, for about 10 or 15 minutes. I remember his last
words before leaving were that there would be no government assistance and that this had to be a private solution.
The principal representative from Treasury was Dan Jester who
was there. He and I actually left the meeting to go call the rating
agencies. So I was actually out of the meeting probably for about
an hour and by the time we were completed calling the rating
agencies, the meeting had broken up and people were coming back
to AIG to work on putting together the financial information necessary for a syndicated loan.
Mr. SILVERS. So what time did that meeting end, roughly?
Mr. WILLUMSTAD. I would say about 12:30–1 o’clock, or something.
Mr. SILVERS. And you left that meeting believing that a syndicate was being put together?
Mr. WILLUMSTAD. No, no. I’ve been in this business a long time.
I’m not naive. I believe——
Mr. SILVERS. What did you believe when that meeting ended?
Mr. WILLUMSTAD. No. I believed that JPMorgan and Goldman
Sachs were charged with the effort to try and put together a syndicate to come up with X billions of dollars and that effort was undertaken.
Mr. SILVERS. Now, did you—were there any further meetings involving that effort that you were involved in or any phone calls
after that meeting ended?
Mr. WILLUMSTAD. No.
Chair WARREN. And, Mr. Baxter, just so I’m sure we have the
record clear on this. Based on your earlier experiences, was the Fed
in the room for the negotiations over Long-Term Capital Management?
Mr. BAXTER. The negotiations with the creditors of Long-Term
Capital Management, to enlighten them of their self-interests in
putting $3 billion in capital in, took place on the 10th Floor of our
building at 33 Liberty Street.
Chair WARREN. So it’s fair to say you were there?
Mr. BAXTER. We were there.
Chair WARREN. You were there. Solomon?
Mr. BAXTER. And Solomon, there were a whole series of discussions.
Chair WARREN. Were you there?
Mr. BAXTER. In some I was.
Chair WARREN. Okay. Or the point is the Fed was there——
Mr. BAXTER. Yes.
Chair WARREN [continuing]. In some form or another? And the
sovereign debt crisis?
Mr. BAXTER. Sovereign debt crisis would have been a number of
discussions among colleagues of mine at the Fed, yes.
Chair WARREN. So the Fed was there, and Bear Stearns?
Mr. BAXTER. Clearly, we were there for Bear Stearns.
Chair WARREN. Okay. Good. Just making sure we’ve got it all
clear. I think that’s it.
Thank you all very much. Thank you for your patience and thank
you for your help to the panel.

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113
This panel is excused, and I call the second panel and while
they’re coming, I will introduce them.
Martin Bienenstock is Partner and Chair of the Business Solutions and Government Department at Dewey & LeBoeuf. Rodney
Clark is the Managing Director of Insurance Ratings at Standard
& Poor’s Credit Rating Agency. Michael Moriarty is Deputy Superintendent for Property and Capital Markets at New York State Insurance Department.
Gentlemen, I want to thank you, all three, for coming here today.
We appreciate it, and I’m going to ask you if you would make opening statements, if you could hold your remarks to five minutes. As
you can see, we are a lively panel with many questions, and flights
back late tonight.
So I’m going to ask to hold your remarks to five minutes, but
your entire written remarks will be part of the record.
Mr. Bienenstock, could I start with you, please?

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

Mr. BIENENSTOCK. Yes. Good morning, Chair Warren and Panel
Members, Deputy Chair Silvers, Mr. McWatters, and Dr. Troske.
Thank you for the opportunity to testify today.
Since I’ve heard several times that testimony is automatically in
the record, I thought at least in part I would try to supplement
what I’ve written by crystallizing some of what I’ve heard this
morning and tying it to the relevant portions of my written testimony.
First, I have no issue with the emergency action taken by the
Fed to provide the $85 billion facility on September 15, 2008, and
you have more information than I do, but all I can say is from what
I have been able to read from a lay person in the public, based on
the speed of the meltdown and the exigencies of the situation on
the heels of the unrescued Lehman bankruptcy and collapse, I don’t
know of any alternative, whether there could have been some
money from the private sector, I’m not sure at the end of the day
would even make a big difference because the $85 billion facility
was all secured. So the secured part will be paid back. Hopefully
it’s over-secured and the Government will get all its money back
at a profit, but it was secured with everything AIG had of value,
as far as I can tell.
Where I might take issue with some of what has gone before,
both this morning and in prior hearings, is the notion that everything was set in stone on September 15 and let me backtrack for
just a moment.
The speed and suddenness of the need for the $85 billion facility,
while I can tell it’s surprising to me, including some in this room,
is not surprising to those of us who have been through crises involving trading companies before.
I met with Enron the Friday after Thanksgiving in 2001 and the
next week it filed Chapter 11. When you’re dealing with a trading
company, financial statements and balance sheets don’t have much
meaning because the next trade changes the assets and liabilities.
It also changes the risk profile.

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When the market loses confidence in either the trader or there’s
a pervasive market shift in confidence in a class of securities, such
as subprime, the values fall out of bed, the financial statements are
worthless, and you’re at what I suppose AIG considered one of the
highly unlikely occurrences in their computer models.
If there was a fault there, I think it was governance at AIG that
didn’t recognize the severity of the damage if the unlikely did occur
and there was no preparation for that, but each of these are unique
situations. It’s only the speed of the death spiral that is the same
and whatever legislation arises out of this, it’s very hard to script
the steps that should be taken.
I think you’ll find that the most important thing is to have the
risks fully understood in advance so people are at least ready to
deal with them when they do occur and each one is unique.
Anyway, having advanced the $85 billion facility on September
15, the Maiden Lane II and III deals didn’t occur for several
months later. Meanwhile, the Fed had a lien on everything of
value. AIG had over 30 million customers which were 30 million
creditors and the creditors from which it really wanted concessions
in the notion of fairness are the creditors who were trading in the
businesses creating the harm, primarily the credit default swaps
and perhaps the securities lending.
Those came down to the bulk of the exposure being with eight
counterparties, the vast bulk being with 16, according to other testimony I’ve read, including from Mr. Baxter a few months ago.
So the bottom line is there were months to talk to the parties
having the most exposure about what concessions they might grant
if the Government and AIG would basically, in partnership, take
them out.
Now, what we know on the opposite end is the Government took
the worst case. They already held $35 billion in securities and the
Government paid the full value, the par value remaining. You can’t
do any worse than was done here. Hopefully the Government will
be able to recover much and all of that. Apparently it’s over-secured from what I’ve read in Mr. Millstein’s testimony that you’ll
hear later today. It’s currently over-secured.
But at the time, we have to recognize that the tables changed
and the essential message I want to give you is this is a process.
You don’t look at just the end games. Once the loan was made,
once AIG was secured, 30 million customers were current as well
as its other creditors. AIG wasn’t going to file bankruptcy voluntarily and under those circumstances, no one could really file involuntarily because AIG was generally paying its debts as they matured.
[The prepared statement of Mr. Bienenstock follows:]

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120
Chair WARREN. Thank you, Mr. Bienenstock. I’m going to stop
you there, but that’s very helpful. Thank you.
Mr. Clark, I just want to say again how much I appreciate your
being here and Standard & Poor’s stepping forward to give us some
insight into the credit rating process here.
If you could give us your opening remarks.

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

Mr. CLARK. Yes. Thank you. Thank you, Chair Warren, Members
of the Panel, good morning.
My name is Rodney Clark, and I serve as Managing Director in
Standard & Poor’s Ratings Services, and from 2005 through 2008
I served as S&P’s lead ratings analyst covering AIG.
I’m pleased to appear before you this morning. At the outset, I’d
like to take a moment to speak generally about our ratings process
and to explain what ratings are and are not intended to convey.
S&P’s credit ratings are current opinions on the future credit
risk of an entity or a debt obligation. They express our opinion
about capacity and willingness of an entity to meet all contractual
and financial obligations as they come due.
S&P forms its rating opinions through quantitative and qualitative analyses performed by our rating analysts and after an opinion is formed, S&P publishes the opinion in real time and for free
on our website and we generally publish a more detailed narrative
about our opinion. This is the process by which S&P arrived at its
ratings on AIG.
My written submission includes a table listing our global ratings
history on AIG since 1990 and a more detailed description of our
rationale for our rating changes. By way of overview, up to 2005,
S&P’s rating on AIG was AAA, our highest rating, reflecting our
view that AIG’s capacity to meet its financial commitments was extremely strong. Our opinion began to change starting in March of
2005 and S&P has since lowered its ratings on the company four
times.
In February 2008, S&P announced a negative outlook for the
company’s rating based on the way AIG was determining the fair
value of its credit default swaps that it had entered into. AIG CDS
guaranteed an array of structured finance securities, including securities backed by sub-prime residential mortgages.
In May 2008, we lowered our rating on AIG further to AA Minus
in reaction to the company’s announcement of losses, including 5.9
billion related to its CDS portfolio, and we maintained a negative
outlook on AIG’s rating throughout the summer of 2008.
In August, S&P announced its view that AIG’s actual credit-related losses in the CDS area would likely amount to $8 billion with
significantly higher mark to market losses. But the market value
of AIG’s investments and the investments of third parties that had
purchased CDS guarantees deteriorated sharply amid the substantial market turbulence in September 2008.
In light of these events, on September 12, 2008, S&P placed its
ratings on AIG and all AIG subsidiaries on credit watch with negative implications. On September 15, as AIG’s condition continued
to deteriorate, S&P lowered its rating further to A Minus in light

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of increasing CDS-related losses and its reduced flexibility in meeting the collateral needs.
In our view, were it not for the extension of an $85 billion borrowing facility by the Federal Reserve Bank of New York on September 17, 2008, AIG’s creditworthiness would have continued to
deteriorate.
Our current rating on AIG, which remains A Minus, includes a
five notch uplift to account for Federal Government support. Our
current view is that AIG has made significant progress in re-establishing its insurance market presence and in implementing a very
challenging restructuring plan. However, we believe AIG remains
susceptible to competitive pressures as well as aggressive market
pricing.
With respect to the effect of AIG’s current financial situation on
the creditworthiness of its subsidiaries, we believe those subsidiaries are to some extent insulated by the state insurance laws and
regulations. For example, if AIG had been forced into bankruptcy,
the bankruptcy would have likely included a relatively small number of AIG’s non-insurance subsidiaries, such as AIG Financial
Products, with only a marginal impact on AIG’s insurance subsidiaries.
Nevertheless, when S&P lowered its credit rating on AIG to A
Minus on September 15, we also lowered the ratings on most of the
insurance subsidiaries to A Plus, where they remain today.
While AIG’s financial problems have no direct effect on the solvency of the insurance subsidiaries, we believe the creditworthiness
of those subsidiaries is nevertheless indirectly affected by the decreased likelihood that they could receive additional capital from
AIG as well as the reputational risk resulting from the parent company’s financial problems and its impact on customers.
You’ve asked me to explain S&P’s ratings treatment of certain
distressed exchanges. Our criteria call for consideration of various
factors in assessing whether a distressed exchange would be viewed
as a selective default, including whether default insolvency or
bankruptcy in the near or medium term would be likely without
the exchange offer.
Chair WARREN. Mr. Clark, I would ask you just to—just do one
sentence. We’ve all read the report, but we’re at five minutes.
Mr. CLARK. Okay. The important line then is every situation is
different and any significant discount to the payment of the obligations, other than perhaps the time value of money, could potentially constitute a default under our published criteria.
Thank you for the opportunity to participate.
[The prepared statement of Mr. Clark follows:]

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132
Chair WARREN. That was impressive. Thank you, Mr. Clark, to
be able to take those last pages and put them together in a sentence.
Mr. CLARK. I knew the important line.
Chair WARREN. That’s right. Mr. Moriarty, could you give us
your opening remarks, please, sir?

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

Mr. MORIARTY. Surely. Pleased to. Thank you, Chair Warren and
other Members of the Congressional Oversight Panel, for the opportunity to present any information the New York Insurance Department can assist in fulfilling your important charge.
There’s some broad points I’d like to make. Number one. AIG Financial Holding Company is not regulated by state insurance regulators. The state insurance regulators are charged with regulating
the insurance operating entities here in the United States.
In that realm, our job is to make sure that policyholders are
treated fairly and that the insurance that they purchase to protect
themselves will be paid by the insurance company when legitimate
claims are put on the table.
Number two. The AIG crisis was the primary result of the credit
default swaps issued by an entity that was, for all intents and purposes, an unregulated derivative shop that traded on the rating of
AIG as a whole.
During the crisis, the Fed’s main concern was not the collapse of
the insurance companies which we don’t believe would have happened, but AIG Financial Products had CDS, had futures, had
other derivatives with many of the major commercial banks and
brokerage firms. The failure to perform on these transactions
would have a systemic impact on the worldwide economy, especially since the counter-parties to AIG Financial Products were already reeling from the failure of Lehman, the problems with Bear
Stearns, and the extreme distress of the other financial institutions.
The aggressiveness of AIG’s bullish outlook on the residential
mortgage market did bleed into the insurance companies in the
form of the securities lending. When the size of the securities lending program in the life insurance companies became known to the
insurance companies in terms of its size, which was probably in the
beginning of 2007, we, with other states, worked with AIG to begin
to wind down the securities lending in an orderly fashion and did
go from a high of $76 billion in the beginning of 2007 down to $58
billion right before the implosion of AIG in September of 2008.
The crisis caused by Financial Products did spook the borrowers
of the securities lending program and they would not let the borrowings roll over as they had done in the past and instead required
that the AIG return the cash collateral that was provided for them.
AIG had invested a lot of that cash collateral in residential mortgage-backed securities which were underwater and fairly illiquid
and would have taken a significant loss at the life insurance companies if those collateral calls were made.

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Once the $85 billion federal facility was established by the Fed,
AIG did take advantage of that and use some of it, $17 billion
worth, to pay back some of the borrowers of the securities, but the
remainder of the lending portfolio remained kind of an albatross
around AIG as a going concern.
Maiden Lane II was formed in December 2008 to effectively end
the lending program at the AIG life insurance companies. Now for
the $19.2 billion that was provided by the Federal Government for
approximately $39 billion in par value residential mortgage-back
securities, again, they are being paid back and by all indications
they could make a profit on it.
I think it’s important to remember that credit default swaps and
securities lendings are different transactions. In a securities lending program, the borrower posts collateral. If you do not return
that collateral, they will keep the securities that they borrow. So
AIG was going to suffer a loss on the securities lending programs
and it’s a different transaction than a credit default swap.
Quickly, in response to our oversight of the AIG insurance companies, as all states do, we review insurance financial statements
and other ancillary documents that are furnished by our domestic
insurance companies. We do on-site examinations and regular
meetings with the management.
At the time of the crisis AIG had 71 licensed insurance companies in the United States. Seven of those were domestic property/
casualty insurance companies and three of those were life insurance companies.
On Friday we did get the call from the CFO of AIG that a downgrade was imminent and it would have drastic ramifications. A
team of New York Insurance Department high-level representatives were sent to the AIG office.
It was during that weekend that the proposal to allow the property and casualty insurers to effectively swap $20 billion of liquid
assets with some of the residential mortgage-backed securities
were put on the table. I just think it’s important to note that there
were conditions to this and that there was capital provided by outside investors and that the life insurance companies be put underneath the P&C company, effectively becoming subsidiaries of the
P&C companies.
[The prepared statement of Mr. Moriarty follows:]

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Chair WARREN. Very helpful. Thank you, Mr. Moriarty.
So I want to be clear, if I can, about setting the stage a little bit
for this panel. If you’ve read the testimony from the Fed and we’ve
had multiple meetings now with the Fed, they basically have made
the argument that negotiation was simply not possible, and that it
was not possible because negotiation under these circumstances,
particularly in the case of rapid dissent, is never possible, that ratings downgrades would have triggered multiple cross-defaults and
contagion throughout the market, and that the insurance regulators would have seized the insurance companies and therefore destroyed the value of the entity and possibly caused losses to the insured, people around the country.
So the reason we asked this panel to come is that we wanted to
probe that claim. That’s what we’re here about, to just push back
on this alternative. So I at least am going to start that. I want to
start that, if I can, with you, Mr. Clark.
Following the bailout of a 100 cents on the dollar—because the
Fed has described and they describe in their written testimony, it
was totally binary. It was either a full bailout with full payment
to everyone or it was no help, bankruptcy, and collapse, as they
saw the alternatives, and so what I want to ask here is following
the Fed bailout, there was still a ratings downgrade, right, of—I
think I’m reading—you have some slight readjustment. No?
Mr. CLARK. You’re saying following the——
Chair WARREN. The actual bailout.
Mr. CLARK [continuing]. $85 billion, the initial——
Chair WARREN. That’s right.
Mr. CLARK. Okay.
Chair Warren: Right. You have some change in how you’re rating
AIG?
Mr. CLARK. Yes. On September 17, following the change, we actually—we had lowered the rating on the Monday, the 15th, to A
Minus. On the Wednesday, we maintained the rating at A Minus.
We revised the credit watch, which indicates the direction of possible movement from negative because the trend was clearly negative on Monday to developing on Wednesday, that implied it could
go up or down, but we were still sorting out the impact of this facility.
Chair WARREN. Got it. So government help—you had to evaluate
it, evaluate what its impact was going to be, its size, the likelihood
it would be there in the future, and I would assume from the ratings you gave, it was not guaranteed that it would be there forever;
otherwise, it would have gone back up to AAA.
Mr. CLARK. Correct.
Chair WARREN. So you were trying to evaluate that, and as we
all know, AIG ultimately paid every creditor 100 cents on the dollar and has continued to do so to this day.
So here’s my question. I also read in your testimony that right
now AIG gets a five notch improvement because of your assessment
of the value of the government assistance.
Mr. CLARK. Right.
Chair WARREN. If AIG had had a negotiated settlement of some
kind with government assistance, with private assistance, and with
a haircut to the creditors of some dollar amount, would they have

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been better off than if they had paid a 100 cents on the dollar or
would they have been worse off going forward into the future?
What would have been their financial picture? If you can pay less
on your debt, are you better off than if you pay a 100 cents on the
dollar on your debt?
Mr. CLARK. Right. And it’s difficult for me to explain in the hypothetical, but I know in our ratings criteria on distressed exchanges,
which we shared with the Panel staff previously, it speaks to the
fact that we would consider a distressed payment of less than what
is owed to be a default or a selective default——
Chair Warren. Yes.
Mr. CLARK [continuing]. Under our ratings criteria. However, it
is true that in many cases following a restructuring, following either a distressed exchange or a series of distressed exchanges, that
the credit condition could be better than before the time of the exchange.
Chair WARREN. Okay. Good. That was the part I needed, and
then if one combined this distressed negotiation with substantial
funding from some combination of private and public sources, what
would the credit rating look like going forward?
Mr. CLARK. I can’t speak to the hypothetical without knowing the
terms, but it is possible that it could have been similar, better, or
worse.
Chair WARREN. Okay. So I’ll ask it then just the other way and
then I’m through, and that is was it a foregone conclusion that
their ratings would be completely wiped out if they paid something
less than a 100 cents on the dollar, if they had secured both government and private money going forward?
Mr. CLARK. Under the criteria that we use, we look to was the
counterparty paid what they were owed, and was it done in a distressed situation, that is, to save the company from insolvency or
bankruptcy?
If there was a modest discount, such as relative to interest rates
and the time value of money, that would not have necessarily
caused a default, but those are factors the rating committee would
weigh in determining is the exchange distressed or isn’t it in determining what the impact on the ratings would be.
Chair WARREN. Okay. Along with how much money is available
going forward, right?
Mr. CLARK. Absolutely.
Chair WARREN. All right. Good. That’s helpful. Thank you very
much.
Mr. McWatters.
Mr. MCWATTERS. Thank you. Let me follow up on that, Mr.
Clark. If there’s a distressed exchange at the same time the Government has made commitments, I mean has by this time, by November of 2008, put in so much money that it seems unlikely the
Government is going to walk away from that, so at that point in
time it’s not that AIG needs to do these distressed situations in
order to save money for liquidity because it has Uncle Sam providing the liquidity. It’s in effect doing the distressed transaction
in order to treat the taxpayers more fairly.
I mean, does that resonate with you at all?
Mr. CLARK. I believe so. I’m not sure I’m hearing the question.

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Mr. MCWATTERS. Well, the question is we’re going to cut a deal.
We’re going to cut a haircut, but the reason we’re cutting a haircut
is not to save money for liquidity of AIG because that’s been assured by the taxpayers, by the Federal Reserve Bank already putting in $85 billion, it’s unlikely they’re willing to walk away. We’re
going to cut a haircut because it’s fair to the taxpayers. The taxpayers are putting in the money to take these guys out.
Mr. CLARK. Okay. Now understand the basis for our ratings.
We’ve published a view that the rating, absent the federal support
on AIG today, would be BB and suffice it to say a year ago it would
have been worse than that. However, it’s an A Minus rating with
the benefit of the government support. That is based on a view that
the support that exists is available to allow the company to meet
its financial obligations.
So it is fair to say that our rating committee would look at a situation where AIG has significant funding but isn’t able to use it to
satisfy its financial obligations in whole, be it for the credit default
swaps or other obligations.
We would have to form an opinion, well, will that funding be
available to future financial obligations to pay them on time and
in whole, and so those are all factors that we’d have to evaluate
in determining the appropriate rating.
As it’s been to date, the credit facility has been there for essentially all of the financial obligations as needed. If that were not the
case, we’d re-evaluate the value of the support in the rating.
Mr. MCWATTERS. Okay. So this is not a simple situation, that if
there is one of these distressed exchanges, therefore the wall falls
down. Okay.
Mr. Bienenstock, I read your testimony with great interest. You
seem to present an elegant alternative to what happened and I
think you were about to get into that in your opening remarks.
Would you care to elaborate?
Mr. BIENENSTOCK. Sure. Once the Government came forward
with the $85 billion facility and secured it with everything of value,
so far as I can tell, the dynamics changed. Bankruptcy was now off
the table. Everything I’ve read in the public record so far has been
the Fed, et cetera, didn’t want to threaten a bluff about bankruptcy
but now the strength of AIG would say we’re not voluntarily filing
and you can’t involuntarily file because we have over 30 million
creditors and we’re paying 99.999 percent of them on time in full.
So what is the remedy now of those creditors you think who, as
a matter of equity to the taxpayers, should provide a discount? The
remedy is not a lot. They can go at most to state court at the cost
of great public notoriety. Some of these entities had government assistance separately. Other of these entities, for instance, purchased
Lehman Brothers for $250 million, plus the appraised value of the
real estate it received, and then had to acknowledge in its SEC filing a $3.5 billion profit on the purchase.
I’m saying as a matter of common sense I don’t think these entities were in a position to say to the U.S. Government no, we won’t
make some moderate but meaningful concession in exchange for
taking us out entirely of these credit default swaps. Remember,
that’s what was done. They were paid 100 cents, and we could always go or AIG could always go to the rating agency and say, look,

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we’re only asking for concessions from businesses we’re winding
down. We’re not doing more of this foolishness and as far as all our
insurance companies, all ongoing businesses, we have the facility
there. It’s available for payment in full on time.
Mr. MCWATTERS. Okay. Thank you.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. Mr. Bienenstock, your response just then, when in
your view—I mean, let me first get this straight. This is your profession, is it not, giving advice in these types of situations, these
highly-pressurized insolvency crises?
Mr. BIENENSTOCK. Yes, Mr. Silvers.
Mr. SILVERS. All right. When are you suggesting that the approach that you just outlined would have best been deployed by the
Federal Reserve?
Mr. BIENENSTOCK. Once they—after—the first thing was to stabilize, to provide the $85 billion facility. Then in discussions with
those people who should equitably give concessions over the next
several weeks, months. They took until November and December to
close their deals. So they had plenty of time to do this.
Mr. SILVERS. But essentially as soon as—you’re saying as soon
as it had been made clear to the markets, in general around the
systemic risk issues and the like, that a simple Chapter 11 filing
was not happening?
Mr. BIENENSTOCK. Well, yeah. To give you a bit more of a professional response since you said this is my profession——
Mr. SILVERS. Right.
Mr. BIENENSTOCK [continuing]. What I would say to the client is
after you’ve taken care of your lifelines, now who were AIG’s lifelines? First, speak to Mr. Clark to explain exactly what’s going on,
why this will improve creditworthiness going forward and not endanger others, after explaining to employees, customers, et cetera,
here’s how we’re going forward.
Then, once you’ve got your lifelines intact, once the Government,
which is the revolving credit facility lender, knows what you’re
doing, now’s the time to do it.
Mr. SILVERS. All right. Mr. Moriarty——
Mr. MORIARTY. Yes?
Mr. SILVERS [continuing]. You—it has been represented to us,
and I think you heard some of it this morning, that absent what
the Fed did and precisely the way it did it, there would have been
a crisis for the insurance subsidiaries and their ability to maintain
their business, pay their obligations, and the like, a crisis that’s so
serious that it was absolutely necessary to rescue the parent in the
manner the parent was rescued in order to avoid such an outcome.
I think there is a kind of implicit analysis made by the Federal
Reserve and the Treasury in saying so, that whatever problems
might have arisen in the insured subsidiaries, they would have
been beyond the ability of the state insurance regulation and guarantee system to manage.
What is your response to both those propositions and specifically
what was the view of the New York State Insurance regulators and
the—I forget the term of art now, but there’s a sort of coordinating
body of state insurance regulators.

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What was your view during the so-called Lehman weekend
around these questions?
Mr. MORIARTY. Sure. I’d like to bifurcate my answer into two
parts. We do not believe that the existing policyholders of the AIG
property and casualty companies for sure or even the life insurance
companies would have suffered any losses should there—would
there have been a bankruptcy of the AIG holding company system.
State insurance laws through the McCarran-Ferguson Act clearly
give the states the authority to regulate insurance companies and
to rehabilitate and liquidate them, which is a different process
from a bankruptcy. So we would maintain that the existing policyholders would have been made whole, even if there was a bankruptcy.
The life insurance subsidiaries would have suffered significant
losses and the cushion, which we call surplus, which is effectively
capital between assets and liabilities, would have taken a severe
hit, but we still think it would have been positive.
Now, when we look at AIG as a going concern that would have
been a problem. Clearly, the reputational risk of bankruptcy at the
holding company level could shake the confidence of the policyholders on the property and casualty side. Much of the business is
placed by three big brokers. If they had blacklisted AIG for all intents and purposes as a going concern, they would be gone; the
same on the life insurance side. So to the extent that there was a
bankruptcy, there would be a concern as to the ability of the AIG
companies, the insurance companies to proceed as a going concern.
Now that being said, there are options. There could be sales of
the book of business to existing insurance companies. There could
be transfers of certain parts of the books to other companies. So,
I mean, there could have been some money moved around. There
could have been rebranding. I mean, it’s hard to speculate, but
clearly the bankruptcy would have had a troublesome impact.
Mr. SILVERS. Well, I’m not asking you to speculate but just to remember. Did you all communicate a view that—did your department or did, to your knowledge, other insurance regulators communicate a view to the Federal Reserve or to the Treasury during this
period that the parent of AIG had to be rescued in the manner that
it was rescued?
Mr. MORIARTY. No, we didn’t.
Mr. SILVERS. Did you communicate any view at all to the Fed,
the New York Fed or the Treasury?
Mr. MORIARTY. When we were at the Fed, beginning Saturday
morning, I think it’s clear from Governor Patterson’s offer, New
York and Pennsylvania at the time, which were the two lead regulators of the property and casualty companies, did see an opportunity to basically lend AIGFP $20 billion in more marketable securities and we would take over the less liquid residential mortgage-backed securities.
We did that again on the premise that, number one, there would
be new capital provided in AIG, Inc., by outside investors and,
number two, that the life insurance subsidiaries and thus the value
of the life insurance subsidiaries would be put underneath the P&C
companies.

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So we were looking for, I guess you’d call it, a private savings
but it had to be a global solution. It had to be part of a solution
that would allow AIG to continue making its way through the financial crisis. Anything short of that I think we’d be highly reluctant to let any money come out of the property and casualty insurance companies.
Chair WARREN. Thank you. Professor Troske.
Dr. TROSKE. Thank you. I guess maybe I’ll start with you, Mr.
Bienenstock, and you can help because one of the things I haven’t
understood about AIG in particular is the claim, the claim that
seems to be made that had AIG entered bankruptcy, they would
have simply ceased operating which seems somewhat different
than most companies that actually do enter bankruptcy if recent
experience of Chrysler and General Motors and a variety of airlines
is any example. Companies often do enter bankruptcy and workers
get up the next morning, go to work and continue to produce products.
Do you have any sense of why, what’s different about AIG in this
instance and Chrysler or General Motors or, you know, United Airlines?
Mr. BIENENSTOCK. I think so. The clear distinction is that trading operations can only trade when there’s confidence in the marketplace. That’s why Enron’s trading ceased before it filed its
Chapter 11 petition. That’s why AIG’s would also.
Dr. TROSKE. When you say trading, you mean their securities
trading, not their insurance business?
Mr. BIENENSTOCK. Not—no. I’ll get to that.
Dr. TROSKE. Okay.
Mr. BIENENSTOCK. The insurance companies are subsidiaries
that are ineligible to go into bankruptcy. They could be seized by
state regulators or not, but they would not technically be in bankruptcy themselves. They might be in state proceedings, but at the
holding company, the various non-insurance operations, the Bankruptcy Code has special provisions for derivatives trading that allows counterparties to terminate and to liquidate. That’s the thing
that doesn’t operate.
The rest of the operations that are, if there are any, more like
the airlines, the auto companies, they can continue. I don’t think
AIG had many of that type of operation.
Dr. TROSKE. Okay. And, Mr. Moriarty, you made the claim, and
this is the claim that’s often made, and it was a claim that was
made of auto companies, of why they shouldn’t enter bankruptcy
because the warranties all of a sudden, you know, who’s going to
buy a car from a bankrupt car company because, you know, you got
no guarantee that you could—you know, they were going to be
around to protect the warranty. Of course, the warranties can often
be provided by third party people and do it all the time.
And, so again, when I look at it as an economist, if there’s value
being produced, somebody’s going to produce that value because
they want to make a profit in a market-based economy. So if AIG
had valuable entities, even if part of the company went bankrupt,
somebody’s got to be able to step up and continue to provide the
services they do, be it maybe under a different name.
Does that seem like a reasonable outcome?

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Mr. MORIARTY. I think it is. Again, there are reasons that the
state insurance laws wall off the assets and the liabilities of the insurance entities from all the non-insurance entities, simply because
the assets are meant to pay the policyholder claims.
AIG, as one of the former panelists indicated, employed over a
100,000 people worldwide. There were less than 500 people employed by AIG FP which arguably brought down or caused severe
stress to AIG. AIG clearly had a lot of talent in terms of its core
businesses which were property and casualty insurance and life insurance, and those subsidiaries could have been sold, the business
could have been taken by other entities.
You know, I think there were options. I think the policyholders,
number one, would have been paid and, number two, probably
could have gotten new coverage, whether from a company that was
sold by AIG or commercial accounts that just went to AIG.
I do think that one of—two other concerns that we were most
concerned about with respect to AIG were, number one, that they
would lose customers because of the reputational risk and that
they would lose good people because of the reputational risk. Those
are concerns that, you know, still remain with us.
Dr. TROSKE. But that’s no different than any business. I mean,
presumably, you know, do you want to fly on an airline that’s
bankrupt? I mean, when I get on an airplane, I sort of do you depend on the person driving it? I got to think that those concerns
may be even more paramount. I think I’m more concerned when I
get on an airline than about my life insurance policy.
Mr. MORIARTY. Oh, again, in insurance, it is a promise to pay.
Dr. TROSKE. It is, yes.
Mr. MORIARTY. They don’t make widgets and they don’t make
cars.
Dr. TROSKE. An airline is a promise to get you there alive.
Mr. MORIARTY. Yes, correct, correct.
Dr. TROSKE. Okay.
Mr. MORIARTY. But I understand your point, and I do agree with
you.
Dr. TROSKE. So let me—one more question. I’m sorry. Yeah. I remember. Mr. Clark. So we’ve discussed today about the combination of private sector/public sector, you know, the financial support
for AIG.
How would that have been affected had the Federal Government
put in less money, private sector put in more? Can you speculate
a little? Would that have affected the ultimate rating of AIG in
your mind?
Mr. CLARK. No. We’d be looking to the outcome in terms of AIG’s
sources of liquidity, its ability and willingness to meet its obligations when due, whether that funding was private, public, or a mixture. That wouldn’t have affected our rating.
Dr. TROSKE. Okay. Thank you.
Chair WARREN. Thank you. Good. Thank you. Mr. Bienenstock,
I think you were in the room to hear Mr. Baxter explain the role
of the Fed in the Long-Term Capital Management negotiations,
and I think his words were that the Fed explained to the creditors
what was in their own best interests in reworking what needed to
be done.

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Can you talk about what kind of conversation might have occurred with the counterparties to AIG and what was in their own
best economic interests? I think you hit this, but I just want to
make sure we got this one nailed down.
Mr. BIENENSTOCK. I’m sensitive to the concern of the Fed not to
use its regulatory power in a debtor/creditor capacity where they’re
serving as a lender. So I’ll phrase it as to what any 800-pound gorilla lender, such as one of the big banks or, in this case, the Fed,
would have said to the other creditors and the answer is we’re taking a lien on everything. In this case, it’s unique, as I said, because
bankruptcy was taken off the table for other reasons.
We’re taking a lien on everything. Bankruptcy is not an option.
We’re willing to do a transaction with you if you make a fair concession for the benefit of all taxpayers because if not for our money,
you would have taken a big loss on us for the most part, and what
are your options? Your options are to do nothing, in which case we
won’t do a transaction, you won’t have more money from us, we
won’t buy out your CDO. Your options are to go to state court.
We’ll argue awhile about whether you’re entitled to more collateral
and how much more and by that time the underlying dynamics will
have changed.
But at the end of the day, you’re not going to have a remedy that
really gets you value because we’re sitting here with an $85 billion
lien and you’ll be in the newspaper and on the news every night
trying to frustrate the United States Government’s effort to save
the global financial system. Now what would you like to do?
Chair WARREN. Okay. I think we have that. Can I ask you one
other that comes out of your testimony, your written testimony,
and that is you talk about shared pain, the principle of shared pain
and bankruptcy? Can you just elaborate a bit on that?
Mr. BIENENSTOCK. Sure. We all grow up being told that when we
make a promise, we keep it. When we give our word, we keep it.
And one of the things that makes bankruptcy counterintuitive and,
frankly, offensive to a lot of lay persons is that in bankruptcy, if
a debtor breaks one promise, takes one creditor and doesn’t pay it,
but pays its others, that’s pretty unfair. So the more fair procedure
is to break all its promises and to share the pain equally across all
the creditors. That’s where bankruptcy is contrary to most of our
notions of substantial justice.
So sharing the pain is the way of the creditor being hurt or the
lender coming up with innocent taxpayer money, saying it’s unfair
that we’re taking all the pain, you’re getting paid 100 cents for a
business that couldn’t have paid it if we had not come to the rescue. You have to share equally because that’s fair.
Chair WARREN. Okay. Thank you very much, Mr. Bienenstock.
I’m through.
Mr. McWatters.
Mr. MCWATTERS. Thank you. Mr. Bienenstock, when I was reading your written submission, again I was struck by the elegance of
it, rather the simplicity of it, which made me think, well, why
wasn’t this done, why didn’t other people think of this?
Then I got to page four and you say on page four, you say, ‘‘Additionally, the Federal Reserve Bank of New York retained an outstanding law firm and attorney for its work, but the law firm is

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identified with representing Wall Street institutions, such as
JPMorgan, and it would be awkward for it to devise strategies to
obtain concessions from those institutions.’’
Could you help me understand that?
Mr. BIENENSTOCK. Sure. In this case, I think it sounds to me because of the exigencies of time, the law firm that was probably familiar with the situation, other than AIG’s own law firms, was the
law firm being used by JPMorgan and Goldman Sachs to try to
come up with a private solution which I heard earlier, I think, was
a Monday, September 15, effort.
Mr. MCWATTERS. Yes.
Mr. BIENENSTOCK. So since they had immersed themselves in the
documents, I suppose at least that was one factor why, with waivers granted and full disclosure and all the rest, this was all done
properly, I’m sure, that JPMorgan and Goldman Sachs surrendered
their counsel effectively to the Federal Reserve Bank of New York.
Those counsel, they are outstanding, as I said, both as a firm and
the individual who was leading it, but they are known to represent
the Wall Street interests, not that they don’t represent others, but
they’re synonymous in the restructuring industry with representing
Wall Street interests.
So it would be awkward, as I said, for them to concentrate on,
‘‘well, here’s how we might get concessions from counterparties’’,
who are their clients in many other matters.
Mr. MCWATTERS. Well, I assume this is particularly true, given
that two weeks from now they will be back representing JPMorgan
and JPMorgan may say, ‘‘yeah, you’re the guy that just came and
represented the Fed and came to us and beat us up for a concession.’’
Mr. BIENENSTOCK. Well, and I want to emphasize this was done,
I think the Federal Reserve Bank of New York people said earlier,
this was done with full waivers, et cetera. It was done totally properly and it’s allowed to be done and it’s often done.
In this case, I just think it put counsel in an awkward position
and also you’ve heard there are a lot of explanations. I mean not
everyone gives my analysis, certainly, maybe no one did, and there
were a lot of explanations that were facile for people to latch on
to why you should just pay all the creditors all the time.
Mr. MCWATTERS. Correct. One last question. If, on September 16,
I came to you and retained you and said we’ve just given this entity $85 billion, this entity, AIG, $85 billion, and it’s on a 180 days
as a bridge. Can you work out a prepackaged bankruptcy of AIG,
working with the insurance companies, the rating agencies, and
the like, within a 180 days and reach resolution?
Mr. BIENENSTOCK. I would have told you less than a 10 percent
likelihood. Let me just amend something I said before.
I did, before today, test with restructuring experts, both business
and legal, the idea of getting concessions and I was surprised to
find out I got unanimous buy-in to that.
On the prepack, the reason I’m saying less than a 10 percent
likelihood is, as a matter of right, any creditor can ask for an examiner. God knows, there was a lot to examine here. I think that’s
what you’re doing. That can take months or years. I would caution
you that if you’re doing the bankruptcy after the $85 billion re-

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volver has been extended, that $85 billion is subject to restructuring in bankruptcy, like all the other debts.
Mr. MCWATTERS. Sure.
Mr. BIENENSTOCK. Prepackage is a term used most technically
for making a deal with everyone in advance, going to court and
asking for swift approval of the plan. It basically works when you
have a small group of sophisticated parties or you’re just paying everyone in full.
Here, if the decision had been made to pay everyone in full, then
my answer of less than a 10 percent probability would change. I
would say if you’re going to pay everyone in full in that prepack,
then yes, you can, more likely than not you can do it in a 180 days,
but if you’re not paying everyone in full, I would say the likelihood
of dealing with millions of people who have guarantees for their insurance policies, thousands of other types of creditors, including derivative creditors, in six months, it’s nearly impossible.
Mr. MCWATTERS. Okay. Well, thank you then, and that helps
support your solution that you have in your paper.
Thanks.
Mr. BIENENSTOCK. Thank you.
Chair WARREN. Thank you. Mr. Silvers.
Mr. SILVERS. Mr. Clark, you, like Mr. Moriarty, have been assigned responsibility by our national government for much of what
has happened here. By you, I mean your firm and the other credit
rating agencies.
I want to offer you the opportunity to, if you dispute what’s been
said about the rating agencies by our other witnesses, to do so, but
I want to also ask you a very specific question about a different
way of thinking about the options available, which is, if, rather
than rescuing the parent, all right, the Federal Reserve had chosen
to make 13(3) lending available to subsidiaries on an as needed
basis, would it have been possible to have maintained the same
level of credit rating, by your agency and others that was effectuated by rescuing the parent.
And just to make this question a little bit more complicated, do
you agree with Mr. Moriarty’s assessment that the subs could have
handled their problems around securities lending absent the problems of the over-the-counter derivative business at the parent
level?
Mr. CLARK. That’s complicated.
Mr. SILVERS. That’s complicated. Well three distinct questions.
One open ended, the second question is, could you have maintained
the credit worthiness of the subs directly and let the parent go?
Or, have the parent have go through something like perhaps
what Mr. Bienenstock was talking about? And thirdly, is Mr.
Moriarty right, that the subs could have handled the securities
lending problems without further assistance?
Mr. CLARK. Okay, I’m going to leave the open ended one on the
table. But if the New York Fed had lent directly to the subsidiaries, I don’t know that they had the authority to do that and I
can’t really speak to whether that would have helped the subsidiaries to maintain their credit ratings without understanding what
the terms would have been.

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Mr. SILVERS. Well let’s just assume that we’re talking about essentially what happened to the parent, a blank check under 13(3).
And you can lend to anybody under 13(3), I think that’s kind of
what we’ve learned. But let’s just—I don’t want a legal opinion
about whether the Fed had the authority. Let’s just assume the
Fed opened the spigot to the subs.
Mr. CLARK. Okay.
Mr. SILVERS. Could they have opened the spigot wide enough to
maintain the credit rating of the subs?
Mr. CLARK. I presume that they could have. It’s much, much
more complicated when you look at the fact that by lending to AIG,
they’re sort of your filter to get money down to the subs. But when
you talk about——
Mr. SILVERS. But they’re a filter with a giant hole in it called
credit default swaps.
Mr. CLARK. Of course, understood. But that was only one of the
places that those funds coming from the New York Fed were going.
Mr. SILVERS. Right.
Mr. CLARK. And when you look at the literally hundreds, when
you start looking globally, of regulated and unregulated subsidiaries of AIG, I think it would have been very difficult to get money
to all of those.
In addition, you had cross guarantees between certain of the subsidiaries, both domestic and foreign, which most often went back
to insurance companies regulated in New York or Pennsylvania,
not always. It was a very complicated web of relationships really
just necessitated by the complex global nature of the group.
Mr. SILVERS. So it was simpler to do it at the parent?
Mr. CLARK. It was much simpler to do it at the parent.
Mr. SILVERS. But you’re not saying you couldn’t have done it?
Mr. CLARK. I don’t know that under their authority they could
or could not.
Mr. SILVERS. Well I’m talking about——
Mr. CLARK. It would have complicated the task.
Mr. SILVERS. Right, it would have complicated the task, okay. Do
you agree with Mr. Moriarty that the resources were available to
the subs to deal with the securities lending problem?
Mr. CLARK. I think it’s possible that they could have. I do think
though if you look at what happened between September 15 and
really the end of the year when the enormity of the financial crisis,
the continued investment losses, not only on the securities lending
program but on other investment holdings of AIG’s insurance companies and many other insurance companies in the industry.
There was a drain there and AIG through its resources from the
New York Fed did inject significant capital into the domestic life
insurance companies. Could they without the drain of the CDS
have handled that themselves given the continued decline of the financial markets, possibly, but it’s difficult to say with any certainty.
Mr. SILVERS. One more question. Is it possible, in your opinion,
for a major insurance player company to operate with a double B
credit rating?
Mr. CLARK. It depends on the businesses that they’re in. Assuming they’re diverse——

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Mr. SILVERS. Assuming a diversified range of businesses, life and
property and casualty——
Mr. CLARK. It’s possible.
Mr. SILVERS [continuing]. And investments?
Mr. CLARK. It’s possible, and we see it in certain areas. Certain
areas of insurance are more confidence-sensitive than others. When
you look at some of AIG’s businesses that were high net worth life
insurance and annuities, those are very confidence-sensitive, vulnerable to runs on the bank in a severe stress.
And the large commercial insurance similarly, not a run on the
bank risk, but very sophisticated purchasers of insurance who
value credit and would be unlikely to purchase or renew business——
Mr. SILVERS. Double B is below the line, isn’t it?
Mr. CLARK. Yeah, definitely. In most buyers’ views it would be.
Mr. SILVERS. Mr. Moriarty, do you—I couldn’t tell if you were
agreeing or disagreeing.
Mr. MORIARTY. No, I disagree with my colleague. The commercial
side of the business, whether it be on the property side or the high
net worth individual are very rating sensitive and do due diligence
in terms of the credit worthiness of the insurance companies that
they’re dealing with.
But for some personal lines, like auto, and homeowners, arguably
they can write at the lower levels. But something below investment
grade even would be difficult to write any extensive book of business.
Mr. SILVERS. I have one more question.
Chair WARREN. Quick.
Mr. SILVERS. I’ll be quick. Mr. Bienenstock, can you help us understand, from your general knowledge of these markets and so
forth. JPMorgan Chase and AIG, was there a mutual dependency
here of some kind during this period?
Mr. BIENENSTOCK. Well gee, I’m not——
Mr. SILVERS. Do you have any insight into this?
Mr. BIENENSTOCK. I’m not familiar with their contractual relationships.
Mr. SILVERS. Okay, thank you.
Chair WARREN. Thank you. Dr. Troske.
Dr. TROSKE. Thank you. Mr. Moriarty, I guess I’m going to ask
a general insurance question. And I’m going to try to put it in as
simple terms as possible because I think sometimes we get a little
confused by the jargon. AIG was writing credit default swaps,
where essentially they were insuring mortgage backed securities.
Mr. MORIARTY. AIG Financial Products——
Dr. TROSKE. Yes, some of them.
Mr. MORIARTY [continuing]. Yes.
Dr. TROSKE. While simultaneously the company was also purchasing mortgage backed securities?
Mr. MORIARTY. Correct.
Dr. TROSKE. So they were actually purchasing products that they
were also insuring?
Mr. MORIARTY. Doubling down, yes.
Dr. TROSKE. Yes. I’m no financial expert, nor am I an expert in
insurance, but that seems rather odd to me that a company would

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both insure something and then expose themselves even further to
the risk that they’re insuring. Is that usual for insurance companies to double down in this fashion?
Mr. MORIARTY. No it’s not, actually. You usually try and make
sure that the risk on the asset and the liability side do have
some—don’t have a high degree of correlation.
When we first looked at these securities lending programs it was
uncovered by Texas, which has one of the biggest life insurance
companies, and they were doing an examination. And they just
noted that this thing was growing exponentially and alerted other
states.
At the time, AIG management had come in to the regulators to
explain the program. And you know, we expressed concern about
two things. Number one, was the size and number two was the fact
that they were investing the cash in securities that were longer
dated than the liabilities on the securities lending.
So they depended on the counterparties to effectively roll over or
else they’d have to liquidate the securities. Then we went into the
diversity of these securities which were 60 percent in—over 60 percent in residential mortgage backed securities, which was clearly a
high amount.
But they brought up the point, these were all Triple A rated,
they were all Double A rated residential mortgage backed securities that were in fact diversified because they came from different
originators, the collateral was spaced throughout the country, that
basically the mortgages. And there hasn’t been a meltdown of the
residential mortgage, across the country in the United States, in a
long time.
Dr. TROSKE. 15 years.
Mr. MORIARTY. And so again, from their viewpoint, it wasn’t an
imprudent activity, I gave them more investment yield. But nonetheless, just the sheer size of it and the concentration in the
RMBS, that they did, at our behest, begin a significant downsizing
of it without reporting big losses.
And they reduced it by 24 percent in a year, from $76 billion
down to $58 billion dollars. And we do things that, you know, again
absent the issues at FP and the financial crisis, that the securities
lending program would have been wound down.
Dr. TROSKE. Let me ask another question too. And it’s actually
when you’re doing this, when you’re sort of both insuring and purchasing, and you exacerbate the risk. Because now you’ve got
what’s known as a co-variance, the way the two of them move together.
Because typically you only have to worry about the changes, potential changes in one. So it’s actually very important if you’re
doing both to understand how the things you’re purchasing are
going to vary with the things that you’re insuring.
Mr. MORIARTY. No, no, I totally agree with you Dr. Troske. I
think one of the issues though is that we regulate the insurance
company——
Dr. TROSKE. Right.
Mr. MORIARTY [continuing]. We do not regulate——
Dr. TROSKE. And I’m asking you just as an insurance expert, not
as that you should have been overseeing this because I don’t want

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to imply that. So let me—and Mr. Clark, as Mr. Moriarty indicated
that these were all triple A rated securities or double A rated.
But your—when you take, and again I’m going to be real simple
here, and this is not particularly what you’ve come to talk to us
about—but when they were coming to you with essentially a box
of mortgages and S&P was giving a rating on those mortgages, you
were rating the mortgages in a box and then the bank would go
out and sell them to somebody.
But what AIG now had is they had—they were insuring a box
over here and they were buying a box over here. You’re not evaluating how those two boxes are going to move together which is a
key point for AIG if they’re both insuring and buying. You’re not
evaluating the co-variance between those two investments, are
you? Well, your triple A—just tell me about the likelihood of loss
from these mortgages I own not——
Mr. CLARK. Let me separate out what I can and can’t answer.
Dr. TROSKE. Okay.
Mr. CLARK. First of all, I’m an analyst in our insurance ratings
practice——
Dr. TROSKE. Right.
Mr. CLARK. [continuing]. Responsible for AIG.
Dr. TROSKE. Okay.
Mr. CLARK. So I can’t speak to how the rating were arrived at
and structured financially.
Dr. TROSKE. Fine.
Mr. CLARK. I can speak to the analysis we did on AIG’s securities
lending and its CDS portfolios.
Dr. TROSKE. Okay, that would be great.
Mr. CLARK. And we were, throughout 2008, analyzing those portfolios and making projections, which we updated publicly to the
market throughout the year as to our expectation as to losses that
the firm would likely see on those portfolios both. We were looking
at both and we were combining the analytics.
What we saw, however, was that in the fall of 2008, and very
much to Mr. Moriarty’s point that we’d seen housing declines before, but one on a nationwide scale of this depth of magnitude, that
was really outside of our assumptions and the assumptions of
many in the market.
It was quite unprecedented. So we did find that the performance
of both of those portfolios, although we modeled them together,
looked at the exposure together, the eventual losses did exceed
what our expectations were.
Dr. TROSKE. Okay, thank you.
Chair WARREN. Good. Thank you very much. I want to thank all
three panelists, Mr. Bienenstock, Mr. Clark, and Mr. Moriarty. We
appreciate your taking the time to be here with us today. This has
been very helpful to the panel and will be very helpful to our report.
We’re going to call a recess for this panel for half an hour. We’ll
start again at a quarter of two. And our first witness at that point
will be Clifford Gallant. Thank you.
[Whereupon, at 1:14 p.m., a recess was taken.]
Chair WARREN. This hearing is back in session. I want to welcome Mr. Gallant, the Managing Director of Property and Casualty

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Insurance of Keefe, Bruyette, and Woods. Mr. Gallant is an equity
research analyst who covers the insurance industry and he’s here
to share his thoughts on AIG’s current financial outlook.
We appreciate your being here today and I’d like you to make
opening remarks if you would and limit them to five minutes.
Mr. GALLANT. Okay, thank you for the opportunity.
Chair WARREN. Thank you Mr. Gallant.

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

Mr. GALLANT. Yes, on April 27th we published a report on AIG
where we downgraded the shares to an Underperform. We put a
$6.00 price target on the stock and at the time that was considered
somewhat controversial, at the time the stock was trading in the
mid–40’s, it’s still in the low 30’s.
However, we didn’t view our conclusion that there was not a lot
of common equity value in the stock to be all that profound. In fact,
we view it to be somewhat self-evident. And by that I think there
are two main realities of the company.
One is that it’s still dependent on government aide. And I think
the evidence of that is in the first quarter that there was further
access of government credit lines. The FRBNY loan went from
$23.4 billion to $28.9 billion through April. And the Series F, U.S.
Treasury-owned securities went from $5.3 to $7.4 billion.
Secondly, when we do any type of sum of the parts analysis, or
try a valuation of the company it’s just, it’s hard to come up with
a positive number. And I think that’s a somewhat obvious reality
of the current financial position of the company.
I think that investors do need to understand a few key points.
One, there is a great franchise beneath this company. The insurance operations have a fantastic global footprint.
And I would say that the current management team has done a
very good job with the company in terms of stabilizing it, you know
to stem the loss of people and of clients. A lot of credit needs to
go to them for dealing with what is obviously a difficult situation.
That said, I think in terms of valuing the stock there are some
things that people have to be aware of. One, is a book value is not
a normal book value calculation, right. The debt to equity is something like seven to one. That’s a ratio that most insurance—no
other insurance company is at and could not normally operate at.
If the U.S. Government were to be replaced with just normal private creditors, I don’t think that they could conduct business. The
only reason it does happen is because it is the U.S. Government
that is the backer.
The earnings that the company is producing do not accrue to the
common shareholder in the normal fashion, because there is a preferred shareholder for its stockholder in the Series E stock.
That dividend has not been paid, but if they financially get to the
point where they can pay that, I assume that that’s where the
money’s got to go. They can’t accrue to the common shareholder.
So again, you can’t use a normal P/E ratio here to value AIG.
And there are a number of book value concerns with the company. I think if we were to have a public offering of the shares on

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a large scale, I think investors would want a discount to book value
for several reasons.
One, concerns over the quality of property and casualty reserves,
valuation of things, like the ILFC, aircraft leasing business. And I
think one thing you need to keep in mind as well is that the peer
group, the property and casualty life insurance companies today on
the market, several of them have redundant capital positions.
They’re buying back stock, have leasing reserves and yet they’re
all trading below book value. Something like 85/90 percent of book.
I got to assume that AIG would trade at a discount to those, those
peers.
And finally, I think just as the systemic risk fades, I think the
treatment of AIG is likely to change. I believe that you know, since
September of 2008 as a result of systemic fears, the taxpayer has
had to take some losses on AIG, has had to be very generous towards its treatment of AIG.
You know, debt has been restructured, top debt was changed into
this non-cumulative form. And those things were necessary, needed
to be done to keep the company going. But I have to believe as that
systemic risk fades, that it’s less likely to happen.
I think the taxpayer is going to say, you know, cash expended,
needs the resulting cash back into the shareholder’s—taxpayer’s
wallet. And is that—and during that process I believe that the common stock will largely be—you’re not going to find a lot of value
left for the common shareholder.
So, I think it all comes down to a question of—when I talk to the
bulls on the stock—that there is value in the company, yet in the
same breath there’s this discussion of somehow the taxpayer taking
some losses as the government tries to exit its position. And in my
point of view that, if anything, indicates that our initial assessment
is right. I mean if the taxpayer is expected to take a loss, how can
there really be value here in the company?
[The prepared statement of Mr. Gallant follows:]

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Chair WARREN. Very helpful. Thank you.
So let me see if I can just disaggregate this a little bit and figure
out what’s going on.
Mr. GALLANT. Sure.
Chair WARREN. Do you have any assessment of whether or not
AIG is likely to need more government assistance to meet its liquidity needs?
Mr. GALLANT. In their—they disclose debt that’s coming due
throughout this year. You know, even excluding ILFC and AIGFP,
there’s something like $10 billion due in 2010. Since AIG is not
able to access normal debt markets, I have to believe that they will
further draw down on government credit lines to make those payments.
Chair WARREN. Okay, do you have any sense, just as you project
this out, when the point might come that the government will not
be called upon to continue its support for AIG? Before we get to the
question——
Mr. GALLANT. Sure.
Chair WARREN [continuing]. Of unwinding the interest——
Mr. GALLANT. Absolutely, yeah.
Chair WARREN [continuing]. That we already have there.
Mr. GALLANT. No, that’s a good question and I can’t really answer. I think AIGFP, as that portfolio winds down, that would
seem to be at least one indication of less systemic risk being posed
by AIG. You know I think that the insurance subsidiaries, as I
know other panels have discussed today, are probably financially
stable and sound.
And so that is probably not a reason to wait. It seems to me that
the systemic risk seems to reside in the parent company.
Chair WARREN. So, actually, let me ask it in a slightly different
way. What are the conditions that need to be met? And we’ll take
them in all, that the government doesn’t have to put more money
in and then we can talk about the second one, about how the government starts unwinding its position.
What do we need to see happen? We’ve got two sales—AIG has
two sales pending, right? So I presume part of it would be the completion of those sales?
Mr. GALLANT. Right, right. That’s a big step, right? You really
start to see—again, cash back into the taxpayer’s wallet. You know
I think the ability for AIG to access debt markets in a normal fashion would be a—is a key to——
Chair WARREN. It would be a very good sign when you can see
AIG borrowing in the debt market?
Mr. GALLANT. That’s right. That’s right. Presumably with the expectation that they’ll be able to internally generate the funds to
repay that debt.
Chair WARREN. That’s right.
Mr. GALLANT. Yeah, I think those are the big things that we
would expect to see over the next year.
Chair WARREN. Okay. I noted in your written testimony you talk
about how the current structure is unsustainable and that some
sort of resolution must occur.
Mr. GALLANT. Yes.
Chair WARREN. Can you just elaborate——

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Mr. GALLANT. Sure.
Chair WARREN [continuing]. A little bit on that?
Mr. GALLANT. Well simply that the government——
Chair WARREN. That wasn’t all the way to a blueprint.
Mr. GALLANT. Yeah, well the government doesn’t want to be a
permanent investor in AIG. That’s basically the bottom line for me.
And I think if you were going to value the common stock, if you
want to invest in this company, you have to assume that the government is going to get out. And so that’s the approach we took in
coming up with our price target.
Chair WARREN. Okay. Very valuable, thank you very much. Mr.
McWatters.
Mr. MCWATTERS. Thank you. The Congressional Budget Office
says the taxpayers may lose $36 billion dollars on AIG, and OMB
says about $50 billion dollars. Do you have a guess as to whether
or not these numbers are anywhere near accurate? Or can you see
a larger or smaller number?
Mr. GALLANT. Yeah, that’s a very difficult question to answer. I
think the current debt outstanding is something like $79 billion.
I’ve come up with my assessment of what the earnings power of the
ongoing operations is—something like $2.8 billion a year.
You could put a 10 to 15 multiple on that, add the gain that you
expect on the operations that are to be sold and you’re still short
of what you need to cover a loss. So it might be—it still seems like
that will be difficult for the taxpayer to break even.
Mr. MCWATTERS. If it was your job, how would you restructure
AIG? How would you make it stronger?
Mr. GALLANT. That’s probably beyond me to answer. But I would
say that probably as a first step, I think there needs to be a test
of what the common value, what the market price is for the common stock.
You know the government does have the 80 percent ownership
in the form of warrants. A public offering of part of those, part of
that ownership might tell you what the market really does think
AIG is worth. And that is a sort of a starting point as to where you
can sort of go from there.
Mr. MCWATTERS. Do you think AIG is solvent? Or is it just simply getting along on its implicit government guarantee?
Mr. GALLANT. I think the government guarantee is intrinsic to
its ability to conduct business on a daily basis.
Mr. MCWATTERS. Okay, okay. So it’s possible, or I don’t want to
put words in your mouth, but I guess you’re—is it possible AIG
cannot be solvent?
Mr. GALLANT. If the government were to walk away today and
you know, pull back all its support, then AIG would be a——
Mr. MCWATTERS. Oh, sure.
Mr. GALLANT [continuing]. Would not be in a position to be able
to conduct business.
Mr. MCWATTERS. In your testimony or in some interviews I think
you said that AIG has the potential to become—the government
has the potential to be embarrassed by AIG. What did you mean
by that?
Mr. GALLANT. You know I think I was just referencing the fact
that AIG is obviously a very high profile name. There have been

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other high profile issues, you know, the compensation for the people at AIGFP about a year ago was obviously a big embarrassment.
Mr. MCWATTERS. Okay.
Mr. GALLANT. And you just want to—you don’t want to have that
risk out there.
Mr. MCWATTERS. And I’ll close by just asking, what is your current outlook on AIG?
Mr. GALLANT. We maintain our $6.00 price target. We’re advising
our clients not to buy the stock.
Mr. MCWATTERS. Is that because 80 percent is owned by the government and there’s only 20 percent outstanding and there’s so
much pressure that ultimately that 20 percent just might get
crushed?
Mr. GALLANT. Yes, eventually that’s right. I mean we believe
that, as I said, as the government exits its position and tries to
repay the taxpayer, there’s not going to be a lot left for the common
shareholder.
Mr. MCWATTERS. Okay, thank you.
Chair WARREN. Thank you. Mr. Silvers.
Mr. SILVERS. In a way I want to revisit my colleague, Mr.
McWatters’ questioning in a different way. Obviously, you write analyst reports for private investors in AIG’s equity in particular——
Mr. GALLANT. Sure.
Mr. SILVERS [continuing]. Who are junior to the government,
right? We are talking to you about the interest of the government.
Mr. GALLANT. Right.
Mr. SILVERS. That’s the investor we represent, in a sense. So
from what you were saying, it seems to me that you’re basically
saying there’s not enough earning power, or cash flow power, so to
speak, in this firm to support not only the stock price as it is today.
I mean it’s an astounding gap between what it is and what you
say it should be, but perhaps not enough to even support repaying
the government ultimately. Is that—am I reading back to you what
you were saying, correct?
Mr. GALLANT. Yes, that’s correct.
Mr. SILVERS. And AIG is currently drawing, as you point out,
drawing on the government’s, on the Fed’s line of credit. Not paying down, but drawing.
Mr. GALLANT. That’s right.
Mr. SILVERS. Now if you put those two things together, doesn’t
that suggest that from the government’s perspective, not just as a
senior, and a senior equity holder to the common, but as the continuing source of funding, right?
That what we ought to, what the government ought to, be doing
is demanding hair cuts from other investors in order to get this
company to function properly. Or is there some other path here? Is
there a way to get growth out of this firm? To get growth in earnings or in cash flow out of this firm?
Is there an expectation that the market will view the underlying
assets of AIG differently in the future? And I’m particularly interested in your perspective on AIG as a global firm given what seems
to be happening in the global economy right now, as of today.
Mr. GALLANT. Well in terms of the ability for the company to increase its earning power or cash flow. You know you are in a dif-

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ficult environment right now. Obviously the global economy is not
on sound footing yet.
And actually the insurance businesses are in a somewhat difficult environment as well. The property and casualty business
prices are going down throughout the industry. And the profit outlook, at least our view of the profit outlook for the property and
casualty, is not great. So the backdrop is not good.
You know, AIG of course is still, even in the continuing operations, under earning what it once did. So there is always the potential to recapture some of that lost value. And I would say that
the current management team seems to at least be moving towards
that as they’ve stemmed the flow of lost employees and all.
But, you know, in terms of another route, I don’t see it. I mean
I think it’s a very difficult road ahead of them.
Mr. SILVERS. I’m sorry, in terms of—you don’t see what?
Mr. GALLANT. No, I’m sorry, I thought you were asking about a
second—in terms of generating more, additional earnings power.
Mr. SILVERS. You don’t see a way to generate additional earnings
power by a multiplier effect. By the way, and this is sort of unfair,
but your somewhat radically pessimistic view, does that make you
a maverick so to speak?
I mean I just find it extraordinary the difference between a current market price of $44.00 in what is an active trading market,
and then your view of $6.00.
Mr. GALLANT. It’s hard—that is—I ask myself that question a lot.
You know I think there are a few factors. I think for one, it is a
complicated scenario. I mean AIG’s balance sheet is not a typical
balance sheet. It does have a stated book value number of $37.00,
$36.00 and that I believe is a misleading number. But you know,
it is out there. There is the underlying value of the company.
Right, these insurance companies which are, like you said, it’s a
great global franchise. And that’s actually a very frustrating thing
for those who were watching the company in 2008 as well. I was
an analyst then and you saw all these underlying earnings that
were very strong and you had this great franchise. It was hard to
believe that the stock was zero. There’s also been a series of good
headlines. As I say, management has done a good job——
Mr. SILVERS. Right.
Mr. GALLANT [continuing]. And there’s been some good headlines
over the last year or so.
Mr. SILVERS. But fundamentally——
Mr. GALLANT. Yeah.
Mr. SILVERS [continuing]. You don’t have a critique of what management is doing, you know I don’t hear one. What you basically
have is a critique that there are too many claimants on the cash
flows to support either the stock price or the Government getting
paid back?
Mr. GALLANT. That’s—yes, that’s ultimately correct.
Mr. SILVERS. All right. Why is that not sort of a no-brainer in
terms of that the government shouldn’t really give this firm any
more money until the existing claimants take haircuts?
Mr. GALLANT. You know I think the——
Mr. SILVERS. I mean what other choice——
Mr. GALLANT. Sure.

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Mr. SILVERS. What other choice do we have?
Mr. GALLANT. Yeah, I can connect that to the question about the
stock price. Because I think the bulls on the stock believe that
through exiting, the government is going to be very generous as it
tries to exit its position in AIG. Whether—that could mean walking
away from things—walking away from ownership interests or forgiving parts of loans. You know I’ve—this is through private conversations with investors.
Mr. SILVERS. Do these people talk to their fellow citizens? Do
they have any notion of what would occur if that—if we started
handing out public money to the private investors in AIG in that
way?
Mr. GALLANT. That’s the argument. And to be fair, I think the
reason that they might have held that view is that the government
has been generous to AIG already, right? You know taking the top
debt, which paid an interest, had an interest payment attached to
it and shifting it to a preferred status that’s non-cumulative, very
generous acts.
Interest rates have been changed for the company. You know
government-owned debt has been moved from AIG’s balance sheet
to off balance sheet vehicles, which has lowered them out of debt
that AIG itself owes, but with only a fraction of the result actually
ending up back in the taxpayer’s wallet. So I think there’s reason
for the investors to think that perhaps that will continue.
Mr. SILVERS. Thank you.
Chair WARREN. Thank you very much Mr. Gallant. Thank you,
Mr. Silvers. Professor Troske.
Dr. TROSKE. Thank you. You can call me Mr. If you really——
Chair WARREN. Oh, okay.
Dr. TROSKE. That doesn’t bother me. So I just want to follow-up
a little bit and I guess I’m going to try to be very straight forward
and clear. Basically—the stock price is, I believe, $33.00 you said.
Mr. GALLANT. Yeah.
Dr. TROSKE. And you’re estimate is it should be $6.00. So you’re
basically saying there are a lot of people out there that are making
a mistake. Is that a fair assessment?
Mr. GALLANT. Yeah, I think buying the stock today is a mistake.
Dr. TROSKE. Okay, or if you owned it right now, if someone
owned it, would you advise them to sell it?
Mr. GALLANT. Yes I would.
Dr. TROSKE. Okay, I just want to—and I guess you’ve elaborated
a little bit on what you think the, where the mistake is coming
from. And I read it as you’re saying, it’s really hard to figure out
what this company is worth so we could get a bunch of different
guesses. The market’s got a guess, you’ve got a different guess. It’s
hard——
Mr. GALLANT. That’s fair.
Dr. TROSKE. Okay.
Mr. GALLANT. And in addition, that is a thesis of the government, as an interest.
Dr. TROSKE. Okay, and yes, thank you, that’s right. You did mention that the subsidiaries were solid. If I could remove them from
the structure, just reach down, pull out and make them independent.

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Mr. GALLANT. Sure.
Dr. TROSKE. What would they be worth? Do you have a guess?
And is that something equivalent to what we’re—I mean is the
price coming from this implicit value of at some point maybe we
could just sort of remove them from——
Mr. GALLANT. Sure. I still think there is significant value in
those insurance subsidiaries. I’d say the earnings power of the domestic life company, the ongoing operations, the ongoing insurance
operations you know, could be $40, $50 billion dollars if they could
in fact be, as you say, removed from the parent company.
Dr. TROSKE. Okay, okay. And is there a way to actually do that
without sort of—that you can see going forward that we can just
sort of remove them from that and just keep that entity whole,
which seems to be producing value for the market. There are parts
of it that are a valuable company. There’s parts of it that seem to
be a very valuable company.
Mr. GALLANT. I mean you know, you could always sell the operations, right? Which would separate it and immediately recognize
some value.
Dr. TROSKE. And so why don’t we?
Mr. GALLANT. [No response.]
Dr. TROSKE. You don’t know.
Mr. GALLANT. Well I think that there is, if you want to try to
pay back the full amounts of the loans, you need an asset to create
value to pay that back.
Dr. TROSKE. Okay.
Mr. GALLANT. And so you can’t, you can’t remove all of the earnings generators.
Dr. TROSKE. That’s all.
Chair WARREN. Thank you very much. Thank you Mr. Gallant.
We appreciate it, thank you for being here today.
Mr. GALLANT. Thank you.
Chair WARREN. And Mr. Benmosche if you could join us. Robert
Benmosche is the President and Chief Executive Officer of AIG.
Mr. Benmosche joined AIG as CEO in August of 2009. Mr.
Benmosche when you’re ready, welcome.
Mr. BENMOSCHE. Thank you.
Chair WARREN. Five minutes for an opening statement.
Mr. BENMOSCHE. Okay.
Chair WARREN. Thank you.

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

Mr. BENMOSCHE. First of all, I appreciate the opportunity to be
here with all of you and describe AIG’s progress in stabilizing the
company, preserving and growing the value of our businesses, reducing our risk, and repaying the taxpayers.
I joined, as you said, in August of 2009 with a priority goal of
stabilizing the company and boosting employee morale, a high priority. Throughout my years in the insurance industry, I respected
AIG as a company and as a competitor.
And in just nine months at the company, I can see substantial
progress in redefining our strategy and in restoring credibility and

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confidence in AIG. Of course, were it not for the commitment of the
U.S. Government at a time of great uncertainty, AIG would not be
on the path it is today.
I want to thank the Government and the American taxpayer.
Since receiving that support, AIG has worked in close coordination
with the Federal Reserve and U.S. Treasury. We appreciate very
much the constructive role that they have played.
Today, AIG remains a significant contributor to the U.S. economy
and a critical provider of financial security to countless communities and individuals across the country. AIG has over 40,000 hard
working and dedicated employees across the nation. Tens of millions of Americans are employed by entities that are protected by
our commercial insurance.
AIG is also one of the largest holders of municipal bonds, providing a much needed source of capital for municipalities to build
new schools and better roads. Chartis, our property and casualty
group, had gross written premiums of more than $40 billion dollars
in 2009, serving more than 40 million customers around the world.
SunAmerica Financial Group, our life and retirement services
business, is one of the largest life insurance organizations in the
U.S., and served more than 16 million customers in 2009.
And ILFC, our aviation leasing company, has a fleet of approximately 1,000 aircraft and has purchased more Boeing aircraft than
any other airline or leasing company since 1990.
At AIG, we take seriously the responsibility that comes with
being so heavily integrated with the U.S. economy and we are well
on our way to remaking AIG into a more streamlined and focused
company with sound, well-managed businesses, a transparent and
consistent governance system and a stable risk profile and capital
structure.
Prior to my arrival, AIG had focused on repaying taxpayers by
moving quickly to divest certain parts of the organization. I was
concerned that this course of action might not enable AIG to repay
the aid the company had received. So I immediately set about to
change this approach and secure greater value for the taxpayers.
This strategy is beginning to pay off. We recently announced the
sales of AIA and ALICO for approximately $51 billion dollars, nearly $30 billion in cash and approximately $21 billion dollars in securities. AIA and ALICO both have demonstrated in these sales our
inherent strength in our brands and the success of our strategy to
maximize the value of our assets.
Once closed, they will mean that AIG can repay the Federal Reserve Bank of New York with cash and sell securities over time to
further repay the government. Our successes are now being reflected in the marketplace. Chartis reported a first quarter operating profit of $879 million dollars compared to a $710 million dollar profit the year before, a 24 percent increase.
SunAmerica Financial Group reported first quarter operating income of $1.1 billion dollars compared to an operating loss of $160
million in the first quarter of 2009. In a sign of market confidence,
ILFC has raised $4 billion dollars from private markets. And I
might add, parenthetically, that is both secured and unsecured
credit markets.

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And AIG financial products continues to make substantial
progress in reducing and de-risking its portfolio from a high of over
$2 trillion dollars at the end of 2008 to $755 billion dollars as of
March 31, 2010. These many accomplishments are enabled by the
dedicated and tireless efforts of tens of thousands of AIG employees.
At AIG, it is critical that we strike the right balance between
paying competitively and ensuring that pay levels are appropriate
in light of our government support. We are implementing new compensation programs to create a consistent performance management culture, one that aligns our employees’ day to day activities
with the interests of our stakeholders. And with this approach, we
are retaining top talent as well as attracting new talent to help
manage our businesses.
Chair Warren and Members of the Panel, I am confident that
AIG is now on a clear path to repaying the taxpayers. I thank you
for this opportunity to bring you up to date and look forward to
your questions.
[The prepared statement of Mr. Benmosche follows:]

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Chair WARREN. Thank you very much Mr. Benmosche, we appreciate you being here today. Do you anticipate that AIG will need
any more taxpayer money?
Mr. BENMOSCHE. Right now, we don’t anticipate that. We are
looking at where we’re at. We’re still dealing with minor cash flow
issues. But if you look at the success we had with ILFC—keep in
mind we’ve been able to raise, with some sales of assets in the secured and unsecured markets, as well as renegotiating our bank
lines after a lot of work with the banks examining our success
there. That’s almost an $8 billion dollar improvement.
We were also able to raise in the market, with securitized financing, $3.5 billion dollars to support American General Finance. So
thus far, as we continue to operate our company strongly, profitably, we show that we’re retaining people, we’re retaining business,
we’re showing new sales, all of the things you want with strong,
vibrant companies. We’re beginning to see we get more access to
financing. So we would hope not.
Chair WARREN. Well we all hope not. What we’re trying to do is
just pin down a bit more. So when Mr. Gallant says he doesn’t
think you’re going to be able to make it through the year without
having to call on taxpayer funds, you’re saying you think the combination of sales of major assets, the renegotiation of some of the
outstanding debt, and raising more money in debt markets will be
enough to meet your cash needs as they go forward? I just want
to make sure I’m getting the strategy right.
Mr. BENMOSCHE. We, at this stage of the game, we look at, we
have a credit line with the Federal Reserve.
Chair WARREN. Yeah.
Mr. BENMOSCHE. And so we see that as going up and going down.
So you’ll see, based upon activities or cash flows we may come
down a little bit, we may go back up again. So we see that as a
line of credit that we’re using, that we have available until 2013.
Chair WARREN. Okay.
Mr. BENMOSCHE. We also, we’ll go through certain activities like,
we went to the Treasury and in order to strengthen the insurance
company—keep in mind, that for AIG, our insurance companies are
strong, and we want to make them stronger. And that’s important
because our clients look to us for our promises and our guarantees.
And so therefore, when the state of Pennsylvania says that
they’re concerned about Chartis, the property and casualty insurer
owning stock in the aircraft leasing company, and they say they’re
concerned about that being in their capital, they’d like us to remove it. Then if it strengthens the insurance company, which allows us to be able to continue to compete in the marketplace, we
did in fact ask for money to be able to do that shift from the property and casualty company into the AIG holdings.
So there is some of that financing going on, but it’s only to make
sure that we maintain solid strength in all of our insurance companies. And I don’t see a huge amount of demand to do that between
now and the end of the year.
Chair WARREN. Okay, so you think that you both have the cash
to meet your needs for loans that are coming due, for payments
that are coming due, and that the only time you’ll be drawing down

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on government funds will be in order to strengthen the capital position of the individual insurance subsidiaries, is that right?
Mr. BENMOSCHE. That’s correct.
Chair WARREN. I just want to make sure I’ve got the——
Mr. BENMOSCHE. Right, so for example, we are planning once the
markets settle down, and here these are very unstable markets——
Chair WARREN. Okay.
Mr. BENMOSCHE [continuing]. As we can all read and see. We
would like to repay the Fed their $4 billion dollars they lent ILFC.
We believe that we can take some of the collateral that they’ve had
holding against that $4 billion, we can go to the marketplace and
raise the additional money to pay down $4 billion dollars to the
Federal Reserve.
Now we may decide to pay it down and we may need $500 million later on. So there will be some of that up and down. But we
see major activities now, between now and the end of the year, to
begin to reduce the amount of money we owe the Federal Reserve.
Chair WARREN. Now I note that Mr. Gallant was complimentary
of the way that you have managed the company since you’ve taken
over. But what I’d like to hear, if you have the strategy mapped
out, what are the biggest challenges to the strategy, what are the
risks? What are you know, where are the places that you might
run into trouble and see problems?
Mr. BENMOSCHE. To me, the greatest risk has been the day-today operations of the insurance companies in particular. We have
never had a problem, through this entire crisis, with the insurance
companies. They are well regulated, very well regulated by the
states and by the countries we do business within.
And so they have made sure that all of the things we do are protected for the policyholders. So we have to make sure we run those
businesses successfully and we make sure that we have the right
capital in those businesses and we have the right risk-based capital
ratios that are expected in those businesses.
And that we show that we can retain and attract people, that we
can be able to retain our current customers, and we can grow new
customers as a vibrant, strong, operating unit, that’s a successful
company. That’s our highest priority, and that’s what we’re focused
on.
The second priority is to show that we can exit the support of the
U.S. Government in a way that we’re left with an investment grade
company that people will continue to feel confidence and support
in.
Chair WARREN. Let me just focus you though, Mr. Benmosche.
Mr. BENMOSCHE. Sure.
Chair WARREN. I do understand that these are the goals, and of
course I’ve read your testimony. My question was, the places that
you see the most risk in not meeting those goals?
Mr. BENMOSCHE. By talking about not being able to achieve good
operational results.
Chair WARREN. Good, that’s what I needed.
Mr. BENMOSCHE. Pretty simple.
Chair WARREN. Thank you sir.
Mr. BENMOSCHE. All right. Took too long.
Chair WARREN. Mr. McWatters.

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Mr. MCWATTERS. Thank you, and thank you for attending the
hearing today. It appears that you will not need additional TARP
funds, at least that’s what you just said. Today, in your opinion,
is AIG a solvent entity?
Mr. BENMOSCHE Absolutely.
Mr. MCWATTERS. Great, great. You also said, in your opening
statement, that you intended to pay back the taxpayers. You didn’t
say, I’m going to pay back everything but $5 billion or $50 billion.
It sounded like the intent is to pay back everything.
Mr. BENMOSCHE. I believe that we will pay back all that we owe
the U.S. Government. And I believe at the end of the day, the U.S.
Government will make an appropriate profit.
Mr. MCWATTERS. Okay, the CBO says we, meaning the taxpayers, will lose $36 billion and the OMB says we will lose $50 billion. So there’s a spread here, it’s a big spread. Can you help me
close this gap in my own head to understand how you can pay back
everything, how you can run the company, pay back everything
when the CBO and OMB say to the contrary?
Mr. BENMOSCHE. I would love them to be able to let me buy back
everything that we owe and go to investors and take a $50 billion
loss. I would be able to hit that bid tomorrow. And the fact is, nobody will sell it to me for a $50 billion loss. Because the fact is,
we are a strong, vibrant company that’s worth a lot of money. I
can’t tell you how they do their analysis, but I am confident you’re
going to get your money plus a profit.
Mr. MCWATTERS. Well then specifically, what is the exit strategy? I mean, when you come up with one, if you had to write a onepage exit strategy to pay back the taxpayers, what would it be?
Mr. BENMOSCHE. The first goal is to make sure that we pay back
the Federal Reserve. And so we are working hard to monetize the
assets that we have. We are continuing to look at other strategies
and different forms of monetization.
So the key is to pay back the $52 billion. Once that is paid back
and the Fed is completely covered, and keep in mind again, we’re
doing that as quickly as we can knowing that we have a 2013 date,
we still would like to get it done this year or next year, if at all
possible. That’s our goal.
These sales give us a tremendous shot at getting that done. And
then we’re going to continue to monetize. So once the Fed is covered, then we’re going to begin to talk with the U.S. Treasury
about how they deal with the preferreds.
Mr. MCWATTERS. How about return to profitability? It’s one
thing to sell a subsidiary, take the cash, pay down the debt. But
how do you return AIG systemically, to a profitable company?
Mr. BENMOSCHE. If you look at our first quarter, in fact, if you
look at our fourth quarter where we reported a huge loss, if you
look at what were the components of that loss, we actually made
a profit.
And so I believe that you’re looking at a company that once we
sell off the companies that we’ve talked about, or assets that we’ve
talked about, I still think we’re talking about a company that could
earn, in 2011, without extraordinary charges and goodwill charges,
and all these other things, I believe we have a company that can
earn between $6 billion and $8 billion after taxes.

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So it is a substantial earner. If you look at the first quarter of
Chartis, we had a huge earthquake in Chile, that cost us a lot of
money because we’re a huge insurer and so we covered a lot of
damage. If you look at this quarter, we have the Gulf and the
issues in the Gulf. We’re going to take losses there as well.
In spite of those losses, those catastrophe losses, we are still
showing a healthy profit in Chartis. And if you look at our retirement business, and life and retirement business, we’re also showing healthy profits. So we are restoring all of the aspects of AIG
to profitability right now.
Mr. MCWATTERS. On Financial Products, are you making money
winding down Financial Products or are you losing money?
Mr. BENMOSCHE. If you look at our numbers, right now I think
basically we’re holding our own, breaking sort of even. Keep in
mind that one of the variables that occurs, is that we have a lot
of debt against that business. And it’s one of the anomalies of our
accounting system. As people become more concerned about AIG, it
actually improves the profitability of Financial Products because
our spreads widen and therefore we can take an earnings, which
is unfortunate, we shouldn’t do that but we do, that’s how we account for it. So in bad times we look better and in good times we
look worse.
But I will tell you that if you take all of that accounting out of
the noise you will see that we’re de-risking. The team has done an
absolutely outstanding job. We are fortunate that they’re still
there. They’re fortunate, even though they were vilified inappropriately, that they are working as hard as they can to de-risk this
book, sell off the book, and do it in a break-even to slight profit.
Mr. MCWATTERS. When they close out a credit default swap, are
they currently closing them out at par or are they attempting to
negotiate discounts?
Mr. BENMOSCHE. We negotiate what we can negotiate in the
marketplace from a position of strength. So I don’t have the analysis. So I’m going to give you how much of that is at what level.
But I will tell you that when we look at the market value and what
the anticipated market values could be, and where we think is a
good optimum position where we’re getting a good price and getting
out, and dealing with, in effect, de-risking the company from where
we have collateral potential calls and so on. I think they’re doing
an excellent job of getting good prices. They were not getting good
prices a year ago.
Mr. MCWATTERS. Okay.
Mr. BENMOSCHE. We were getting hammered a year ago in the
marketplace. That has changed dramatically.
Mr. MCWATTERS. Did it change because of the personnel within
Financial Products, or the market?
Mr. BENMOSCHE. It changed because the market realized that we
were going to change our approach. That we’re not going to liquidate this company. And therefore, the Street realized that if they
wanted to negotiate with us, they have to negotiate with us from
a position of strength.
Mr. MCWATTERS. Yeah, if it’s possible to let us know in general
terms if you’re able to negotiate discounts that would be helpful.

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Mr. BENMOSCHE. I think it’s more about trading and selling and
doing things. And I think we’re not—I’d have to go back and have
the people give you an exact answer. I don’t have that.
Mr. MCWATTERS. Okay, fair enough.
Chair WARREN. Thank you.
Mr. Silvers.
Mr. SILVERS. Mr. Benmosche, I’m sort of interested in the contradiction or the contrast between your testimony, Mr. Gallant’s
testimony, and the testimony of Mr. Clark from S&P.
Can you (a) explain to me your understanding of the difference
between your estimation of the company’s earning power going forward, after your asset sales, and Mr. Gallant’s? And can you (b) explain to me if your general characterization of your company’s financial position is consistent with S&P’s view that absent government support you’re Double B?
Mr. BENMOSCHE. I can’t comment on Mr. Gallant, you’ll have to
get him to figure it out. I know what I’m running, I know the company I’m running, and I have confidence in this company, and I
know what I’m talking about. So you’ll have to see whether he understands the company as well as I do.
Mr. SILVERS. Mr. Benmosche, that’s not an acceptable answer.
Mr. BENMOSCHE. Okay.
Mr. SILVERS. You know we represent your majority stockholder,
or at least we kind of do. We are trying to look out for your majority stockholder. I am frankly frightened by what Mr. Gallant said
on behalf of the American public. And I would like you to explain
specifically with reference to numbers why he’s wrong.
Mr. BENMOSCHE. I have not looked at his report. I’d be glad to
have a team of people study it and do a side-by-side. We did that
when we had a report that said that we had an $11 billion hole
in our reserves. It was written by Bernstein, and in fact, you found
out we did not have an $11 billion hole. We actually went through
that report, showed them why they were wrong, and they still went
forward with it. So I’m happy to do that for him as well.
Mr. SILVERS. Well perhaps there’s a different—perhaps I can put
it in a different way. Explain to me how you get from today’s operating results to the type of cash flows that you were just describing, the $6 billion to $8 billion range in 2011. How do you get from
here to there?
Mr. BENMOSCHE. Well look at the first quarter. If you look at the
first quarter we made $879 million——
Mr. SILVERS. Right.
Mr. BENMOSCHE [continuing]. In Chartis.
Mr. SILVERS. Okay.
Mr. BENMOSCHE. Okay, with casualty losses in Chile. If you look
at what we did in our SunAmerica, we had a strong result of almost a billion dollars. If we continue to operate all the other companies at break-even to a positive, and just deal with those two
companies alone, and deliver the times four, you get pretty close
to the number.
And so I would say to you that if you look at our results for the
fourth quarter, without extraordinary charges, if you look at where
we were in the first quarter——

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Mr. SILVERS. Mr. Benmosche, I’m missing something. Your total
operating income at corporate level in first quarter of this year was
$800 million, I multiply that times four, I get $3.6——
Mr. BENMOSCHE. I don’t know what number you’re referring to
then. We made a profit of $1.4 billion in the first quarter.
Mr. SILVERS. I’m talking about your operating income which is,
I think, kind of more relevant to what we’re talking about, is it
not?
Mr. BENMOSCHE. You have to look at all of the pluses and
minuses, all of the accounting charges. For example, we have to
take the charge of the fee that is assumed by the government taking 80 percent ownership of $23 billion. We take charges of between $500 million and $800 million a quarter to amortize a $23
billion fee which represents the price we pay for the line of credit
from the Federal Reserve. So in effect, we pay $23 billion in points
for an $85 billion——
Mr. SILVERS. But if you’re a Double B——
Mr. BENMOSCHE [continuing]. Which is more——
Mr. SILVERS. But if you’re a Double B credit without support
from the government, aren’t you going to have to replace that with
comparably expensive capital?
Mr. BENMOSCHE. We’re going to replace it. And I don’t know how
expensive it will be. And keep in mind what S&P said today, we’re
a Double B. As we begin to achieve our plans we’ll be investment
grade by the end of the year.
Mr. SILVERS. You can imagine, I think our concern is about just
the gap between different assessments here. I would very much
welcome, and I’m sure the other panel members would welcome a
more detailed explanation of how you think you’re going to not be
a Double B without government support. Which seems to me to be
critical to the question of whether or not you know, your representations about the likely outcome here for the public, being paid
back in full with a respectable profit, are realistic and can be realized.
You know, I think we have heard, I think in general, a great deal
of support and a number of compliments for the way that you’ve
managed the company so far. But you know we, I think we need
to see some support for what the likely outcomes are here and why
we don’t have a structural problem. A problem not really susceptible to managerial skill.
If I might turn and ask you a different question. Some have suggested including I think one of my colleagues, including Professor
Troske, have suggested that we really ought to be selling assets
more quickly. I would—I know that’s not been your view. Can you
explain why that—and I’ll put my cards on the table, I’m sympathetic to your position. I think selling assets prematurely is a certain way to realize losses. But I’d appreciate to hear it from you,
in your own words, why you’ve taken that view and what the benefit has been for the public as an investor in AIG?
Mr. BENMOSCHE. I think so far you have seen prices improve. I
think at one point, they were thinking of selling AIA for the high
teens. And so we got a very aggressive price. And other properties
that are out there we are finding people willing to come to the
table and talk to us about more value. Because you cannot buy a

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business that is in trouble, number one. And number two, you have
to sell when the time is right. And we have to make sure that we’re
prudent, we move as quickly as we can. But so far, even for example, in Financial Products, we probably would have been down an
additional $5 billion had we rushed the sales and tried to de-risk
that business too quickly.
And so now that we’ve reduced—taken the risk out, de-risked it,
you’re going to see the fact that we have the money that’s here.
Sometimes it’s not obvious that we didn’t make it, but we didn’t
lose it. So I can only tell you that as we move, we’re moving quickly. We’re finding more people coming to the table. More people
wanting to invest with us. I think you’ll see more options open up.
We just met with Boeing, as you know, we’re a large customer of
Boeing and our goal is to continue to buy Boeing aircraft. But Boeing is going to work with the XM Bank with us and others to be
able to get sources of capital to continually invest and to continually strengthen that business over time. That will provide good
operating earnings.
So throughout the company, at all levels, we’re looking at ways
to improve our position, strengthen our position, and then find appropriate buyers when it makes sense. And I think we will do that
as quickly as we can. We’re not just sitting here saying, let’s wait
for 2013, but you got to do it when the market’s right.
For example——
Chair WARREN. Okay, I’m going to stop you there Mr.
Benmosche.
Mr. SILVERS. Thank you.
Chair WARREN. Thank you. And I appreciate your offer to provide the numbers. And we’d like to have those numbers for the
record on the Gallant analysis, why you have a different analysis
on the profit projections, where those are coming from, and on the
credit rating.
Mr. BENMOSCHE. I’ll bet you my staff—I just heard her say that
they’re watching the TV, and I’ll bet you they’re off and running
already.
Chair WARREN. I’m delighted to hear that.
Mr. BENMOSCHE. I’m sure they’re running right now.
Chair WARREN. We will hold the record open so that we will be
able to get those numbers.
Mr. BENMOSCHE. I’m not sure I’ll have it in the next hour, but
they’re working on it.
Chair WARREN. That sounds good.
Professor Troske.
Dr. TROSKE. Thank you. I guess so I don’t want you to ask you
to comment on a report that you didn’t write or maybe haven’t
even read. But the previous witness said his guess was $6.00, the
market says $33.00. Do you have a guess as to what you think the
share price for AIG should be? Just your own opinion?
Mr. BENMOSCHE. Totally inappropriate to even comment.
Dr. TROSKE. Okay.
Mr. BENMOSCHE. I wouldn’t.
Dr. TROSKE. Okay, that’s fine. You seem to suggest that you can
operate in the—you are borrowing money in an unsecured credit

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market, so you are operating in the debt market, is that what I
heard you say? That you——
Mr. BENMOSCHE. At ILFC, we have done that.
Dr. TROSKE. Okay, and so the previous witness said that you
couldn’t borrow money and you’re telling us you can?
Mr. BENMOSCHE. No, I’m telling you I borrowed $2.7 billion——
Dr. TROSKE. You did.
Mr. BENMOSCHE [continuing]. For ILFC aircraft leasing unsecured, without a guarantee from AIG.
Dr. TROSKE. So can you give me, I guess some more background.
Exactly when you say you’re you know, spinning AIGFP down. Exactly as you are removing the risk from AIGFP, is that going to
be—is that part of the long term solution for the company? Do you
view AIGFP continuing to be a part of AIG in the long run?
Mr. BENMOSCHE. I do not.
Dr. TROSKE. Okay, and so can you describe to me a little how
you, how you’re going to move from where you are today to a company that looks a little different?
Mr. BENMOSCHE. Well I think what’s important now is we focus
on the core businesses of AIG——
Dr. TROSKE. Okay.
Mr. BENMOSCHE [continuing]. Which is the insurance companies.
Dr. TROSKE. Okay.
Mr. BENMOSCHE. What you have is a lot of other companies were
created outside that entity, which you heard a lot about. I think
we should minimize all of those, which were basically trading the
Triple A of the insurance companies, and being able to borrow in
the market short, and then begin to do things with assets long.
And so those kinds of carry trade kinds of businesses, we need to
stop. That’s not a business we should be in.
We should be in a solid business that talks about, we provide
protection in various forms, whether it’s property, casualty, life, annuities, and so on. And those should be the primary businesses
that we’ll run, and run them in a way that they’re not over-leveraged.
Dr. TROSKE. Okay. Okay, and so that’s essentially your vision of
what your company is going to look like at the end of the day when
you are out of all of this, these problems, focus primarily on the
core insurance businesses.
Mr. BENMOSCHE. We will be the world’s largest property and casualty insurer with a strong life and annuity business in the United
States and other selected businesses that will enhance that nucleus
and core.
Dr. TROSKE. Okay, thank you.
Chair WARREN. Mr. Benmosche, I have been struck as I’ve read
through the documentation on AIG about the incredible number of
intra-corporate guarantees and loans among the various, particularly among the various insurance subsidiaries and the parent and
the various insurance subsidiaries among themselves. And I see
that as once the parent got into trouble, as everyone likes to point
out, AIGFP was just one tiny little part of AIG. And it at least
threatened the entire rest of the company in part, because of this
incredible interconnection.

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So I’d like to know about how you’re managing that going forward. Is this a company that will still be run as one that has lots
of cross guarantees and intra-company loans and inter-subsidiary
loans?
Mr. BENMOSCHE. The answer is no. I think that it was created
out of a lot of complexity over a lot of time. We’re a company that
has over 500 general ledgers in it today. The degree of complexity
to run the business every day is huge. Which is why the people are
so important to this company. And so I will tell you that they are
working daily looking at ways to deliver, to change, and move.
So part of what you’ll see is us going to the Treasury saying, we
need capital to put into the insurance company. You just don’t take
something out of an insurance company without the approval of the
regulator. Whether it’s in Malaysia, or whether it’s in Korea, or
whether it’s in Tennessee. All of those, as well as New York and
Pennsylvania, and so and so. You’ve got to make sure, as we do
this, we do it in an appropriate way such that the regulators are
satisfied.
But at the end of the day, we want very clear discreet businesses
that we can see what they are, where we can see their financials.
And therefore, we can go to the capital markets for that insurance
company. And for example, deal with raising debts through bonds
and so on which is what makes them even stronger from a ratings
agency point of view. Because they have access to the markets and
so we’ve got to have them understood, clean and plain. It’s not easy
to do. It’s taking us time to get there. Which is why you can’t accelerate some of the sales. Because it’s too intertwined, too complex.
Chair WARREN. So would it be fair then to say that you’re striving for a simpler, a more transparent business than you had in the
past?
Mr. BENMOSCHE. We will achieve a simpler organization.
Chair WARREN. I like that.
Mr. BENMOSCHE. Not striving for. We will do that because you
have to do that to have your exit from the government. You’re
going to have to be able to do that to get the rating agencies to give
us very good ratings for our insurance companies.
Chair WARREN. And would you be able to demonstrate some
progress along that line, say from a year ago?
Mr. BENMOSCHE. [No response.]
Chair WARREN. You don’t have to do it off the top of your head.
Mr. BENMOSCHE. No, I think that the whole——
Chair WARREN. We can hold the record open for this.
Mr. BENMOSCHE [continuing]. The whole rating agency, or feedback from S&P in particular, basically talks about the kind of
progress we’re making. And I think that at the end of the day
when we have rating upgrades in our insurance companies will be
the sign that we’ve achieved.
Chair WARREN. But you would forgive us if we weren’t entirely
reliant on rating agencies at this moment.
Mr. BENMOSCHE. I won’t comment on that.
Chair WARREN. Thank you.
Mr. BENMOSCHE. You’re welcome.
Chair WARREN. But it would be helpful, I just want to stress this
point because I think it’s very important, about if you could give

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us, as a supplement to your testimony, some examples of the work
that has already been done to make this a more transparent company, let us describe it as one with a simpler chart of how it works.
Mr. BENMOSCHE. I’m happy to have the team put together things
we’ve done in Chartis and SunAmerica and things we’re starting
to do to begin to pull things apart so we don’t have to deal with
all of the cross-guarantees and cross-collateralization agreements.
Chair WARREN. Thank you.
Mr. McWatters.
Mr. MCWATTERS. Thank you. I’ll follow-up on Professor Warren’s
comment and I’ll put it this way. It still seems to me that AIG is
too big to fail. That if, for whatever reason, you ran out of cash,
you had a liquidity crunch again, chances are the taxpayers would
have to come to your rescue.
Okay, let’s just stipulate that for a second. What has your firm
done to negate that status? How are you drawing back from this
too big to fail situation where a year from now, two, three years
from now, we’re not going to have to worry about AIG being too big
to fail? If you fail, than you can just be liquidated, sold off, broken
up, or whatever. In other words, do you have a living will? Do you
have a plan? Are you developing a plan?
Mr. BENMOSCHE. I think that to say that we’re too big to fail
comes from the fact that we have a lot of assets and all the different insurance companies are added up. My personal belief that
the reason you might think we’re too big to fail is we owe you a
lot of money. And therefore, we can’t fail until we pay you back.
Mr. MCWATTERS. That would be nice, yes.
Mr. BENMOSCHE. Well I think that’s the issue. The issue is we’re
not too big to fail, but we are right now because you got to make
sure that we do this in a way that clearly pays back the taxpayer
100 cents on the dollar with an appropriate profit.
And I think to the extent we do that, the remaining company,
other than by what Congress decides is too big to fail in terms of
assets size or whatever, I don’t believe that AIG, once we pay back
the government and we exit as an investment grade company, I believe that we are no longer too big to fail.
Mr. MCWATTERS. So there will be no ‘‘Financial Products II’’ or
‘‘Son of Financial Products’’? I mean you’re out of that business?
Mr. BENMOSCHE. I can only tell you what I will do. I hope that
somehow we find the appropriate regulations that say in the future
that any company that decides to get in businesses and put at risk
some of the businesses that we had in insurance or banking is prevented.
I can’t tell whether my successor will come in and find a clever
way to go back into the FP business. But I will tell you, while I’m
here I want to make sure that that is not part of this company because that’s not what we should be doing.
Mr. MCWATTERS. Well specifically, have you adopted risk management and internal control provisions that will just simply prevent, prohibits FP from coming back?
Mr. BENMOSCHE. You cannot create policies that will prevent
people from making bad management decisions. At the end of the
day, the CEO has to take responsibility for the activities in their

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company. And when they blow up, they have to take responsibility
for why they let that happen.
At the end of the day, I am very confident we have all of the
processes in place in risk management. But at the end of the day,
if I don’t listen to it and I don’t lead this company the right way,
I can get the company in trouble.
And the Board of Directors will do their best to oversee me. They
will make sure they have the checks and balances. But at the end
of the day, if we don’t listen to what we hear, we can get in trouble.
And I believe our Board at AIG today is very strong. It would not
let that happen. I will not let that happen. And over time, we hope
new Board Members and new CEOs will also make sure that
doesn’t happen.
Mr. MCWATTERS. So is it fair to say you’re developing a culture
that is anti-FP?
Mr. BENMOSCHE. We’re developing a culture that is anti-taking
inordinate risks. That would jeopardize the quality of our businesses when the businesses we are in make guarantees to people,
sometimes for their lifetime.
Mr. MCWATTERS. Are you in doing that, making any effort to
separate risk from reward? So if you have an employee who comes
up with a brilliant idea like someone did at FP a few years ago on
credit default swaps, where they are paid a huge bonus, let’s say
in year one, for doing the deal. If the deal blows up four years
later, I mean is that still possible?
Mr. BENMOSCHE. It wasn’t possible before either. I think I need
to clear up something. When you look at AIG and the people at
AIG, the 10 people that reported to me when I got there, those 10
people lost $168 million dollars of their prior pay because of what
happened at FP.
They lost $168 million. Five senior people at FP, leadership at
FP, those five people lost $88 million dollars of their prior pay.
Their pay has always been at risk for almost a five-year period of
time through stock and cash plans.
So you’ve got to have something other than pay. You got to reward pay, you have to have risk in the pay process. You have to
have controls over when it gets paid out. But at the end of the day,
the real challenge is to make sure you have good risk management
and a good management of the company, and not rely on the compensation system. Either way, we’ve got to run the company the
right way. So I can tell you that at FP, that was never the case,
of getting rewarded in one year.
Mr. MCWATTERS. Never the case?
Mr. BENMOSCHE. Never the case.
Mr. MCWATTERS. As I suspect right now, and from what I’ve
read, at least in the popular press, at 2:45 in the afternoon there’s
some guys on the 14th hole right now teeing off. And it’s because
they made a lot of money at FP and then left. But they left the
damage behind, which is the key.
Mr. BENMOSCHE. There are people who worked there, and I will
tell you in the last five years, most of their compensation was
wiped out. In fact, even the bonuses that I got approved for people——
Mr. MCWATTERS. Right.

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Mr. BENMOSCHE [continuing]. 40 percent of that bonus goes into
a deferred compensation plan at FP, which is so negative they will
never see the light of day. And so people today are still losing pay
for what happened in the past. Unfortunately, there are people who
caused the problem that aren’t there which is what——
Mr. MCWATTERS. That’s my point.
Mr. BENMOSCHE. And my point is, it’s a shame that we picked
on the people who are there trying to get the job done. So I can
only tell you that they still, the people who left, even the person
who ran it, lost almost $70 million of his prior pay. But he got a
lot of money from prior years, no question about that.
Mr. MCWATTERS. Exactly.
Mr. BENMOSCHE. But at the end of the day my concern is, from
what you said is, it’s not about their pay. It’s about the fact we
should have strong risk management and we should have a company that doesn’t over leverage itself and too cheaply allows parts
of the company to leverage a Triple A of a solid insurance company.
That was the mistake, not the pay.
Mr. MCWATTERS. Okay, thank you.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. I’d like to come back to this pay question and look
at it a different way. Last fall, the Federal Reserve system promulgated a sort of set of principles around pay for entities they regulate. And indicated that they would, that the Fed was going to be
looking at pay at financial institutions that they regulated. Basically, looking at two issues, risk and time horizons.
What processes do you have in place, as an entity that has this
sort of unique relationship with the Federal Reserve system, what
processes do you have in place and what, if anything, is the Fed
doing to oversee them in relation to those policies?
Mr. BENMOSCHE. I believe that the Fed is overseeing not only our
compensation policies, but I will tell you first and foremost, that
they’re in every aspect of our business, and rightfully so, because
we owe them a lot of money.
I will also tell you that I believe the working relationship—I’m
going to make a comment. Our working relationship with them is
extremely professional and very effective. They’ve been terrific
partners. So they watch everything we’re doing and everything
we’re working through.
Mr. SILVERS. So tell me exactly what does that mean in relationship to compensation policy? What are they asking you—how is
that oversight manifest?
Mr. BENMOSCHE. Well, first of all, we can start with Ken
Feinberg. And so Ken Feinberg deals with the way we’re paying
the top 100 people.
Mr. SILVERS. Yes, but I’m asking you about the Fed, and the
Fed’s relation—and the Fed’s implementation of their policy.
Mr. BENMOSCHE. They are aware of our compensation plans. We
share with them all the long-term incentive plans, what our goals
are. We talk about the vesting, we talk about claw back, we talk
about how we’re doing it. All of our plans are presented to them
and they’re aware of the things we’re doing.
Mr. SILVERS. Okay. Now to pick up on my colleague’s question
about sort of downside exposure. You described that some individ-

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uals made money in AIG during the boom period and then lost it
during the bust. I don’t doubt that that’s true.
If you look at it though from the beginning of the process, the
moment when people make decisions as executives about taking
risk. All that money all right, all the gain is the upside. You don’t
seem to have described any kind of actual downside that anybody
took.
So my question is, going forward, how do you build real downside
around risk, around risk for your senior employees? And how do
you avoid this asymmetry where it’s all about how much you gain
and the comp plan can’t really embody the notion of the loss that
investors in your company or ultimately the public, it appears, will
bear?
Mr. BENMOSCHE. I think it’s a question of how you design your
goals and you design things. So for example, if you have part of the
company where they are incentivized to create operating earnings——
Mr. SILVERS. Okay.
Mr. BENMOSCHE [continuing]. And that’s all they’re asked to do,
then they will do that.
Mr. SILVERS. Right.
Mr. BENMOSCHE. They may also make that part of the business
insolvent. They also may not choose to clean out the inventory of
some antiquated product and therefore, they’re not taking losses
that you should take. So you have to design your compensation program that takes risk into account, sets parameters of what those
risks are, and you have to manage it.
You cannot let the compensation program drive results. And
that’s why, for example, in the securities industry, I have always
been against just revenue compensation plans. Because I think
they don’t talk about risk, they don’t talk about bottom line.
Mr. SILVERS. How do you build downsides, how do you build true
downside in from any perspective?
Mr. BENMOSCHE. What would you like downside to be?
Mr. SILVERS. Well I mean, look, from an investor perspective
downside is downside. I put up money and if I don’t—and if I lose,
I lose, right? If you think about it graphically, I have real downside
exposure and real upside exposure.
Most executive pay plans I am familiar with, that purport to be
performance based or to tie compensation to performance have only
the upside of that line, they don’t have the downside. And that creates situations like that which my colleague Mr. McWatters was referring to. Where executives are not really fully exposed to the
risks that investors are exposed to and the public is exposed to.
Mr. BENMOSCHE. Well——
Mr. SILVERS. I’m just curious if you’ve got a solution to this problem given——
Mr. BENMOSCHE. YES.
Mr. SILVERS [continuing]. Given the stakes involved for AIG and
for the country.
Mr. BENMOSCHE. I think when you have stock ownership, you
want to have downside. If you look at what happened to the associates of AIG. People have been there their whole careers have been

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totally wiped out through no fault of their own. Keep in mind there
were 44,000 trades at FP, 44,000. Less than 125 went bad.
Almost all the people at FP, all the people, 100,000 employees of
AIG all suffered huge losses in various forms because of what happened here. Because a lot of them owned AIG stock either in their
401k or in their bonus plans or stock plans.
So I will tell you that there was huge losses taken by people who
owned the company. And that’s about the only way you’re going to
be able to do it. The downside is, you own the company and if you
screw it up you’re going to lose money.
Mr. SILVERS. I don’t think—my time is up, but I don’t think
that’s exactly what happened. People lost some of the money they
made. It’s not the same thing as the perspective of investors or the
public who are at risk of losing money they brought to the table.
It’s quite different. Thank you.
Chair WARREN. Professor Troske.
Dr. TROSKE. One of the advantages of going last is I get to free
ride on my colleagues and they get to ask all the questions. And
so I don’t have very many left. But I guess I do have one. And that
would be, does AIGFP still pose a threat to the success of the overall company?
Mr. BENMOSCHE. I believe the AIGFP threat at the end of, at the
beginning of 2009, was probably a $20 billion to $22 billion cash
call.
Dr. TROSKE. Okay.
Mr. BENMOSCHE. That has been reduced to almost $4 billion. So
there’s still a risk. I think the greatest risk is downgrade. That’s
why operating results are important and as long as we continue to
do that I think that will be further de-risked as we go through the
year.
So I think that it’s manageable and will continue to be manageable until we get through the end of the year and then the rest of
it gets absorbed into the rest of the company as just investments
that have to wait until the duration gets there.
Dr. TROSKE. Okay. Thank you.
Chair WARREN. Thank you very much Mr. Benmosche.
Mr. BENMOSCHE. Thank you.
Chair WARREN. We appreciate your coming and we will hold the
record open for the additional information.
Mr. BENMOSCHE. Okay, thank you very much.
Chair WARREN. Okay, thank you.
Mr. Millstein.
We now call our fifth and for the day, final panel, Jim Millstein,
Chief Restructuring Officer of the U.S. Department of Treasury.
Have you found a comfortable place? I think you found a low
chair sir. That or you’re shorter than I recall.
Mr. MILLSTEIN. It might be that.
Chair WARREN. There we go, much better. When you’re ready if
you could give us an opening statement and hold it five minutes
please.
Mr. MILLSTEIN. I will.

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

Mr. MILLSTEIN. Chair Warren, members of the panel, thank you
for the opportunity to testify today. Since joining the Treasury Department in May of 2006, I have been—2009, sorry. I have been—
it feels like four years. I have been primarily responsible for overseeing the taxpayers’ significant investment in American International Group.
As you know, prior to joining the Treasury Department I spent
28 years working in the private sector focused exclusively on financial restructurings.
I will use my time today briefly to outline our current investments and commitments to AIG, the company’s restructuring plan,
and the Government’s exit strategy.
As of today, the Federal Reserve Bank of New York and the
Treasury Department have extended $132 billion of financial support to AIG. The New York Fed has provided $83 billion of this
support, $26 billion of which represents loans outstanding to the
parent company.
$25 billion of which represents the preferred interest in AIG’s
two largest international life insurance subsidiaries, AIA and
ALICO, and $31 billion of which represent loans to two special purpose vehicles formed to acquire troubled assets from AIG in November of 2008.
The Treasury has provided $49 billion in the form of Series E
and F Preferred stock. In addition, the AIG Credit Facility Trust
established for the benefit of the taxpayers in connection with the
original funding of the New York Federal Reserve Credit Facility,
holds AIG’s Series C Preferred stock which represents approximately 80 percent of AIG’s outstanding common stock on a fully diluted basis.
This substantial financial commitment has enabled AIG to remain a going concern with an investment grade rating. However,
without government support, because of its leverage and the risks
associated with its financial products business, it would not have
an investment grade rating, a rating that is critical to the competitiveness of its insurance subsidiaries.
Therefore, the objective of the company’s restructuring plan is to
restructure its balance sheet and business profile so that it can
sustain an investment grade rating on its own. Thereby, permitting
the government to exit its support and to monetize its investments.
The restructuring plan has six essential components. First, the
company will have to substantially reduce its debt through asset
sales and divestitures. Next, the Company will have to demonstrate independent access to the capital markets and secure
standby lines of credit.
Third, the wind down of AIGFP will have to be substantially
completed. Fourth, AIG will need to divest any businesses whose
potential cash needs or credit rating represent a potential drag on
the parent company rating.
Fifth, the company will have to demonstrate that its core insurance subsidiaries are profitable, well capitalized, and have repaired
the damage to their franchises that the uncertainty associated with
rescue has generated. Finally, the company will have to dem-

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onstrate that it has improved its risk management procedures and
practices.
Today as you’ve heard, AIG has made significant progress on
each critical front. The pending AIA and ALICO divestitures will
result in a substantial deleveraging of AIG’s balance sheet and will
facilitate its access to third party capital.
AIG’s leasing and finance businesses have accessed the long term
debt markets again, allowing them to refinance their maturing
debt and meet their own liquidity needs without recourse to the
parent. The wind down of FP has made significant progress and is
targeted to be completed substantially by year end.
Financial results have stabilized and begun to improve at
Chartis and SunAmerica Financial, the core businesses of AIG’s future. And finally, its risk management practices have improved.
At the conclusion of this process, once it can sustain an investment grade rating without government support the government
will exit as promptly as practicable. Whether we get all of our
money back remains an open question. Let me briefly review where
we stand today.
If the AIA and ALICO divestitures close as planned, proceeds of
those sales and the sale of other non-core assets should be sufficient to repay the New York Fed facility and redeem the preferred
interest it holds in AIA and ALICO in full with all interest and
dividends.
Cash flows from the assets in Maiden Lane 2 and 3 and recent
valuations of those assets suggest that the New York Fed loans to
Maiden Lane II and III will also be paid in full with interest. And
that the equity they own in each of those facilities is likely to have
a real value.
As a result, it seems very likely that the $83 billion dollars of
outstanding Fed support will be paid in full. Similarly, at current
market prices, the common stock that the Series C represents has
value. Market conditions may change before the trustees have the
opportunity to sell that stock, and the very selling of that stock,
given how much they have, will put significant downward selling
pressure on the price of AIG’s common stock. But the stock market
today suggests there’s real value there.
Finally, that leaves the Treasuries Series E and F Preferred, the
$49 billion. The timing of our ability to monetize those investment
in AIG will depend on the pace at which the other steps of the restructuring plan are accomplished.
Whether Treasury ultimately recovers all of its investment or
makes a profit, will in large part depend on the company’s operating performance and market multiples for insurance companies
at the time the government sells its interests.
Chair WARREN. Mr. Millstein, we’re at five minutes.
Mr. MILLSTEIN. I’m done.
Chair WARREN. Do you want to just give me another sentence?
Mr. MILLSTEIN. One more sentence.
Chair WARREN. You got it.
Mr. MILLSTEIN. But as soon as we are confident that AIG can
stand alone, we will move to exit these investments as promptly as
practicable. Now I’m ready for your questions.

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Chair WARREN. There we go. I like that, ‘‘promptly as practicable.’’
[The prepared statement from Mr. Millstein follows.]

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Chair WARREN. So let me just get started here, I want to walk
through this. I’m hearing you say that it is very likely that the
American taxpayer will be repaid in full from AIG?
Mr. MILLSTEIN. I think——
Chair WARREN. Is that what I heard you say?
Mr. MILLSTEIN. What I said is that the New York Fed, which has
about $83 billion dollars outstanding today, is very likely to be paid
in full. The asset values that we’ve seen in both Maiden Lane II
and III, and the sales prices for AIA and ALICO, should be sufficient to pay them in full.
The Series——
Chair WARREN. That’s not everyone though.
Mr. MILLSTEIN. No, that’s not everyone. The Treasury Department has $49 billion dollars outstanding in Series E and F Preferred. And as I said in my testimony, the recovery on that will depend on the performance of the remaining businesses and how
those businesses are valued in the market at the time.
Chair WARREN. So do you have any estimate at this point?
You’ve heard the estimates——
Mr. MILLSTEIN. I have.
Chair WARREN [continuing]. We’ve referred to them multiple
times——
Mr. MILLSTEIN. I have.
Chair WARREN [continuing]. From CBO.
Mr. MILLSTEIN. I have. I think that there are, you know, substantial—there’s a lot of things that have to occur before we’ll know
the answer to that question. And I think if—as you heard from the
KPW analyst today, if the common stock has a value of $5.00, the
preferred is paid in full.
While that may be a lower stock price than the company is trading at today, that implies that the preferred is money good.
Chair WARREN. Okay.
Mr. MILLSTEIN. And even at that $5.00 stock price, the Series C
Preferred held by the Series C Trust would have a value of $3 billion dollars. That’s pure profit to the taxpayers.
Chair WARREN. But—since I see you wince and hesitate on the
second number, that is you feel confident about the $83 billion repayment, a little less confident about the $49 billion.
Do you feel that Mr. Benmosche perhaps is a bit optimistic?
Mr. MILLSTEIN. No, in fact he knows his business better than I
do. And if he can, in fact, drive——
Chair WARREN. You are principally responsible for overseeing
him though——
Mr. MILLSTEIN. Yes, I am.
Chair WARREN. So I take it only a little bit better.
Mr. MILLSTEIN. Well no, he’s a you know, an experienced insurance executive. I’m a financial restructuring professional. He
knows his businesses better than I do. And his confidence that he
can get Chartis and SunAmerica Financial to an $8 billion dollar
net after tax earning. If he can do that, we’re going to be paid in
full.
Chair WARREN. All right, so what do you see as the biggest risk
here that we won’t get repaid? I know you’ve laid out some of the
things that have to happen. But where do you see the biggest risk?

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Mr. MILLSTEIN. I think the biggest risk——
Chair WARREN. You assess risks.
Mr. MILLSTEIN. The biggest risk for an insurance company are
the state of the financial markets and the impact it has on their
franchise values. Remember, an insurance company you know,
writes long dated risk and it takes the premiums and invests in a
variety of financial assets.
The markets go up, the assets perform. The markets go down,
the assets are impaired, and so they vary. The fortunes of this company, like every other insurance company, in part ride on the performance of the financial markets. We’re obviously in very volatile
times still. And so to me, that is the greatest risk.
Chair WARREN. All right. So the American taxpayer is on this
ride along with the up and down of the stock market?
Mr. MILLSTEIN. Yeah, I think——
Chair WARREN. Or the down of the stock market.
Mr. MILLSTEIN. There’s no question we’ve made a substantial investment in the largest insurance company in the world. And we
did that for, in my view, good and valid reasons to prevent a further catastrophe in the financial markets.
I think it’s been very successful. We have stabilized AIG. And the
returns on that investment and on that policy approach will depend on the future performance of the company, which in part, depends on the performance of the financial markets.
Chair WARREN. Actually, let me ask you about that performance
since we’re hearing a lot of good news here. The preferred stocks
held by Treasury are not paying or accumulating dividends. And
that means that we have, we the American taxpayers, have given
up about $5 billion dollars in foregone cash?
Mr. MILLSTEIN. Actually——
Chair WARREN. Why has Treasury chosen this course of action?
Mr. MILLSTEIN. The math is a little more complicated than that.
Remember, we own 80 percent of the common stock. So we really,
the giving up of dividends on the preferred, was really just giving
up 20 percent of them because the value of those, the value of that
dividend would otherwise flow to the common stock if it doesn’t go
to the preferred. And we own 80 percent of the common stock.
Chair WARREN. Now wait, wait, wait though. But those pockets
don’t match. So you’re saying that we gave away $1 billion of the
$5 billion to the other——
Mr. MILLSTEIN. We haven’t given it away.
Chair WARREN [continuing]. AIG shareholders——
Mr. MILLSTEIN. We haven’t given it away.
Chair WARREN [continuing]. By not collecting the dividends that
belong to the taxpayer?
Mr. MILLSTEIN. Chair Warren, with all due respect, we haven’t
given away anything. These are dividends the company could not
afford to pay. And in its current——
Chair WARREN. Well I’m hearing so much optimistic news I——
Mr. MILLSTEIN. I know, but——
Chair WARREN. So they can’t afford to pay their dividends.
Mr. MILLSTEIN. I understand.
Chair WARREN. And that’s cost us $5 billion.

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Mr. MILLSTEIN. It hasn’t cost us anything. These are dividends
they could not afford to pay.
Chair WARREN. All right. And you’re saying but that’s all right
because we’re still going to sit in the common shareholder position——
Mr. MILLSTEIN. Had they been able to pay the dividend, they
would first have to bring the preferred dividends current before
they could pay a dividend to the common stock, and that’s where
we are today. But at this point, at this point, the company’s cash
flows, its net income after taxes are insufficient to support a preferred dividend.
Chair WARREN. Okay, so where do you anticipate between this
optimistic view of AIG repaying the American taxpayer in full, and
the position where we are today, which is they can’t pay the dividends owed.
Where are we going to cross that line where we don’t continue——
Mr. MILLSTEIN. Okay.
Chair WARREN [continuing]. To lose money from a company that
can’t pay us dividends that it owes us.
Mr. MILLSTEIN. I laid out the six steps of the restructure plan.
Chair WARREN. I heard those.
Mr. MILLSTEIN. Okay, so if you just bear with me for a minute.
What is going on is a resolution of a large financial company. And
that resolution involves its downsizing, okay?
We’re selling stuff to pay back debt. We’re selling AIA and
ALICO. We’ve got a sale transaction for the life insurance operations in Taiwan. We’ve sold buildings and real estate around the
world. All of——
Chair WARREN. I understand all this.
Mr. MILLSTEIN. Wait, wait.
Chair WARREN. I’ve read the Treasury.
Mr. MILLSTEIN. Bear with me.
Chair WARREN. I’ve read your report.
Mr. MILLSTEIN. Bear with me. It takes time to take a company
of this size and scope to get it down to a footprint where it’s actually reduced its debt, reduced its leverage, reduced its risk——
Chair WARREN. I understand that. That’s why I——
Mr. MILLSTEIN [continuing]. And can pay a dividend.
Chair WARREN [continuing]. Asked a time question.
Mr. MILLSTEIN. What was your—what time question?
Chair WARREN. And the time question was, I hear this enormous
optimism which suggests that you have some kind of plan in mind
and that AIG has a plan in mind for where it will end up. And
what I see today, is that it is not able to pay the dividends owed
on the preferred shares.
So what I’m asking is, when in this downsizing do we expect
those two to cross over so that it can at least meet its obligations——
Mr. MILLSTEIN. Okay.
Chair WARREN [continuing]. Before the happy day comes that it
pays us back in full?
Mr. MILLSTEIN. If the AIA and ALICO deals close, they’ll likely
close sometime in the third and fourth quarter of this year, okay?

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So that’s—that will result in an immediate pay down of the Federal
Reserve facility—sorry, of the preferred interest at the—at AIA and
ALICO, that’s about $25 billion that will be immediately retired
with the cash proceeds.
And the balance of the consideration can be sold, given the terms
of the lock ups we’ve negotiated with MetLife and Prudential over
the course of a year to a year-and-a-half. When those proceeds are
realized, they should be sufficient to pay off the credit facility at
the parent level in full.
So sometime, I would expect, in 2011, if those deals close, the
Federal Reserve will be paid in full for all of its existing exposure
to AIG.
Chair WARREN. Okay.
Mr. McWatters.
Mr. MCWATTERS. Thank you. Mr. Millstein, when the deal was
struck in September, current shareholders of AIG stayed in place.
It was not a bankruptcy, they weren’t wiped out.
So today we have sort of an odd situation of pre-bailout shareholders that may live to collect dividends someday, may live to sell
their stock for a profit even though the tax payers may lose, CBO
$36 billion dollars, OMB $50 billion dollars, is that correct?
Mr. MILLSTEIN. Well let me just—if in fact, the preferred stock
interests lose money. It’s unlikely the common are going to get anything, right? In the way a balance sheet is constructed, the preferred stockholders are going to get paid first before the common
stockholders get anything.
Now we have, it is true that the stock is trading. The common
stock is trading and 20 percent of it was left outstanding. People
are buying in and selling that every day. No dividends are being
paid on that stock. So it’s a bet on the company’s future.
Mr. MCWATTERS. But given that it’s trading for $33.00 a share
today, there must be a lot of people, a lot of smart people, a lot of
analysts who think the preferred stock will be repaid.
Mr. MILLSTEIN. That would be the inference you would draw,
yes.
Mr. MCWATTERS. Yeah.
Mr. MILLSTEIN. So that’s good news for the taxpayers. The common stock, the common—the people who are trading the common
stock are suggesting the preferred stock is money good.
Mr. MCWATTERS. Okay, but the equity, the pre-bailout equity
was not wiped out in this deal?
Mr. MILLSTEIN. It was substantially diluted.
Mr. MCWATTERS. Substantially diluted, but not wiped out.
Mr. MILLSTEIN. If I may though, again, just to take the market
price of the common stock. The 80 percent of the stock that was
represented by the Series C, if you valued that at the $33.00 a
share, at which the common stock market is trading the outstanding float, that’s an $18 billion dollar profit to the taxpayer for
the privilege of having made all creditors whole, and for having put
a wall up around this company to keep it from failing. You know,
if that’s how it plays out, I think all of you would agree that this
was a very successful rescue.
Mr. MCWATTERS. It was only successful because the taxpayers
got lucky. If we go back to September 16, 2008, and we start look-

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ing at the CDOs, we start looking at the RMBS, that was junk, nobody wanted it. Because there was not a market. We had no idea
what it was worth and it was simply purchased because it had to
be purchased.
The fact that it appreciated, that’s to our benefit, and that’s
great. But that was far from assured or guaranteed at the time.
Mr. MILLSTEIN. Listen, I was a private citizen at the time that
this rescue occurred. So I had no greater involvement with it than
you did. And I stood back at probably the same distance from it
that you did.
But I think if you listen to the testimony of my colleagues, my
now colleagues at the Federal Reserve, what you hear them tell
you is, that this wasn’t done to make a profit. It wasn’t done for
the protection of Goldman Sachs, or JP Morgan, or any of the other
counterparties. It was for the protection of the financial system of
this country, to try to prevent a panic. A panic that had already
started that would have been worsened and exacerbated had this
company failed. And I believe that.
Mr. MCWATTERS. I agree, but that’s the reason I said in my
opening statement that if you, if the supposition is, we need to save
AIG to save the world financial system, well the world financial
system is Goldman Sachs and JP Morgan and some others.
So if the world financial system had collapsed, these institutions
would have collapsed. So it was certainly in their best interests to
have AIG bailed out. And if they can be bailed out at 100 cents on
the dollar, it’s a happy day.
Mr. MILLSTEIN. Listen, I understand the ambivalence about—the
view that AIG is a vehicle to pay other large financial institutions.
But if you believe that its a collapse would have created fear and
panic across all financial markets, and it wasn’t just Goldman
Sachs and JP Morgan who were being helped by this rescue.
It was you and I as depositors in our banks. It was the insurance
policy holders across AIG and every other insurance company. It
was the pensioners whose pension plans were racked by AIGFP. It
was the holders of stable value funds, whose——
Mr. MCWATTERS. I agree. I totally agree with what you’re saying.
But none of those folks you just mentioned got the wire transfer
that Goldman Sachs and the others did.
Mr. MILLSTEIN. In fact though, they did. In fact they did, because
the 44,000 trades that Mr. Benmosche talked about include all
those stable value insurance contracts that FP wrote that FP has
honored. It includes the various transactions they did with pension
funds to insure their assets too.
We’ve singled out, because they happen to have held very, very
volatile assets on AIG’s—that AIG had insured, and that the decline in the price of which were running through AIG’s income
statement and creating enormous losses in the fourth quarter of
2008.
So in order to try to mitigate the losses at AIG, and in order to
try to stabilize its balance sheet, the Federal Reserve went after
these two asset classes that were causing such losses and such instability. And tried to buy them in at those prices to terminate the
losses going forward so as to try to keep this company from needing
more money and it becoming even more unstable.

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´ ´
´ ´ ´
So yes, Goldman Sachs, and Societe Generale, and the other
counterparties to those RMBS and to the CDOs, got paid, but it
was part of a broader effort to stabilize this company so they could
honor everybody’s contracts in full. They weren’t the only parties
whose contracts were honored in full. Everybody since September
of 2008, has had their contracts honored by AIG.
Chair WARREN. Mr. McWatters.
Mr. MCWATTERS. I understand.
Chair WARREN. Are you okay?
Mr. MCWATTERS. I’m done.
Chair WARREN. Are you through?
Mr. MCWATTERS. I’m done.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. I wasn’t planning to ask this, but I now feel compelled to do so. I notice Mr. McWatters didn’t bring up Goldman
Sachs or JP Morgan, so obviously it’s on Treasury’s mind.
Is it not the case that in the week of September 15, 2008, that
the cash calls that the company could not meet were in two lines
of business and two lines of business only. And but for those cash
calls, none of this would have been necessary?
And those two lines of business were, and it depends on what—
you know you can believe or not—you can argue I guess with the
state insurance regulators, they certainly were the swaps business
and they may have been the securities lending business.
And but for those two enterprises, none of this would have occurred? Is that not so?
Mr. MILLSTEIN. That is not so. So let me——
Mr. SILVERS. Are you seriously asserting that if you wipe those
two pieces of business off the books, that AIG was nonetheless insolvent?
Mr. MILLSTEIN. Let me——
Mr. SILVERS. And are you accusing the New York State Insurance Commissioner of lying to this panel?
Mr. MILLSTEIN. Can I answer the question? I’m trying to be——
Mr. SILVERS. I’m just astounded at the lengths you will go to to
defend something that may, in fact, be defensible in a perfectly
straightforward way.
Mr. MILLSTEIN. No, I actually have sat through the entire hearing today.
Mr. SILVERS. I know.
Mr. MILLSTEIN. I’ve heard——
Mr. SILVERS. I’m impressed.
Mr. MILLSTEIN. And I’ve heard the testimony of all the expert
witnesses and fact witnesses before you. And I’ve spent a year now
with this company’s balance sheet and understanding its liability
structure. And I want to give you the benefit of my learning.
All of the contracts at AIGFP are guaranteed by the parent. The
parent has a $100 billion dollar balance sheet of its own. On September 8th of 2008, with $15 billion dollars of commercial paper,
we all know what happened to Lehman Brothers, to the commercial paper markets after Lehman Brothers filed and defaulted on
$5 billion dollars of commercial paper.
Fifteen billion dollars of commercial paper at the parent company. Eighty billion dollars of repo. Again, the repo markets went

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into seizure after the Lehman Brothers filing. And a much smaller
amount of repo. Two trillion dollars of notional derivatives, $400
billion of credit derivatives, concentrated very much in the real estate part of the market.
Had AIGFP defaulted on the collateral posting requirements that
it had on September 16, every counterparty, 44,000 trades could
have terminated their trades, declared cross default——
Mr. SILVERS. You know Mr. Millstein, you’ve—you’re not paying
attention to what I was asking you.
Mr. MILLSTEIN. I’m sorry.
Mr. SILVERS. And you’ve actually agreed with me.
Mr. MILLSTEIN. Oh.
Mr. SILVERS. What you’ve said is, is that—you said that all kinds
of terrible things would have happened had they defaulted on the
collateral posting obligations. But it was, but it’s the collateral
posting obligations that were the triggering issue, right?
Mr. MILLSTEIN. The collateral posting obligations were actually
triggered by the downgrade. The downgrade——
Mr. SILVERS. Yes, I know that. But that’s where the cash need
was that week.
Mr. MILLSTEIN. I’m sorry.
Mr. SILVERS. All the witnesses, all day long have said this.
Mr. MILLSTEIN. And the——
Mr. SILVERS. You’re not disputing that.
Mr. MILLSTEIN. And the securities lending part——
Mr. SILVERS. Right, exactly.
Mr. MILLSTEIN. They refused to roll over——
Mr. SILVERS. Okay, so we all agree.
Mr. MILLSTEIN. Okay.
Mr. SILVERS. Let me move to the present. As my colleagues have
expressed, there are these estimates from the government accounting bodies that $30 billion or $50 billion dollar losses is likely.
It appears from your testimony, that what that really means is
that they believe that the preferred Series E is worthless. Or in the
better case scenario, the $30 billion dollar loss, they believe that
it is worth 60, no 40 percent, of the face.
Mr. MILLSTEIN. Right.
Mr. SILVERS. Am I understanding their point of view correctly?
I know it’s a little unfair to ask you what they think. But is that
essentially what that means?
Mr. MILLSTEIN. Yeah, I mean there’s $50 billion outstanding, if
they think it’s only worth $30, there’s going to be a $20 billion dollar loss.
Mr. SILVERS. And we’re not—explain to me why you think they
are wrong, because clearly you do.
Mr. MILLSTEIN. Well no, I don’t think any of us can predict the
future.
Mr. SILVERS. Okay.
Mr. MILLSTEIN. I think that the Government Accountability Office and the OMB have to, under the regulations they’re subject to,
they have to make estimates of this for purposes of budgetary accounting.
Mr. SILVERS. Yes.

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Mr. MILLSTEIN. And I suspect they’re being conservative in their
view. You know, I’m working to get the taxpayer’s money back.
Mr. SILVERS. Right.
Mr. MILLSTEIN. I think we have a—or the company—has a restructuring plan that they’ve worked on with us that is going to
take time to implement. But it should—and we’ve spent a lot of
time on it, if they can implement it—should leave them as an investment grade company and if it can perform, if the two core businesses can perform the way that Mr. Benmosche suggested they
can, the NEF should do very well.
Mr. SILVERS. My time is up. Thank you.
Chair WARREN. Professor Troske.
Dr. TROSKE. Maybe we’ll continue on a related line. And you
were here for Mr. Gallant’s testimony as well and his estimate of
what the stock price should be. And can you sort of respond to that
a little.
And apparently you disagree with him as well. I don’t know
whether you’ve had a chance to look at his estimate. And there are
widely different estimates out there. And I recognize that people
are making—I understand how we come up with different estimates that we’re making different assumptions about the outcome.
Mr. MILLSTEIN. Yeah I’ve seen his work and you know, an analyst report such as that is built on a number of assumptions.
And——
Dr. TROSKE. Can you tell me which ones you would quibble with
specifically?
Mr. MILLSTEIN. In part I’m constrained not to quibble with any
particular assumption because I actually know more than he does.
I have much more material non-public information and it is a publicly traded stock and it would be inappropriate for me to do so.
Dr. TROSKE. Okay.
Mr. MILLSTEIN. I mean I’m not—I’m not trying to——
Dr. TROSKE. No, I respect that. Can you give us some broad indication that you’re comfortable with where you think that there are
differences that you might have.
Mr. MILLSTEIN. From my point of view of representing the Series
E and F, I take some comfort from his conclusion that the stock
actually has positive value because it means the interests I’m trying to recover are going to be paid in full.
Dr. TROSKE. Okay.
Mr. MILLSTEIN. And it also means that the Series C stock has
real value. And that’s pure profit to the tax payers.
Dr. TROSKE. So I guess you—I believe you answered Chair Warren’s question about when you thought the AIG will no longer need
government support. Was that what your estimate was in 2011? Or
I guess that’s where you said it was going to cross the line.
Mr. MILLSTEIN. Yeah, I think the de-leveraging that is a predicate to its being able to garner a stand alone investment grade rating, is dependent upon these major asset sales closing and our
monetizing the value of the stock that we’re taking back on those
deals.
And I see that occurring you know, sometime between year end
this year and year end next year when we’ve fully monetized those
interests.

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Dr. TROSKE. Okay.
Mr. MILLSTEIN. And therefore, you know if its got its leverage
profile, that is its debt down and its coverage to a point where it
looks like an investment grade company. Then I think we can
begin you know, assuming the other elements of the restructuring
plan that I outlined.
Which, as I said, independent access to capital, that the parent
company starts tapping the credit and capital markets again independent of the government. You know I think that’s when we can
start thinking about exiting the Series E and F.
Dr. TROSKE. Mr. Gallant also said that he thought the share
price, the current share price reflected the trader’s beliefs that the
government was going to walk away leaving—you know, giving a
gift, another gift to AIG.
Mr. MILLSTEIN. I think you can be certain that that is not going
to occur.
Dr. TROSKE. Okay. Let me change gears just a little.
You are an expert in restructuring. If you’re—and you were not
in the room at the time, as you made clear. Had you been, would
you have done anything different?
Mr. MILLSTEIN. Yeah, Mr. Bienenstock and I go a long way back
together. We’ve been on opposite sides of the table, we’ve been on
the same side of the table on numerous occasions.
I think that his confidence in the ability to actually have a discount negotiation with 16 counterparties is misplaced. In part because I think he’s simplified some of the assumptions on which his
analysis relies.
During the period from September to November, when he assumes we had that three months in the Federal Reserve and the
government to conduct a negotiation, collateral was required to be
posted almost every other day.
So the failure, while it—well he’s right, having put the $85 billion dollar loan in place, bankruptcy was remote, but default was
not remote. Every day, those 16 counter-parties or every week
those 16 counter-parties were making demands for collateral.
So in order to have the dissident account negotiation, the company would have had to be prepared to say, I’m not paying. And
to take the risk that anyone of those 16 counterparties or anyone
who had cross-default rights, the other 44,000 claimants, or anyone
at the parent who had cross-default rights, would not exercise their
rights to cross-default.
So while we could—you could have gathered the 16 major
counterparties in a room and had a negotiation. I can tell you at
the time, I was actually concluding a very—the very similar negotiation to that which was urged upon AIG, after nine months of negotiating with that very same group over the extent of their discounts and how it would be done in another entirely different situation.
But most importantly for AIG, the company would have had to
be prepared to take the risk of nonpayment, and have that nonpayment put at risk every other debt instrument that had a crossdefault at the parent level and at FP.
And if I may, I know where you’re going. If I may, that would
have made that company completely unstable. Any creditor with

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the right to declare a cross-default could have brought the house
of cards down.
Chair WARREN. So if I can just follow-up on that. Is that—you
were talking about you were negotiating the same thing. Were you
negotiating something like that with a government back stop behind it? Where the government said, I will make sure that between
us, we get you paid so long as you don’t cross-default and bring this
company down?
Mr. MILLSTEIN. No I——
Chair WARREN. Doesn’t that change the negotiating dynamic
somewhat? A carrot the size of Manhattan——
Mr. MILLSTEIN. Yeah.
Chair WARREN [continuing]. And a stick the size of——
Mr. MILLSTEIN. Right.
Chair WARREN [continuing]. The global economy.
Mr. MILLSTEIN. If—I mean I’m not sure I’m comfortable with, as
a citizen, with the Federal Reserve using that power to pick and
choose winners.
Chair WARREN. I’m sorry, were you uncomfortable with Long
Term Capital Management?
Mr. MILLSTEIN. The government didn’t put any money up in that
situation.
Chair WARREN. The government had nothing to do with what
happened in Long Term Capital Management?
Mr. MILLSTEIN. No, no. I think you heard——
Chair WARREN. I think we heard, they were in the room——
Mr. MILLSTEIN. We were both——
Chair WARREN [continuing]. And said nobody leaves the room
until there’s a deal done here.
Mr. MILLSTEIN. I know it’s tempting to believe this, that the government could have made this possible and extracted discounts.
But just assume with me for the moment that among the creditors
who had cross-default rights with someone not within the territorial limits of the United States, who held a material claim and
didn’t care about the government of the United States or its policies wanted just to perfect its rights to payment.
Chair WARREN. And how exactly—you know this is—you weren’t
there—I wasn’t there. This is a crazy conversation to have. But
how exactly was that person going to enforce those rights? Either
they had collateral, in which case they hang on to them or they’ve
got to go to court. And I think you and I both have an idea of how
long that takes. I just——
Mr. MILLSTEIN. I understand that. I understand that. But this is
a huge balance sheet with numerous creditors on it.
Chair WARREN. This is what bankruptcy lawyers do for a living.
Mr. MILLSTEIN. I understand that. And I did this for a living.
And I can tell you that I would have been very nervous——
Chair WARREN. Well who wouldn’t have been nervous?
Mr. MILLSTEIN [continuing]. About creating—about threatening
default or even defaulting on this without being prepared to put
this company into bankruptcy. Because you would be putting holders of claims of $100 billion of debt and of $2 trillion of notional
derivatives at the table on the first default.

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Chair WARREN. So let me see, this may be an unartful pivot. But
from that very point I want to go to another one that you made.
And that’s the question, it’s ironic that AIG is in the insurance
business because the American taxpayer ended up in the insurance
business here. They ended up insuring, in effect, that AIG’s creditors were going to get paid 100 cents on the dollar.
And so I’m wondering, what was the value of that insurance?
What’s the value of the guarantee that we won’t let your company
fail?
Mr. MILLSTEIN. Yeah.
Chair WARREN. You described potentially here an $18 billion
profit. Except it treats that insurance policy that came from the
American taxpayers as worth nothing.
Mr. MILLSTEIN. No, I think we’re coming at this from two different frames of reference. And I think again, just having spent
time with the Federal Reserve and understanding what they
thought they were doing at the time, in 2008.
And I don’t think they thought they were underwriting creditor
recoveries at AIG. They thought they were preventing a meltdown
of the financial system. And a consequence of that was that everybody at AIG had to get paid.
Because just imagine that the government had tried to extract
concessions from major counterparties, other systemically significant firms who did business with AIG. What would the risk have
been then? What would be the inference that other creditors of
those institutions would draw——
Chair WARREN. I’m sorry Mr. Millstein, we’ve been around this
before. But the question I started with is, what is the value of the
guarantee that the American taxpayer put into this? You describe
the profit here as $18 billion.
Mr. MILLSTEIN. No, I think——
Chair WARREN. Potentially $18 billion. And I just want to put it
against—you treat the guarantee from the American taxpayers as
if it costs nothing.
Mr. MILLSTEIN. No, I think the benefit to the American taxpayers is that the financial crisis we all have lived through, which
has been—had horrible effects on the economy wasn’t worse.
And if it turns out that the cost of this operation with AIG is—
that there is some cost to it in the billions of dollars, I hope it won’t
be, that was money well spent in the sense of avoiding what could
have been a much, much worse crisis.
Chair WARREN. I just have one small question to finish with this.
And that is, you can’t tell us why Mr. Gallant is wrong. And I understand the reason for that. Others agree with Mr. Gallant, others
obviously don’t. The market is trading somewhere else.
But I’d just like your advice for what you would offer to an oversight panel. Are we just supposed to take your word for it? That
it’s all going to work out fine? How do we evaluate these very differing points of view if you can’t give us anything more specific?
Mr. MILLSTEIN. The question I think you need to ask yourself
today is, as a result of the government’s actions is the company
today stable? The answer is yes. Is it improving? Yes. Is it executing against the restructuring plan? Yes. Is it moving to a posi-

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tion where it can give up on its government support and stand
alone? Yes. Are there risks? Certainly.
A company of this size and scope can’t help but have risks to its
outcomes and financial performance. But in terms of you know,
where it was and where it’s going, it’s making progress. That’s all
that can be told.
Chair WARREN. So when people ask us whether or not the American taxpayer’s going to get repaid, the answer is, we don’t know
and we don’t have anything to look at.
Mr. MILLSTEIN. No I think I did answer it. I think you can say
with confidence, as an oversight panel, that the Federal Reserve is
going to be paid in full. You can say that the——
Chair WARREN. But——
Mr. MILLSTEIN. Wait. You can say that—it was a comma, not a
period. You can say that an analyst, a well respected analyst, came
in to your hearing and said that the—basically the E and F is
going to be paid in full and that the government Series C is worth
something.
Chair WARREN. But there will be losses——
Mr. MILLSTEIN. No.
Chair WARREN [continuing]. According to the——
Mr. MILLSTEIN. No, that’s not what this gentleman is telling you.
Chair WARREN. You think he thinks we’re going to get paid in
full.
Mr. MILLSTEIN. If he’s——
Chair WARREN. And that the CBO——
Mr. MILLSTEIN. If the stock is——
Chair WARREN [continuing]. Estimate is simply wrong.
Mr. MILLSTEIN. If he believes the stock has a positive value of
$5.00, that means that what I’m trying to recover is going to get
recovered.
Chair WARREN. Because we’re going to be paid in full. Okay,
thank you Mr. Millstein.
Mr. Silvers.
Mr. SILVERS. What——
Chair WARREN. No, Mark isn’t finished. Oh, I’m sorry, Mr.
McWatters.
Mr. MCWATTERS. So this means that AIG is solvent, in your
opinion? In the opinion of the Department of the Treasury?
Mr. MILLSTEIN. It’s a—you know solvent’s a legal term. It has a
positive net worth and it’s paying its debts as they come due.
Mr. MCWATTERS. Okay, fair enough. AIG to me appears like it
is still too big to fail. What are you doing, as the majority shareholder to lessen that risk?
Mr. MILLSTEIN. I think if the restructuring plan that we have
worked with the company on designing and implementing is a plan
that is downsizing this company relatively rapidly.
We’re selling off its international life insurance operations. FP
has—is not a shadow of its former self, but it’s about a third of its
former self. And those risks should be wound down substantially
by the end of the year.
The aircraft leasing business and consumer finance businesses
are now financing themselves, not drawing on the government to
finance them. And as you heard Mr. Benmosche say, the inter-com-

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pany loan that last year was necessary to finance ILFC, he hopes
to be able to raise money to refinance it this year.
So the core business of AIG, at the end of this restructuring plan,
will be Chartis and SunAmerica Financial, the largest property
casualty company in the world and a very strong annuity and life
insurance provider in the United States.
A much smaller, much simpler—and a company that he’s confident he can manage with the help of his Board. And that is much
smaller than the company that the Fed confronted on September
of 2008.
Mr. MCWATTERS. So let’s say a year from now, a year-and-a-half
from now, after this had been implemented, if AIG was to fail
again for whatever reason, then a filing under Chapter 11 followed
by the insurance regulators doing whatever insurance regulators
do.
In other words, would working the resolution of AIG in its bankruptcy—and its insurance subsidiaries through the normal protocol
seem to work? In other words, there’s nothing out there that would
start triggering the dominoes that take down the other too big to
fail institutions?
Mr. MILLSTEIN. Yeah, I mean if that plan that I just outlined has
been implemented and the environment stays as relatively friendly
as it is today, I think that you know, it’s not up to me to make a
systemic risk determination but it seems to me this will be much
less of a risk to the system than it was in September of 2008.
Mr. MCWATTERS. What are the consequences on the competitors
of AIG’s insurance business who have received perhaps a subsidy,
or at least AIG subsidiaries who have received a subsidy from the
U.S. taxpayers. If you’re competing against AIG in the insurance
business, what’s the consequence?
Mr. MILLSTEIN. It’s a pretty competitive business. And in some
sense, I think AIG’s burdened by its government ownership in the
competition it has with other insurance companies. I think you
know, we’re not a natural holder, we’re a reluctant owner, but
we’re still a majority owner.
And you know when the government of the United States rolls
over you know, you might not like being underneath it. So I think
the answer is, that I think the sooner they can shed us the more
competitive they will be.
Mr. MCWATTERS. Okay, so there’s no indication to you that the
rates or the underwriting standards of an AIG——
Mr. MILLSTEIN. You know there was some——
Mr. MCWATTERS [continuing]. Are considered different——
Mr. MILLSTEIN. There was some chat about—you heard some
noise about that in the marketplace shortly after—you know in
early 2009. You haven’t heard that since.
Mr. MCWATTERS. Okay, I’m done.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. Mr. Millstein, AIG is the only participant in the
Treasury Department’s SSFI program, Systemically Significant
Failing Institutions program. What are the—this may seem silly
after this day’s worth of testimony, but it’s not. What are the characteristics of AIG that made it an SSFI?

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Mr. MILLSTEIN. You know, for a company you’re going to take a
majority ownership in and invest $132 billion to create a program
called failing institution, you know, it’s—it’s a little contrary to the
objective of getting your money back. I don’t know who named it
that. I myself don’t tend to use it a lot as the program description.
It’s the—you know, it’s the AIG program.
Mr. SILVERS. But the fact that it was the only participant in that
program, the only institution—you know, my colleagues have made
a big—Mr. McWatters was talking about how the Treasury left 20
percent of the common stockholders intact. That was actually pretty tough treatment in relation to what happened later with other
people.
And Treasury at the time articulated to this panel—and I know
this is a different administration, but, you know, there’s some continuity—articulated to this panel that AIG was different. Do you
disagree? Do you think AIG wasn’t different?
Mr. MILLSTEIN. I really—I can’t—I don’t know what was in their
minds in that regard. You mean in terms of taking their common
stock?
Mr. SILVERS. Well, no, just in general. What made—what made
AIG—why does AIG have a unique program all to itself?
Mr. MILLSTEIN. I don’t know. I mean, you know, we have—we—
the Federal Reserve was the lender of last resort here first.
Mr. SILVERS. And this comes back to my question this morning
about sort of what’s the—you know, when did things kind of get
set in stone? You seem to be sort of saying that you guys—the
Treasury—inherited a circumstance created by the Fed.
Mr. MILLSTEIN. Well, I think the sequence—actually in my written testimony I lay this out.
Mr. SILVERS. Yes.
Mr. MILLSTEIN. And—and if, you know, in September—and
again, this is sort of an advertisement for a regulatory reform resolution regime because in September of 2008 the government really
didn’t have the tools to resolve an institution of this size. The Federal Reserve could make a loan. But you really didn’t have the
tools to put it to bed quietly.
Mr. SILVERS. Now, let me—I mean—you know, I think it’s critical—the fact that there’s not a—the fact that you can’t give a clear
answer to this—to the question of—and I understand why. It’s not
a criticism of you necessarily. But the fact that there’s not a clear
answer that can be articulated across administrations to why it
was that AIG got unique treatment is a problem, I think. And I
just leave that as an observation.
I wanted to shift to something you said earlier in response to one
of my colleagues’ questions. You said that you had to think about
the impact on other systemically significant firms during the period, you know, in September 2008. What firms are you talking
about?
Mr. MILLSTEIN. No, no, I was—I did say that, but I said it in the
context of Chair Warren’s questioning with regard to, you know, we
insured all of AIG’s creditors through this bailout. And again, what
I was trying to convey there is that I don’t think that was a consequence of what we did. I don’t think that was the intent of policy.

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Policy intent was to draw a line and try to prevent a further collapse of the system. And they drew the line at AIG. And the next
point I was going to try to make was that if, as some have urged,
the government rather in November or some time else along the
way, should have tried to extract concessions from AIG’s creditors,
having intervened in AIG, what would that have communicated to
the broad market about—about the government’s role with regard
to other firms that—you know, the other 20 large financial institutions, which by then it had made investments in? Would it have
promoted financial stability to think—for the markets to think that
the government was going to turn around for all of the large financial institutions in which it then owned preferred stock and demand creditor concessions?
Would that have encouraged financial intermediation or discouraged financial intermediation? Would it promote stability or promote instability? I submit that if that were official government policy that we were going to use our ownership stakes in these large
institutions to demand concessions from their creditors, I think you
would have had risk running away from those companies—the contagion associated with that government policy would have been
enormous.
Mr. SILVERS. No, I’m sorry. I think my——
Mr. MILLSTEIN. You would have discouraged people from doing
business with our large financial institutions.
Chair WARREN. But the point is about the debt that existed prior
to the government putting its own money on the table. This is like
post-petition financing. The haircut is for those who were dealing
with the company so that you get some market discipline, so you
keep some market discipline.
And the government says we’re going to provide the backstop
going forward. But we’re not paying off the old people who understood the risks they were taking, at least not paying them off 100
cents on the dollar.
Mr. MILLSTEIN. But, Chair Warren, you know and I know the
staff knows that these large financial institutions don’t have near
long-term debt. Their debt is coming in and out everyday. So once
you communicate to the financial markets that these large institutions are going to be—have required haircuts, the people who are
lending money on a short-term basis to them withdraw their credit.
Chair WARREN. No.
Mr. MILLSTEIN. They withdraw their credit.
Chair WARREN. Not from AIG. What you’re now talking about
are all the other participants in the financial market.
Mr. MILLSTEIN. No, AIG—that’s——
Chair WARREN. Once the government says I am putting money
on the table and the money will be available to backstop the creditors, there’s been no indication the government has ever backed off
from that. And indeed, we have heard repeatedly in every meeting
we’ve had with the Fed that they could not back off.
Mr. MILLSTEIN. No.
Chair WARREN. That’s why the decisions made in September had
to be followed through in November in the way that they did.

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Mr. MILLSTEIN. But, if I may, what you have been urging or at
least inquiring about is whether or not they should have done
something different.
Chair WARREN. Right. Yes.
Mr. MILLSTEIN. And what I’m suggesting to you——
Chair WARREN. That—that is——
Mr. MILLSTEIN. Had they done that, their short-term creditors
would have run on them before you could have asked them may I
have a discount.
Chair WARREN. I think we will simply have to agree to see the
world differently on that. I apologize.
Professor Troske.
Dr. TROSKE. So as a professional economist, I don’t deal in individual companies. I sort of look broader at the economy.
But I think when I hear the comments that my colleagues on the
Panel are making, what I think about is the moral hazard problem
going forward. The fact that when we make credit—when the government consistently makes creditors whole—creditors play an important regulatory role in a market economy in that they regulate
the performance of the people that they’re lending money to. If the
creditors don’t believe that that’s important because the government’s going to come in and bail them out, they no longer play that
regulatory role.
And obviously then we have to create a government structure to
regulate, which is incredibly challenging. And it’s much cheaper for
the taxpayers if creditors actually do the regulation for them.
And I would argue much more efficient. Can you sort of—I mean,
so you’ve talked about this instance. Can you maybe expand a little
on the moral hazard that’s introduced by what we’ve done? Because
I’m not sure I would agree with your statement that even if we get
paid off and make a profit, we’re better off once you consider the
dynamic implications.
Mr. MILLSTEIN. I think if we fail to follow this episode in American economic history with strong regulatory reform, then we will
have created—we will have compounded the problems that existed
in early September of 2008 before AIG was bailed out. The system
that allowed an AIG to run up $2 trillion of risk without really any
capital behind it, that allowed it to lever itself up the way it had
without any effective holding company regulator supervising it and
demanding that it have both capital and liquidity to support the
risks it was underwriting—that system, you could argue, created
the moral hazard that certainly has been compounded by what occurred. So we need to have a regulatory reform package to counter
what has occurred and to make sure this doesn’t happen again.
Dr. TROSKE. You know, I think I would disagree with you. I
think that if the government had consistently allowed creditors to
fail in Long Term Capital Management, in—you know, back over
the last 30 years, then we would have regulators. They would be
called creditors.
And this problem wouldn’t exist in the first place because the
creditors to AIG would have taken a much more active role in ensuring the company didn’t get into the problems in the first place.
And the solution you’re proposing is for the government to go out
and hire creditors to do the job——

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Mr. MILLSTEIN. No, not at all.
Dr. TROSKE. Excuse me—the government to go out and hire regulators to do the job that creditors should have been doing is going
to produce a much more inferior solution to the one we would have
if we actually allowed the market to function in an efficient fashion.
Mr. MILLSTEIN. No, I actually agree with what you’ve said.
Dr. TROSKE. Okay.
Mr. MILLSTEIN. But when firms of this size fail, they have spillover effects that are enormous. And so, when I say strong regulatory reform, I mean a resolution regime that can contain the
spillover effects of a failure of the size of this firm.
Dr. TROSKE. And that offers me a good segue into my next question, which is, again, a fairly general question that I want to ask.
I have heard the term systemic used more often since I’ve been appointed to this panel than I had, you know, in the last—in my entire previous life. Yet I have yet to see an operational definition
that would allow me to know what a systemic firm looks like and
what one doesn’t look like.
And if you seem to be arguing that we need a regulatory regime
that regulates systemic firms that offer a systemic risk—to do that,
I think we need a definition. And I would love for someone to give
me one. And you’re sitting here, so I’m asking you. Sorry about
that.
Mr. MILLSTEIN. And I would love to take the bait and join issue
with you on that. But I think we don’t have the time.
Dr. TROSKE. Okay.
Mr. MILLSTEIN. I mean, I think it’s important. I agree with you.
It’s important. And if the regulatory reform bill passes, I think
you’ll see one emerge from the new systemic risk regulator that
is——
Dr. TROSKE. So you think we’re going to come up with a definition? Because, I mean, I would be happy if we did in which, you
know, the government basically said these are the firms that we’re
going to backstop—and so, we know the moral hazard is here with
these firms—and everybody else we’re not. And we’ve got this dynamic definition. I guess I’m less confident than you are that that’s
going to arise in a——
Mr. MILLSTEIN. Well, I mean, I think the premise, though, is
wrong, that—some people worry about that the systemic—the systemic designation means that no, we’re not going to backstop you,
you’re in the resolution regime where, you know, you’re going to be
put to bed and you’re going to have, you know, living wills or whatever you want to call it, but severe regulatory oversight to prevent
us from having to do what we did with AIG again.
Dr. TROSKE. That’s all.
Chair WARREN. Thank you very much, Mr. Millstein. I appreciate
your being here today.
Mr. MILLSTEIN. Thank you all.
Chair WARREN. This hearing is concluded. We will hold the
record open for questions and additional documentation from our
various witnesses. Hearing adjourned.
[The Congressional Oversight Panel, at 3:45 p.m., was adjourned]

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[The following written statement of Keith M. Buckley, Group
Managing Director, Global Insurance, Fitch Ratings, was submitted
for the record:]

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