to the city today, you'll find a thriving, bustling commercial environment with bazaar and businesses and people earning a living. what you won't find, though, is much investment for there's been little investment since the 1970's. .

. what's also needed is the governance must be improved. because at the moment the mayor's office is not much more than one man deep. and what's required is for the

capacity of those offices to be built up so that they can begin to bring the sort of order and administration to the city. now, we will do this using the resources that begin to come online with the reinforcements that aarrive because that provides us with the where with all to train additional policemen, to partner up with them, to improve the command and control and information sharing that the afghan forces in the city and importantly to impose a ring of security around the outskirts of the city, to keep any potential insurgent intimidation at bay. and by ramadan you'll see an improvement in the terms of the security in the city. what will be happening in parallel, though, is that we'll be turning our minds to the rural areas with a view to pushing a political strategy in

its proper sense which will see security being welled out into those areas which the military has freedom of action and that will be a matter of four to six months of work from now onwards, i sense. but what you'll find also that is interesting about this is that we'll define success here by the extent to which we roll out with the provincial governor of the helm credible, transparent, inclusive and representative governance. it's a problem that is political, it's involving inpunity and the culture of inpunity that has grown up over the last eight years and the stabilization of reconstruction projects that went to the heart of removing the causes of the insurgency. now, how do we get to that point? it's about connecting the population to the people. to the government. and that requires building representative governance from the bottom up.

and in the city, my sense is that the 10 or 12 subdistricts will over the next six weeks or so begin to develop these community councils with district leaders who will be able to connect to the mayor and the plan. now building structures from the bottom up, one will compete with the parallel government structures that have grown up as part of this cultural inpunity over the last eight years or is and i know when i give you a chance to question me, you'll ask me about karzai. recognizing, of course, that he does fulfill a constitutional position as the chair of the provincial council whose proper sfucks -- function is to monitor and provide advice and support to the governor. clearly what is needed is for the governor's capacity to increase and to become connected with the population, while the

provincial council plays its proper part as a monetary process in support of the governor. that is currently what is under way and we will very much judge success by the extent to which that switches and met forically speaking, the queue outside the governor's office goes up and the queue outside the provincial council's office goes down. now, this is not going to be terribly exciting for you chaps in the press, to look into it. nor indeed do i sense you'll see a massive change overnight. but i hope that by the fall, the average citizen in kandahar will wake up one morning, shake himself down and he'll realize that he's got a better right of redress, he's got better security and importantly he feels connected to his government in a way that he wouldn't feel today. i hope that give us some context against which you can ask me some questions. over. >> general, can you tell us

whether you are on schedule to begin major operations in june and also you can comment on the story this morning involving the governor, that he was once fired from a job with an american security contractor? >> yes. taking your first question. the answer is that we are on schedule but of course this has been very much led by afghans and of course it's important that the afghan government and president karzai direct what is happening. so really it's them who are setting the schedule rather than us. we are in support and partnership with them. but as things stand at the moment, we are entirely on the line we expected to be on when we conceived this a month or two ago. turning to the governor, i read the article. the answer is that i don't know whether there's any truth until the article. suffice it to say that i work on a daily basis with governor wiessa and at the moment he's

asserting himself as the governor and he's constantly cutting on and i've got absolutely no evidence whether or not that article was true. over. >> general, general mcchrystal visited with your region a few days ago and was quoted as talking about the situation, the public perception of the situation being a bleeding ulcer. he talked about challenging the assumptions on that. what is your sense? is if a bleeding ulcer right now? can you overcome the perception in many quarters of the public that the strategy is not working? did you tell general mcchrystal any changes you'd like to see of the strategy such as more troops? >> yes. last thursday general mcchrystal did come down to have a look at what's going on in central hallucinate monday and he didn't

look at marja, he looked at lashkar gah and he looked at the central element and of course what he wanted to see was how all of central helmond was evolving and how things were or were not improving for the 600,000 people he that we're talking about. and he asked, as you'd expect a professional commander to ask, some difficult questions about whether we were going as quickly as we can. and the answer is that the process we went through of all those difficult questions we all concluded by the end of the day that we were doing what was needed in the right way, that the strategy was appropriate and that it would deliver results. but as i said in my opening remarks, we have to be patient and during the course of the summer, watching as the intimidation reduces and the population becomes more on side. the point, of course, though, is that this is all about perception. and counterinsurgency is about

an argument between the forces of the insurgencies and the policy of the government. what the population in central helmond is doing at the moment is forming a view as whether it's better off without the government and whether it believes thatity neighbors, which is what the taliban is, in political terms are also going come across to the side of the government. and that i think is the key point to this. is that it's a political movement, the taliban, and the something that you don't necessarily know. and of course like all political movements, it takes time for people to be convinced. now, what is going on in central helmond at the moment is people are being convinced. now, of course, when general mcchrystal referred to marja as a bleeding ulcer, he was talking about the perception of the outside world -- world and of course in the same way it's important that afghan perceptions go in the right direction, it's important that the outside world also has the right perception. and i think his feeling was that something from the outside world

would regard marja as being a bleeding ulcer. that's not the way he cease it in theater nor is that the way the afghans see it. very important, i think, that things are set properly in context. we have proper process review that has to be done regularly. over. >> follow-up. what if it doesn't work? >> i'm sorry, i didn't pick up your question. is it did you say, what happens if it doesn't work? >> right, sorry. what happens if it doesn't work? what is plan b? >> i think you have to ask general mcchrystal that question if you're talking about his strategy. i can tell you what will work and what won't work at my tactical level. clearly my plan as commander is about resolving the trials and tribulations of central helmond and kandaharries and i can tell you that given time, we have the

resources and the will miles an hour and the afghan partners to make that work. in terms of the overall strategy, at the kabul level, that's a question that i think properly ought to be addressed to general mcchrystal. over. >> general, -- [inaudible] you said intimidation in marja is still fairly high. what concerns do you have that kandahar -- [inaudible] morissettes, the level of intimidation will continue for a long time in kandahar and make your job more difficult? >> i think the point i made is within the urban environment in which some 500,000 people live, there is not the great deal of intimidation at the moment. not like there was in marja which was generally under the control of the taliban and indeed the narco barrens.

kandahar's not like that. it is under the authority of the government to one degree or another. the challenge is more complicated than that. it's about private security companies, it's about militias, it's about criminality. so the more of a problem of order and organization and administration and basic policing and security than it is about contested space. so my sense is that if you provide all of those then you're not going to have an intimidation problem at all. in the rural areas it's different, as i described earlier. small parts are very much more contested and indeed the insurgents have reasonable freedom of action and they are oppressing the population and we will have to go through the same process we are going through in marja and nad ali in order to get the population generally to believe that its government is

connected and committed to it. so it will require patience. over. >> general, tom morgan with national public radio. i want to focus what you said on karzai. you emphasized that he has a constitutional function. as you know, there have been serious allegations of corruption and that he has too much power in relation to his position in the provincial council. and i just want to focus -- is your strategy to somehow dilute his power and make sure the governor has more power and tribal elders? is that true in essence your strategy here? >> the a complex strategy and it hugely depends on the expression i've used a lot which goes with connecting the population with government. and what is happening at the moment is that governor wiessa is conducting a good deal of assurance with local residents

and the population and out in the rural areas to connect to them. what he's seeking to do is build representative governance from the bottom up, through his district governors, through the mayor in the city and through the district's -- subdistrict leaders in the city. and by engaging with the population he will draw strength from that relationship and that will give him authority that when it's matched to the additional capacity which will happen as the kabul level rolls out more civil servants and bureaucrats to work for him, so he will begin to be able to fill the space that at the moment is more filled by the provincial council and by ar sky and his elected cohorts on that provincial council. it's also my sense that in relation to karzai, he would tell you and he's either a candidate for an oscar or the most maligned man in

afghanistan, that he is trying to help his country, he's trying to help us and he's trying to help his people and he'll also tell you that as an avid chelsea soccer club watcher and supporter, he'd rather be watching soccer than he would be providing governance. now, whether you believe it or not, the key to this is, if you make it clear to him that it's the governor who's going to govern, so i think he would increasingly stand out of the way and allow the governor to do that governing. and that is the strategy that we're encouraging and the early indications are that he's creating the space for the governor to fill. over. >> what will karzai -- he has connections to the kandahar strike force and other militias and security groups. what will their role be in his upcoming operations? >> well, first of all, i've got no evidence that he's connected to any of the force elements that you talk about.

but while we're on the subject, private security companies and militias are a serious problem that wie need to deal with. and -- that we need to deal with. when i talk about cultural inpunity, this is something to our own creation, because our very efficient logistic contracting process, where we contract out everything to the civilian market, has created these private security companies. and of course that made a great deal more than our afghan security forces which in itself is counterproductive because it causes a temptation for the soldier in the e.m.p. to go across to a private security company because he might earn double in pay. one of the things we've got to do as part of what we do in kandahar and the rural areas is to manage the security companies and what needs to happen is, they need to become regulated and we are working hard in developing a strategy that will deal with this problem so that the private security companies have gone out of the city and over time goes away.

and that's an important plan in our overall approach and strategy. over. >> general, if i could ask you about the upcoming operation in kandahar. there's been much stress that this is going to be a military operation rather than a ballistic operation. how do you measure progress of this kind of operation as the months go on? >> well, of course that's always our challenge because we have to assess it for two reasons. one, we have to measure progress so that we know whether or not our strategy's going the right direction and we touch on the appropriate. and of course the other reason we have to measure progress is to demonstrate to the doubting thomas sitting in the room with you that we're going in the right direction. and that is where it becomes really challenging, because, as i try to set out in my opening remarks, it's very difficult for you guys and girls to visionize what life is like for the

average afghan and what the been like for the last 30 years. when i talk about freedom of movement and i talk about connecting to the government and i talk about the range of stock on the shelves of the bazaar becoming more fullsome and i talk about prices going down and i talk about the ability for to you take your poll granites from your -- poll gran ats from your or charge and -- orchard and send them to a marketplace other than in pakistan, those are things that are probably quite difficult for people to comprehend. those, of course, are the criteria against which we will judge success. because that is what pop lation-sent rick counterinsurgency is all about. we need to be clearer about setting the narrative about what life is like for an afghan so that you can comprehend how it is that some of these slightly about a -- bizarre metrics mean something to the outside world. over.

>> general, you can tell me what you're doing specifically to provide protection to some of the afghan leaders in kandahar area who are sticking their necks out and participating in some of this effort that you're talking about and connecting the population to them? how intimidated are -- have they been by some of the attacks that have occurred? and what do you think has slowed the progress in central helmond area, especially in marja specifically, that you can sort of learn a lesson from it and translate to some extent to kandahar? >> i think first of all i'll pick up your point about progress in central helmond and in marja. and the answer is that i think on our level we always predicted that it would take time and it take patience.

i think some of the people in the outside world who perhaps were looking for some sort of utopia overnight, i don't think any of us pragmatists on the ground ever thought that would be the case. so i don't detect that progress is going any slower than we expected. but your question about afghan human capacity and protecting it is a great question. because we're doing engineering work at the moment and you might be surprised that the three priorities i've set for engineering support, priority one is protecting afghan governance and human capacity. priority two is about building the security infrastructure and priority three is about our own infrastructure. and what we're doing to protect afghan governance is first of all some of the key players will have private security details and vehicles to drive around in. but we also assure that we create a combination which will be unobtrusive and properly

protected in which afghan civil servants and officials can reside. it's particularly important that we do this for judges and the whole rule of law community as well. we'll also be ensuring that we approve their freedom of movement where we can. we'll also be providing training for them in terms of security so that they'll set patterns and understand what's going on. but i think really importantly what we'll be doing and we're well supported by kabul in this, is encouraging the afghan civil service commission to try and come up with incentive schemes for people to work in the south. you'll know that we incentivize the a.m.p. and the a.m.a. to work in the south, they get money. the same needs to apply to afghan officials and civil servants. and i think that we will find more people will come and work in the south if we can get that security i described and incentivize them in terms of federal municipal ration as well. over. >> can you clarify one thing? general, --

[inaudible] you talked about the large presence around central helmond -- 160 days and that we're now at plus 102. do i have those numbers right? and you spoke about needing perhaps another three months until a lot of the population there felt comfortable with the local surea. are you predicting that there will be a larger isap force present in central helmond as a result of that lack of confidence? >> no. i'm not predicting that at all. we have seen numbers in central helmond that we forecasted we would require. when we planned the operation back in january. because of course what you do with these operations is to plan them for the finish back to the start. because what we've learned over the last eight years in afghanistan is it's critical to have the right four --

[inaudible] terms. the right entities in central helmond at the moment. what we're talking about here is about people's perceptions and about convincing them that the government is committed to them. and that takes time. and that is a case in point. there's a presence in thataly arrived there and it's taken, you know, the better part of a year for people to be completely convinced. it's taken three refreshes of the district community council, the shurah, before you got something that's generally representative of most of the community in thatally. and what will be -- that aly. and what will be instructive is to see what the first surea in marja is and how often it has to be refreshed as it goes forward in terms of delivering the connection to the population. and that's a bit i shall be

watching with interest and my sense is that we'll know pretty soon how well that's going. but it could be another 90 days before we got to show that's more representative and you might be looking even further down stream. it's frustrating, it takes time, but it's about convincing people and that's a political problem. over. >> with that i'm going to turn it over to you, general carter, for any closing remarks you'd like to make. >> no, that's kind. thank you very much for your questions anddfor your interest. i think you're now better informed and i'm sure you'll be watching this space with interest during the next few months. a very good morning to you. >> sure. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> we are waiting for the u.s.

house to gavel back in. they came in this morning at 10:00 eastern. they've been in recess subject to the call of the chair for about two hours or so. when they come back it is possible we'll see a number of votes on suspension bills. also some work on the bill that would expire that would extend expiring tax breaks and congress daily is reporting on that that democratic leaders might have to scale back a $192 billion package of tax breaks and payments to states, that, quote, the coverage i'm here -- hearing on the floor is make it smaller or shorter. so we may see some action on that when the house returnsle we'll have live coverage when they do return here on c-span. earlier today they did debate a bill that honors the 11 people that were killed in the explosion of the deep water oil rig on april 20. here's some of the comments made during that debate. i yield myself such time as i may consume.

the speaker pro tempore: the gentleman is recognized. mr. cao: thank you, mr. speaker. mr. speaker, i rise today in support of house resolution 1347. this resolution honors the workers who perished on e deepwater horizon fshore oil platform off the coast of louisiana and extends our sincerest condolences to those families. it also recognizes the valiant efforts of emergency response workers and volunteers at the disaster site. i commend my colleague and friend, congressman melancon, for bringing thismportant piece of legislation before the house. and i extend my appreciation to him and to the rest of my colleagues in the louisiana congressional delegation for working together to address this disaster. mr. speaker, i have come to the house floor a number of times since april 20 speaking of the ongoing impact of this tragedy

on the gulf coast. today, i want to focus on those lives who were lost thaday and those who continue to respond to the crisis. as i listened to my colleagues support this resolution, my heart is heavy. as with their family and friends, i mourn the loss of those who died aboard the platform. on that tragic day, the 11 men, jason, aaron, donald, steven, roy, carl, gordon,lair, dewie, shane and adam were on the rig doing what they do best. the demand of working the rig is great. it is physically demanding work and it takes loved ones away from their families for long stretches of time. our coastline is a working

coastline because we are blessed with abundant resources in the gu of mexico. from fishermen to those working the rig, each day you can find thousands on the water laboring to produce these resources and to contribute to the industry and economy of this nation. on april 20, the 11 men were woing to provide the energy that has driven this nation for centuries and that continues to be a force in the economy of my home state of louisia. this is dangerous work and it is our responsibility to ensure that safetyrecautions are taken and that procedures are strictly followed. the explosion is being investigated by congressional committees, and it is our responsibility to ensure the findings are swiftly addressed with new policies to strengthen safety procedures for those

working in dangerous conditions. you have my word this will be done. this nation has come together as one and this is especially the case for those along the coast. i wish to recognize the extraordinary work of the thousands of volunteers and the emergency personnel, from the red cross to the u.s. cot guard whose unhesitating response to the call of need thus represents the compassion and dedication of this great nation. to the families of the 11 who perished, i know there is nothing my colleagues or i can say will return your sons, husband, brothers home to you, but it is my hope that the gratitude we express on behalf of the citizens of this great nation will provide some comfort to you while you grieve your loss. in closi, mr. speaker, i ask my colleagues to support house

resotion 1347. thank you, and i reserve the balance of my time. the eaker pro tempore: the gentleman from louisiana reserves the balance of his time. the gentlelady from california. ms. speier: mr. speaker, i now yield to the gentleman from and great leader from louisiana, mr. melancon, as much time as he may consume. t speaker pro tempore: the gentleman from louisiana is recognized for as much time as he may consume. mr. melancon: thank you, mr. speaker. thank you, repsentative speier. i rise today with a heavyeart to remember t 11 men that died in the offshore rig, deepwater horizon. those men and thousands of them like tm, women included, travel to offshore rigs ever day to work hard and provide opportunities for us to make a living. as a crisis in the gulf of mexico continues to grow, we see shortlines, fisheries and other -- shorelines, fisheries and other economies threatened. this has the entire gulf coast and country watching to see how soon we can end this. setting aside the present crisis for a moment, i am proud to stand with members of is

congress to remember those men who represent a very human face to this tragedy. i'd also like to take a moment to recognize the families of those 11 people. those men were doing what so many other men and women do in louisiana every day. they were working to provide a better life for their families while braving difficult and sometimes dangerous conditions to pvide domestic energy needed to drive our nation and our economy. our thoughts are with these families, and i pray that their grief is not forgotten by the rest of us. and as we should also recognize, the courage, work of the emergency responders who fought the blaze and saved lives that night. the loss of those loving workers is a high cost to their families, and so i ask everyone to please remember the personal side to this tragedy as we move forward. please keep them in your thoughts and particulay keep them in your prayers. i thank you, mr. speaker, and i yield back. the speaker pro tempore: the

gentleman yields back the balance of his time. the gentlelady from california reserves thealance of her time. the gentleman from louisiana. mr. cao: thank you, mr. speaker. and i would like to yield to my distinguished colleague and friend from louisiana, mr. alexander, for two minutes. the speaker pro tempore: the gentleman from louisiana is recognized for two minutes. mr. alexander: i thank the gentleman for yielding. all those along the gulf coast there are communities, many communities, hundreds of miles from the edge of the water, communities that are filled with families that for generation after generation hae produced the workers that are required to produce gas and oil in the gulf region. some of those workers leave home for a period of seven days, 14 days, perhaps 21 days before coming home. sadly, some never return home. families can't be prepared for losing those loved ones. and for that our hearts and prayers go out.

and i yield back. the speaker pro tempore: the gentleman from louisiana yields back the balance of his time. the gentleman from louisiana reserves the balance of his time. the gentlelady from california. ms. speier: mr. speaker, i continue to reserve the balance of my time. the speaker pro tempore: the gentlelady from california reserves the balance of her time. the gentleman from louisiana. mr. cao: mr. speaker, i yield three minutes to my distinguished colleague from the state of louisiana, mr. scalise. the speaker pro tempore: the gentman from louisiana is recognized for three minutes. mr. scalise: thank you, mr. speaker. i thank my colleague from new orleans. this is a sad time for those of us from south louisiana. it's a sad time, especially as we look at what's happening every day as more oil gushes into our marchland, our valuable, fragile ecosystem. but if there's anything that eclipses the sadness that we're experiencing on the coast, it's the loss of those 11 lives, the

11 brave men who died on that hozon rig and the families that they left bind. so many of those young men left behind young children and wives who now have to cope with the loss an somehow find way -- find a way to move on. our prayers go out to those who lost their lives and those families who are continuing to experience the tragedy that we're all so sorry for experiencing othe lf coast. so it's a sad time for all of us on the gulf coast, but we want to give a special pause for those families who lost lives and the young children and spouses they leave behind. >> we expect a number of votes on suspension bills when the

house returns and also today in the house, possible work on a bill dealing with expiring tax provisions. we will have live coverage when the house gavels back in. in the meantime we're going to show you a portion of a hearing looking at the oversight of the tarp fund, the financial rescue fund. elizabeth warren at this hearing on the american international group said the company was, quote, a corporate frankenstein. we're going to show you some of that hearing starting with the opening statements by the federal reserve board of governors general council. >> thank you for the opportunity to discuss the authority and role of the federal reserve with regard to a.i.g. section 1303 of the federal reserve act empowers the board to authorize a federal reserve bank to extend credit to any individual partnership or corporation. section 1303 requires that first the board finds that unusual negligent circumstances exist,

that the loan be -- three, that the loan be secured to the satisfaction of the reserve bank, four, that the reserve bank obtain evidence that the barrower's unable to obtain adequate credit accommodations from other banking institutions, and, finally, that the institution be 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 nonbanking 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. each of the conditions established by section 1303 was met in the case of the loans extended by the federal reserve

to a.i.g. and the two 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 institutions, strained conditions in financial markets and the slowdown of broader economy. equity prices dropped shopperly, 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 ongoing energy prices were seen to likely weigh on economic growth for the foreseeable feature. 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 a.i.g. within the time needed to addressity critical funding needs. so on october 16, one day after the collapse of lehman, and during this period of tremendous economic instact and financial turmoil, the federal reserve in coordination with the treasury department made a secured loan to a.i.g. in order to avoid the potentially devastating and destabilizing effects on the economy and the financial system that would have attended the collapse of a.i.g. in the board's judgment and given the fragile economic conditions at the time, the fault imposed on this period would impose unacceptable risks to our economy as well as to the million of individuals and businesses that were counterparties to a.i.g. including individuals who were in insurance policy holders, state and local governments,

workers with 401-k plans, monday market mutual fund holders and commercial paper investors as well as banks and investment banks in the united states and worldwide. were the -- with the financial system teetering on the brink of collapse, the disorder of a.i.g. would have undoubtedly led to even greater financial chaos, further contractions in the flow of credit, businesses and consumers, and a tar deeper economic slump than the very severe one we are experiencing today. as detailed in my written testimony, the other conditions required by section 1303 were also met for the revolving line of credit and for the loans to the two main facilities. in particular, the credits were each fully secured at the time they were made. importantly, the loans are being repaid as a.i.g. 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 two has been reduced from $19.5 billion to $14.5 billion. and the outstanding balance on the loan to maiden lane three 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 a.i.g. while the conditions for use of section 1303 were met, a better option in our view than 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 nonbank financial firms. >> i'm going to have to stop you there. but your entire statement will be made part of the record. >> thank you. >> 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 people inen. all of us who serve on this panel do so in addition to our other responsibilities and for mr. neeman, those

responsibilities include serving as the superintendent of banks for the state of new york. he felt that it would not be appropriate for him to be involved in our oversight report on a.i.g. because this report will include an examination of a.i.g.'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. my apologies for not mentioning that at the end of our last statement. we miss mr. neeman and we'll be glad when he can rejoin us on subsequent reports. mr. baxter, could i ask to you give your opening remarks? >> 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 the american and national group or a.i.g., since september of 2008 the federal reserve has provided liquidity

assistance to a.i.g. 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 a.i.g.'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 a.i.g. and to prevent a loss to the taxpayer. today we are positioned to begin thinking of the day, hopely not too far from now, when we will be repaid principle in interest and have no further role as a creditor of a.i.g. 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 sophomore 16, 2008 -- september 16, 2008 in my nearly 30 years

as a federal reserve lawyer, i have been privileged to worken a number of different crises. including the iranian hostage crisis, the thrift crisis, the so-called 87 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 11, 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 their decisions concerning a.i.g. you cannot understand the decision without an appreciation of the crisis context. a.i.g. came before federal reserve policymakers in the midst of the greatest financial crisis we have experienced in -- since the great depression. in testimony on january 27, 2010, before the house committee on government oversight,

secretary geithner described the policy choice as, quote, whether to rescue a.i.g. by putting billions of taxpayer dollars at risk or to let a.i.g. fail and accept potentially catastrophic damage to the economy, period, unquote. on the morning of september 16, 2008, there were no other realistic options. congress had provided the federal reserve with the ability to lend to a nonbank, in unusual circumstances, providing the punitive 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 a.i.g. 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, quote, action was required.

the world was watching and the government did not have the luxury of time, period, unquote. he spoke met forically of the federal reserve as a kind of fire station and the decision was to put out the fire before it spread. on september 16, 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 fireball exploded. when a.i.g. came for 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 principle reason why the federal reserve needed to take action with a.i.g. and 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 a.i.g. unfolded more slowly and apart from a broad market crisis, policymakers might have pursued additional information and solutions. they could have asked for more granule information about a.i.g. creditors. they could have dispatched the federal reserve's lawyers to explore a prepackaged bankruptcy. or perhaps even asked to us begin contacting the largest creditors, to see if they would consider some kind of voluntary restructuring of a.i.g. debt. but these would have consumed considerable time and given the actual situation on september 16, would have meant the immediate default of a.i.g. and certain bankruptcy with all of its systemic consequences. >> i'm going to have to stop you there. your entire remarks will be part of the record.

>> thank you. >> thank you. >> good morning, chair warren, thank you for inviting me to appear here today. as the expect tifpk vice president of the federal reserve bank of new york responsible for the management of the federal reserve's work to stabilize a.i.g., 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 16, 2008, policymakers made the courageous choice to provide a.i.g. with liquidity that enabled its survival. as a result of that decision and the actions taken by the federal reserve and treasury, we avoid the catastrophic consequences of a $1 trillion conglomerate bankruptcy. as the congressional budget office noted in its may, twep, report, quote, 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 morr severe. unquote. going forward from september 16,

as we learned more about a.i.g., and as congress provided the treasury and the federal reserve with additional tools to stabilize the company through the passage -- [inaudible] we took steps to restructure a.i.g.'s debt so to stop the increasing liquidity drain on the company. we also spent terms of our resolving facility and discussed the maiden lane two and three transactions. we were motivated by two goals. financial stability and protecting the american taxpayers. both of those goals required a.i.g. to remain a growing concern and a.i.g. could not remain a growing concern unless it had credit rating. some questioned our focus on a.i.g.'s credit rating but that focus is easy to explain when you consider the nature of a.i.g.'s business. financial firms like a.i.g. 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 of a poorly rated company. a municipality will not trust its teachers' retirement moneys to a company with questionable credit and a homeowner will not purchase a property ownership policy with a company unless the home owner 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 a.i.g.'s credit rating so that it could retain its customers and the value of its businesses. two of those businesses, a.i. andal could he, are currently under contract for sale of $51 billion. the cash proceeds of that sale and the cash a.i.g. generates as it mod fice the noncash proceeds that have sale will go directly to paying down a.i.g.'s loans from the federal reserve. those proceeds would not be available if we had not ensured that a.i. and alco remained growing concerns. we fully expect to recover our principle and interest on the loans we made 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 a.i.g. under the revolving credit facility and that the losses on the facility will be negligentble because the federal reserve is collateralized. the c.b.o. estimates that the fed will bain $2 billion each in the investments of maiden lane two and three l.l.c.'s and notes that it expects positive returns the federal reserve bought at fair value. to date the maiden lane two and three l.l.c.'s have repaid approximately $13.1 billion of the loans made to them by the federal reserve. what we set out to do on september 16, 2008, stabilize a.i.g. 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. >> thank you. mr. fin. >> chair warren, members of the congressional oversight panel, thank you for the opportunity to testify today about the o.t.s. supervision of a.i.g.

i am michael fin, regional director for the northeast region. from january, 2004, to august, 2004, i served as o.t.s. assistant managing director in washington, d.c., for the newly formed union called complex and international organizations. this unit had responsibility for developing programs to coordinate the supervision of the internationally active o.t.s. regulated holding companies, including a.i.g., that were subject to the european union's conglomerate directive. after my departure from washington in august of 2004, the o.t.s. continued to manage and supervise a.i.g. from washington until july of 2008. when the responsibility was transferred to the o.t.s. northeast region where i reside today. my responsibility for a.i.g. supervision ended two month it's later on september, 2008, when the federal government made its ownership investment in a.i.g. although the o.t.s. no longer supervises the a.i.g. parent company, the agency continues to

supervise a.i.g.'s thrift subsidiary which operates with $1.1 billion in assets today. my testimony includes details about the legislative history of o.t.s. supervision of savings and holding companies, o.t.s. supervision of a.i.g. specifically and o.t.s.'s recommendations for holding company regulation in the future. in the time i have this morning i'd like to touch on a few points about a.i.g. and its collapse. first, the legal framework for o.t.s. 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 o.t.s. never had that authority. to measure o.t.s.'s performance as a systemic risk regulator would be to apply a yard stick that never existed. the supervision -- that supervisery authority will not exist unless congress

establishes it. the o.t.s. strongly supports the proposals in congress to establish a systemic risk regulator. a.i.g. financial products as a second point was a subsidiary of a.i.g. that originated the credit default swaps that were part of a.i.g.'s problems, was operating long before o.t.s. had any responsibility for a.i.g. a.i.g. financial products began its operations in 1990. o.t.s. became the regulator of a.i.g. after the company applied for and received a federal savings bank charter in 1999. the savings bank opened for business in the year 2000. third point, credit default swaps were and continue to be today unregulated products that lack transparency. as you know, congress is considering proposals to rerequire regulation of such products and to improve transparency. the o.t.s. strongly supports federal regulation of derivatives and a greater transparency across this market.

a fourth point, a.i.g. financial products never had any business dealings with the o.t.s. regulated a.i.g. federal savings bank and had no relation beyond chairing the same corporate pairing. despite a.i.g.'s near failure, the o.t.s.-regulated savings bank today continues to operate as a well operated thrift. the last point i'd like to make today is that based on our experiences with a.i.g., the o.t.s. 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's prudent to align regulatory oversight with each holding company enterprises primary activities and ensure clear authority to supervise risk across the consolidated area. thank you again for having me here today and i'm happy to respond to questions. >> thank you, mr. fin. and the only nongovernment official on this panel. we appreciate you being here

because you have something important to say about that very same time period that we're focused on. your opening remarks, sir. >> 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 and from june 16 to september 16, 2008, i served as chief expecttive officer of american international group. in june, 2008, when the board asked me to replace martin sullivan as c.e.o., i was initially reluctant to do so. however the board ultimately persuade 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 a position to successfully lead a.i.g. in a difficult period. my first day as c.e.o. i publicly announced i would present my long-term strategic plan for a.i.g. in 90 days. this was an ambitious time frame for a strategic review of the company that in 2007 had $1 trillion in assets, $110 billion in resk knew and which employed

more than 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 a.i.g. team worked tirelessly and the plan came together. while we were formulating the plan i took immediate actions. the market declined further and it became apparent that if the decline continued and a.i.g. were again downgraded by the rating agencies a.i.g. could potentially face a liquidity problem. the week after i became c.e.o. i retained a preeminent financial services firm, black rock, to provide an outsiders view of a.i.g.'s financial products' expose tower to market-backed securities. they told me they would not review a.i.g.'s ratings until after i announced our strategic plans. which was then scheduled for september 25. even so, to be prudent we immediately put in place a number of additional measures to protect a.i.g. in the event of a liquidity problem. we worked through july and

august to strengthen a.i.g.'s balance sheet. we identified nonstrategic businesses, retained financial advisors and began selling those businesses to raise cash. to conserve cash we stopped discussions relating to a number of acquisitions. we developed an implemented an aggressive plan to further reduce expenses. we were negotiating a transaction with berkshir hathaway that would have protected billions of dollars of a.i.g.'s liquidity. we were working with j.p. morgan and other banks to pay additional credit lines. these were precautionary steps. the first week of september we believed a.i.g. could whether or not the difficulties in the financial markets. and we believed we'd be able to announce and implement the new strategic plan on september 25. in late july and again on september 9, i met with the president's federal reserve bank of new york to apprise him of the situation and discuss ways in which a.i.g. 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 8,

the counterparties with whom we had been negotiating became unwilling to complete those deals. in addition, the markets spiraled downward, with lehman and others increasing -- under increasing pressure, the rating agencies indicated they would no longer wait to review a.i.g.'s ratings until the investor meeting on september 25. a.i.g. was caught in a vicious circle. a potential for down grades and the market fears caused a.i.g. counterparties on its securities lending programs and other transactions, not just those related to the credit default swaps, to require a.i.g. to post additional collateral with a demands of return of cash or investments. further increasing the need for liquidity the we worked around the clock through the week of september 8 to take measures that would get a.i.g. the liquidity needed to make it through the crisis. we worked potential private investors and new lendsers, 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 9, 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, a.i.g. 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 a.i.g. bankruptcy would have massive negative effects on stability of the entire financial system. in terms of the offer were nonnegotiable. with the advice of counsel, the a.i.g. 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 c.e.o. though i would have liked to

continue to work for a.i.g. and its shareholders, i complied with this requirement two days later. .

was a week before it faced collapse? >> 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 a.i.g.'s problems began on about september 12. >> on about september 12. >> when lehman weekend began. >> do you know about a the aware noes of others such as the president of the federal reserve bank of new york or others? >> i know that president geithner was also concerned on september 12 because he had asked some of the staff to begin -- >> you don't know about prior to september 12? >> i'm not aware of any concern. >> you are not aware of any phone calls made? >> i'm aware mr. willenstead testified today and in his prior appearance there was a meeting in july which i was not present for and he also had contact with president geithner earlier in

the week. >> you never verified any of that. >> i did not. >> ok. so, mr. willenstead, said then you described binary choice, either bankruptcy and collapse as you describe it or 100% bailout. mr. willenstead said they were preparing papers for bankruptcy. when did you consult bankruptcy counsel to discuss alternatives for a.i.g.? either one of you. >> and i'm the one who should answer that question. if i can back up, because you 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. 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 a.i.g.'s liquidity problems. >> so a.i.g. at least from the point of view of the fed, the fed now knew there was a serious problem with a.i.g. but believed there was going to be a private bailout. was the fed a party to the negotiations? >> in the course of the discussions about lehman brothers, several of the senior officers of the so-called private sector conorganization yum -- consortium had said when a.i.g. had come up they were working on a solution to a.i.g.'s lech bidity problems. those who were in the room at the time and heard those, and i was one of those people, were mindful there was a solution being fashioned for a.i.g.'s liquidity problems. >> 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? >> we were not involved in the

negotiations. we were mindful they were going on. because there were conversations in our presence about those negotiations. >> your plan was the creditors, others, would take care of a.i.g. did you have a plan b in place in case that failed? >> 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 supervision that the private sector solution to a.i.g.'s liquidity problems was not only underway but there was confidence that it would come to pass. >> so i take it that means there was no plan b? >> well, some would say the federal reserve ak became the plan b. >> i got that part. >> you asked my, chair warren, i want to be responsive to your question, about when we involved bankruptcy counsel. bankruptcy counsel, and i'm speaking about davis polk, had been engaged by the private

sector conshore shuttle columbia along with morgan stanley to work on the terms of that private sector -- >> were they engaged at bankruptcy counsel? >> not as bankruptcy counsel but engaged -- >> engaged by creditors? is that right? lenders to a.i.g. >> by j.p. morgan chase. >> is the last thing they would have wanted would have been bankruptcy? >> i'm trying again to be responsive to your question. davis polk was working on the private sector solution. davis polk -- >> did you ask them for bankruptcy advice? >> 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 huber in. >> let me make sure i understand. there were creditors, about to be creditors of a.i.g. and soferse you know potential counter-- over as you know potential counterparties who were trying to negotiate an arrangement with a.i.g. and when that failed you used their lawyer in order to advise the federal reserve on what path to take forward? >> the way i would answer that is first there were multiple creditors, 100,000 employees, 106 million american policyholders who would be impacted if a.i.g. should file for bankruptcy. 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 a.i.g. to resolve its liquidity problems, avoid the

catastrophic systemic consequences and implications for literally hundreds of millions of americans, that was one choice, or the alternative was a.i.g. was going to file for bankruptcy. >> let me ask one more and then i will stop on this about bankruptcy. but mr. willenstead said okously a.i.g. was talking with attorneys about the possibility of bankruptcy. did you talk with the alternatives that a.i.g. was talking with about the advice they were receiving on bankruptcy? and as an alternative? >> we were talking to lawyers representing a. irnings g. -- a.i.g. we were also talking to the lawyers we had newly retained at davis polk to get our own advice. >> the answer is, yes you did. you talked with a.i.g.'s bankruptcy lawyers to seek their views on whether bankruptcy or negotiated arrangement -- >> i wouldn't limit it to bankruptcy. we were in open dialogue -- >> fair enough. on many -- bankruptcy was

certainly one of the things you discussed with a.i.g.'s lawyers. >> we understood that a.i.g.'s board had been assembled on september 16, and that board was going to consider the option as they appeared -- >> i'm sorry. that wasn't my question. my question was did you speak with a.i.g.'s lawyers about their advice about the possibility of bankruptcy or negotiated settlement? >> i personally spoke to lawyers about the board meeting that a.i.g. was going to have and the decisions taken at that board meeting. 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 including the prospect of a bankruptcy filing. >> thank you. mr. mcwaters. >> thank you. let me follow up on that a bit. mr. willenstead, when did you

first advise the president of the new york fed or someone else at the new york fed rarting the problems at a.i.g.? there's a book by andrew ross, "too big to fail" that says president geithner received an early warning. >> 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 a solution to the company's problems. they were basically to derisk the company. as i kind of dug into a lot of the financial issues related to doing that, the securities lending program actually concerned me. the securities lending program. if there were a failure of confidence in a.i.g. and a.i.g. 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 the short period of time for a very complex company like a.i.g. with the losses it was having to raise capital in the private markets. so on july 29 i went to see tim geithner and i had explained to him what i had been doing at a.i.g. 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 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 a.i.g.? we had a meaningful conversation. we talked a lot about the kind of issues and concerns. he indicated to me that he thought if there were a formal allowance by the fed to allow a.i.g. to go to the fed window, it would in fact exacerbate what i was trying to avoid, which would have been the respective run on the bank which is what the securities lending program effectively would have been if all 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 a.i.g.'s issues. >> i assume -- >> a portion of the congressional oversight panel. a hearing on the financial

assistance provided to a.i.g., the american international group, a portion of that had been from this morning. the event has resumed live. we are going to take you there now. live coverage on c-span of the congressional oversight panel. >> chair warren and members of the panel, i am confident that a.i.g. 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. >> thank you very much. we appreciate you being here today. do you anticipate a.i.g. will need more taxpayer money? >> right now we don't anticipate that. we are looking at where we are at. we are still dealing with minor cash flow issues. if you look at the success we had, keep in mind we were able to raise with some sales of assets, the secured, nonsecured market, 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 improvement. we were also able to raise in the market the securitized financing $3.5 million to support general finance. that's far. we continue to operate our company strongly, profitably. we are retaining people and business. we are showing new sales. all of the things you want with strong vibrant companies. we are beginning to see we get more access to financing. we would hope not. >> we all hope not. what we are trying to do is pin down a bit more. when mr. gallant says you are not 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, renegotiateation 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 want to make sure i'm getting the strategy right. >> we at this stage of the game, we have a credit line with the

federal reserve. and so we see that as going up and going down. so that you'll see based upon activities or cash flows we may come down a little bit. we may go back up again. we see that as a line of credit we are using we have available until 2013. we also will go through certain activities like we went to the treasury. in order to strengthen the insurance company. keep in mind that for a.i.g. our insurance companies are strong. we want to make them stronger. and that's important because our clients look to us for our promises and guarantees. so therefore when the state of pennsylvania says they are concerned about charters, the property casualty insurer, owning stock in the aircraft leezing company and they are 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 casualty company into the a.i.g. holding.

there's 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. >> you think that you both have the cash to meet your needs for ones coming due for payments coming due, and that the only time you'll be drawing down on government funds will be in order to strengthen the capital position of the individual insurance subsidiaries s. that right? >> that's correct. >> i want to make sure -- >> for example. we are planning once the markets set sethle down, these are very unstable markets as we can all read and see, we would like to repay the fed their $4 billion they lent. we believe that we can take some of the collateral they have had holding against that $4 billion, we can go to the marketplace, and raise the additional money to pay down $4 billion 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 beginning to reduce the amount of money we owe the federal reserve. >> i note that mr. gallant was complimentary of the way you have managed the company since you have taken over. but what i'd like to hear, if you have the strategy mapped out, what are the biggest challenges to the strategy? where are the risks? where are the places that you might, might run into trouble and see problems? >> to me the greatest risk has been the day to date 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 with. 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 we can retain and attract people. that we can be able to retain our current customers and we can grow new customers. a as a vibrant strong operative unit, that's a successful company. that's our highest priority. and that's what we are focused on. the second priority is to show we can exit the support of the u.s. government in a way that we are left with an investment grade company that people will continue to feel confident and support. >> let me focus you. i do understand these are the goals. of course i have read your testimony. my question was the places that you see the most risk in not meeting those goals. >> by talking about not being able to achieve good operational results. >> good. that's what i need. >> pretty simple. >> took too long. >> mr. mcwatters. >> thank you. thank you for attending the hearing today. it appears that you will not

need an additional tarp funds, at least that's what you just said. today in your opinion is a.i.g. a solvent entity? >> absolutely. >> 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 million or $50 billion. it sounded like the intent is to pay back everything. >> 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. >> the c.b.o. says we, meaning the taxpayers, will lose $36 million and o.m.b. says 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 and pay back everything when the c.b.o. and o.m.b. says to the contrary? >> i would love them to be able

to let me buy back everything we owe and go to investors and take a $50 billion loss. i would be able to hit that bid tomorrow. 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. i'm confident you'll get the money plus the profit. >> what's the exit strategy. when you come up, an exit strategy to pay back the taxpayers what, would it be? >> the first goal is make sure 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 so the key is to pay back the $52 billion. once that is paid back and the fed is completely covered, and keep it mind again we are 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 if at all possible. that's our goal. these sales give us a tremendous shot at getting that done.

and we are going to continue to monetize. so once the fed is covered, then we are going to begin to talk with the u.s. treasury about how they deal with the preferreds. >> how about return to profitablity? it's one thing to sell subsidiary, take the cash, pay down the debt. how do you return a.i.g. systemically to a profitable company? >> if you look at our first quarter, in fact if you look at our fourth quarter where we report add huge loss, if you look at what was the components that have loss, we made a profit. i believe that you are looking at a company that once we sell off the companies that we have talked about or assets we talked about, i still think we are talking about a company that could earn in 2011 without extraordinary charges and good will charges and all these other things, i believe we have a company that can eastern between $6 billion and $8 billion after taxes. so it is a substantial earner. you look at the first quarter of charters, we had a huge earthquake is chile, that cost a lot of money. we covered a lot of damage. if you look at this quarter, we

have the gulf and issues there. we are going to take losses there as well. in spite of those losses, those catastrophe losses, we are still showing a healthy profit. and if you look at the retirement business and life and retirement business, we are also showing healthy profits. we are restoring all of the aspects of a.i.g. to profitablity right now. >> on financial products, are you making money? winding down? or losing money? >> if you look at our numbers right now i think basically we are holding our own. breaking sort of evan. keep in mind one of the variables that occurs we have a lot of debt guns that business -- against that business and it's one of the anomalies of our accounting system. as people become more concerned about a.i.g.t. actually improves the profitablity of financial products because our spreads widen and therefore we can take in 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 good times we look worse. i will tell you if you take tall accounting out of the noise, you'll see we are derisking. the team has done an outstanding job. we are fortunate they are still there. they are fortunate even though they were vilified appropriately that they are working as hard as they can to derisk this book, some of the book, and to a break even or slight profit. >> when they close out a credit default swap, are they currently -- continuing to negotiate discounts? >> we negotiate what we can negotiate in the marketplace from a position of strength. i don't have the analysis. i'll have to give you how much of that is at what level . 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 are getting a good price and getting out and dealing with, in effect, derisking the company, where we have collateral. i think they are doing an excellent job of getting very good prices. they were not getting good

prices a year ago. we were getting hammered a year ago in the marketplace. that has changed. >> did it change because of the personnel within financial products or the market? >> changed because the market realized we are going to change our approach. that we are not going to liquid date this company. and therefore the street realized they wanted to negotiate with us after negotiating from a position of strength. >> let us know in general terms if you're able to negotiate discounts, that would be helpful. >> i think it's more about trading and selling and doing things and i think -- i have to go back and have the people give you an exact answer. i don't have that. >> fair enough. >> thank you. mr. silvers. >> mr. benmosche, i'm interested in the contradiction of the contrast between your testimony, mr. gallant's testimony, and the testimony of carp from s&p. can you, a, explain to me your

understanding of the difference between your estimation of the company's earnings power going forward after your asset sales and mr. gallant's? and can you explain to me your general -- how your general characterization of your company's financial position is consistent with s&p's view that absent double support -- >> 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 have confidence in this company. i know what i'm talking about. you'll have to see whether he understands the company as well as i do. >> that's not an acceptable answer. if -- 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.

>> i have not looked at his report. i'll be glad to have a team of people study it to do a side by side. we did that when we we had a report that said we had an $11 billion hole. and we found out we didn't. we went through that report, showed them why they were wrong, and they still went forward with t i'm happy to do that for him. >> 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 you were just describing, the $6 billion, and $8 billion range in 2011? >> first quarter, we made $89 million in charters. with casualty losses in chile, if you look what we did in our sun america, we had a strong result of almost $1 billion. if we continue to operate all the other companies at break even to a positive and just those two companies alone, and dealing with the times four, you get pretty close to the number. i would say to you if you look at our results fourth quarter

without extraordinary charges, if you look where we were in the first quarter -- >> i'm missing something. you your total operating income at corporate level in the first quarter of this year is $800 million. i multiply that times four -- >> i don't know what number you're referring to then. we made a profit of $1.4 billion in the first quarter. >> i'm talking about your operating income, which is, i think, kind of morel vant to what we are talking about. >> you have to look at all of the pluses and minuses, all the accounting charges. for example we have to take the charge of the fee that is assumed by the government taking 80% ownership of $23 billion, we take charges of between $5 million and $800 million a quarter. which represents the price we pay to the line of credit from the federal reserve. so in fact we paid $23 billion in points for an $85 billion loan. >> if you are double big credit without support from the

government, aren't you going to have to replace that? >> we are going to replace it. i don't know how expensive it will be. today we are at double b as we continue to achieve our plans we'll be investment grade at the end of the year. >> you can imagine our concern about just the cap between different assessments here. i would very much welcome, i'm sure 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 your representations about the likely outcome here for the public as being paid back in full with the respectable profit. are we -- can be realized. i think we have heard -- i think in general a great deal of support and number of compliments for the way you have managed the company so far.

but 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 susceptible to managerial skill. if i might turn and ask you a different question. some have suggested, including i think professor tosky, have suggested we ought to be selling assets more quickly. i would -- i know that's not been your view. can you explain why -- and i'm sympathetic to your position. selling assets is prematurely is a certain way to realize losses. but i appreciate to hear from you in your own words why you have taken that view and what the benefit has been for the public. >> i think so far you have seen prices improve. i think at one point they were thinking of selling a.i.a. for the high teens, and so we got a very aggressive price.

and other properties that are out there you are finding people willing to come to the table to talk to us. you cannot buy a business that is in trouble, number one. and number two you have to sell when the time is right. we have to make sure that we are 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 try to derisk that business too quickly. so now that we have taken the risk out, the risk that you can see the fact that we have the money that's here. sometimes not obvious, but we didn't lose it. i can only tell you as we move, we are moving quickly. we are finding more people coming to the tabling. more people willing to invest -- table. more people willing to invest with us. i think you'll see more options open up. we just met with boeing. large customer of boeing. and our goal is to continue buying boeing aircraft. they are continue to work with others to get sources of capital to continually invest and shrink

that business -- strengthen that business over time. so throughout the company at all levels we are looking at ways to improve our position, strengthen our position, and then find appropriate buyers when it makes sense. i think we'll do that as quickly as we can. we are not just sitting here saying let's wait for the 2013. you got to do it when the market's right. >> i'm going to stop you there. thank you. 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. >> i just heard say that and watching the tv and i bet you are off and running already. >> i'm delighted to hear that. we'll hold the record open so we'll be able to get those numbers. >> they are working on it. >> that's sounds good. professor. >> thank you. i guess so i don't want to ask you to comment on a report you didn't write or maybe haven't

read, the previous witness said his guess was $6, the market says $33. do you have a guess what you think the share price for a.i.g. should be? your own opinion? >> totally inappropriate to comment. i wouldn't. >> that's fine. you seem to suggest, are you borrowing money in unsecured credits, you are operating as debt market. >> we have done that. >> and so the previous witness said that you couldn't borrow money and you're telling us you can. >> i'm telling you i borrowed, unsecured. without a guarantee from a.i.g. >> so can you give me, i guess, some more background, exactly when you say you're spending -- exactly as you are removing the risk from a.i.d., is that going -- part of the long-term

solution for the company -- excuse me, do you, a.i.g., continue to be a part of a.i.g. in the long run? >> i do not. >> and so can you describe to me a little how you are going to move from where you are todayle to a company that looks different? >> i think what's important is we focused on the core businesses of a.i.g. the insurance companies. what you have is a lot of companies related 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 inshureps companies and being able to -- insurance companies and being able to borrow in the market short. 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 and so on, and those should be the primary businesses that will run and run them in way they are not overleveraged. >> is he lentionly that's your

vision of what -- essentially that's your vision of what your company will look like when you are out of all of this. you focus primarily on the core insurance business. >> we will be the world's largest property and casualty insurer with a strong annuity business in the united states. >> thank you. >> i have been struck as i read documentation of a.i.g. about the incredible number of intracorporate guarantees and loans among the various -- particularly among the various insurance subsidiaries and parent and insurance subsidiaries among themselves. and i see that as as the parent got in trouble, one tiny part of a.i.g. and it threatened the

entire rest of the company in part because of this incredible interconnection. i want to know how you're managing that going forward. is this a company that will still be run as one that has cross guarantees and intracompany loans and intrasubsidiary loans? >> the answer is no. i think that it was created out of a lot of complexity over a lot of time. we are 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. so i will tell you that they are working daily, looking at ways to delever, to change, and move. part of what you'll see is go to the treasury saying we need capital put into the insurance company. you don't take something out of insurance company without the approval of the regulator. whether it's in malaysia ortown finance. -- or tennessee. all of those as well as new york and pennsylvania. so you got to make sure as we do

this we do it in an appropriate way. the regulators are satisfied. at the end of the day we want very clear discreate businesses we can see what they are, where we see their financials, and therefore we can go to the capital markets for that insurance company. and for example deal with raising debt 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. so we 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. it's too intertwined. too complex. >> would it be fair to say you are striving for a simpler, more transparent business you had in the past? >> we will achieve a simpler organization. >> i like that. >> we will do that because you have to do that to have your exit from the government. you have to do that to get the rating agencies to give us very good ratings for our insurance companies. >> would you be able to demonstrate some progress along

that line? say from a year ago? you don't have to do it off the top of your head. we can hold the record open. >> the whole rating agency, feedback from s&p in particular, basically talks about the kind of progress we are making. i think that at the end of the day when we have rating upgrades in our insurance companies will be the sign -- >> you would forgive us if we weren't entirely reliant on rating agencies. >> i won't comment on that. >> thank you. >> you're welcome. >> it would be helpful. i want to stress this because i think it's very important, about if you can give us, as a supplement to your testimony, some examples of the work that has already been done to make this a more transparent company and a company as one with a simpler chart of how it works. >> i'm happy to have the team put together things we have done in sun america and things we are starting to do to begin to pull things apart so we don't have to

deal with all the cross guarantees and cross collateralization agreements. >> thank you. mr. mcwatters. >> thank you. follow-up on professor warren's comment. it still seems to me that a.i.g. is too big to fail. that if for whatever reason you have cash, liquidity crunch again, chances are the taxpayers would have to come to your rescue. ok, let's stipulate that for a second. what is -- 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 are not going to have to worry about a.i.g. being too big to fail. if you fail you can be liquidated, sold off, broken up, whatever. in other words do you have a living will, plan? developing a plan? >> i think to say we are too big to fail comes from the fact we have a lot of assets and all the different insurance companies are added up. my personal belief the reason you might think we are too big

to fail is we owe you a lot of money and therefore we can't fail until we pay you back. >> yes. >> i think that's the issue. the issue is we are not too big to fail but we are right now because you got to make sure we do this in a way that clearly pays back the taxpayer with an appropriate profit. 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 asset size, i don't believe that a.i.g. 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. >> so there will be no financial products to or sun financial products? you're out of that business? >> 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 the insurance or banking is

prevented. i can't tell whether my successor will come in and find a clever way to go back into business. but while i'm here i will make sure that's not a part of what the company is. >> specifically have you adopted risk management and internal control provisions that will just simply prohibits f.p. from coming back? >> can you not create policies that will prevent people from making bad management decisions. at the end of the day the c.e.o. has to take responsibility for the activities in their company. when they blow up, they have to take responsibility for why they let that company. at the end of the day i am very confident we have all of the profits in place in risk management. at the end of the day if i don't listen to it and don't lead this company the right way, can i 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. at the end of the day if we don't listen to what we hear, we can get in trouble. i believe our board at a.i.g. today is very strong.

they will not let that happen. i will not let that happen. and over time we hope new board members and c.e.o.'s will also make sure that doesn't happen. >> is it fair to say you are developing a culture that is anti-f.p.? >> we are developing a culture that is anti-taking inordinate risk that is would jeopardize the quality of our businesses when the businesses we are in make guarantees to people, sometimes for their lifetime. >> 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 f.p. a few years ago in credit default swaps, where they are paid a huge bonus in year one for doing the deal, the deal blows up four years later, i mean is that possible? >> it wasn't possible before either. i think i need to clear up something. when you look at a.i.g. and the people, the 10 people that reported to me when i got there,

those 10 people lost $168 million of their prior pay because of what happened at f.p. they lost $168 million, five senior people at f.p., leadership in f.p., those five people lost $88 million of their prior pay. their pay has always been at risk. for almost a five-year period of time through shock -- stock and cash plans. you 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 of when it gets paid out. at the end of the day the real challenge make sure you have good risk management and good management company and not rely on the compensation system either way. we got to run the company the right way. i can tell you that at f.p. that was never the case. of getting rewarded in one year. >> never the case. >> never the case. >> there what i have read at least in the popular press that 2:45 in the afternoon there's some guys in the 14th hole right now teeing off and it's because they made a lot of money at f.p.

and left. but they left the damage behind which is the key. >> there are people who work there and i will tell you in the last five years most of their compensation was wiped out. in fact, even the bonus that is i got approved for people, 40% of that bonus goes into a deferred comp plan at f.p. which is so negative they will never see the light of day. 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. my point is it's a shame we picked on the people there trying to get the job done. i can only tell you, the people that 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. at the end of the day, my concern is for what you said is it's not about their pay, it's about the fact we should have strong risk management and have a company that doesn't overleverage itself and too cheaply allows parts of the company to leverage a triple-a of a solvent insurance company. that was the mistake.

>> thank you. >> mr. silvers. i would like to come back to the pay question and look at it a different way. last fall the federal reserve system plom mull gate add set of -- promulgated a set of principles and indicated they would, the fed was going to be looking at pay and financial institution that is they regulated, basically looking at two issues, risk -- what -- what processes do you have in plates and what if anything is the fed doing to oversee them in relation to those policies? >> i believe that the fed is overseeing not only our compensation policies, but i will tell you first and foremoss they are in every aspect of our

business. rightfully so because we owe them money. our working relation was them is extremely professional. and very effective. they have been terrific partners. they watch everything we are doing and working through. >> tell me exactly what does that mean in retionship to compensation policy -- relationship to compensation policy? how is that oversight manifest? >> first of all we can start with ken fineberg. ken fineburg deals -- >> i'm not talking about the fed and the fed's implementation of their policy. >> 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 how we are doing it. all of our plans are presented to them and they are aware of the things we are doing. >> now, to pick up on my colleague's question about sort of downside exposure you described some individuals made

money at a.i.g. during the boom period and 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 the gain is the up side. you don't seem to have described any kind of actual downside that anybody took. my question is going forward how do you build real downside around risk for your senior employees? and how do you avoid this asymmetry where all the -- where everything that -- 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 the public appears will bear. >> i think it's a question of how you design your goals. and you design things. for example if you have part of the company where they are

innocented to create operative earnings, and that's all they are asked to do, then they will do that. they may also make that part of the business insolvent. they also may not choose to clean up the inventory of some antiquated product and therefore they are not taking losses that you should take. you have to design your compensation program that takes risk into account. sets parameters of what those risks are. you have to manage it. you cannot let the compensation program drive results. 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. >> how do you -- true downside from -- >> what would you like downside to be? >> from an investor perspective, downside is downside. i put up money, and if i lose, i lose. i've got -- if you think about it graphically, he i have real downside exposure and upside exposure. most executive pay plans i'm

familiar with that purport to be performance based or tie compensation to performance have only the upside of that line. they don't have the downside. and that creates situations like mr. mcwatters referring to where executives are not fully exposed to the risks that investors are exposed to anti-public is expotioned to. i'm curious if you have a solution to this problem given the stakes involved for a.i.g. and the company. >> i think when you have stock ownership, if you want to have downside, if you look at what happened to the asosh yachts of -- associates of a.i.g., people who have been there their whole careers have been totally wiped out through no fault of their own. there were 44,000 trades at f.p. less than 125 went bad. almost all the people at f.p., 100,000 employees of a.i.g. suffered huge losses in various forms because of what happened because a lot owned a.i.g. stock either in their 401-k or bonus

plans or stock plans. i will tell you there was huge looses taken by people who owned the company and that's the -- you own the company and if you screw it up you lose money. >> my time is up but i don't think that's what happened. people lost some of the money they made. it's not the same thing as investors or the public or risk of losing money they brought to the table. quite different. thank you. >> professor. >> one of the advantages of going last is i get to free vide on my colleagues. so i don't have very many left. do i have one. does a.i.g.-f.p. still pose a threat to the success of the overall company? >> i believe a.i.g. -- aigfp threat at the beginning of 2009 was probably a $20 billion to $22 billion cash call. 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. as long as we can do that, i think that will be durt derisked as we go through the year. it will continue to be manageable until the end of the year anti-rest gets absorbed into the rest of the company as just investments that have to wait until the duration gets there. >> thank you. 12k3w4r50eu6r7b8g9sdzef6ings ggeds thank you vimment we -- thank you very much. we appreciate you coming. we'll hold the record open. mr. milstein. our fifth and final, mr. milstein, u.s. department of treasury. have you found a comfortable place? i think you found a low chair, sir.

>> when you are ready. give us an opening statement. >> 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 -- feels like four years. i have been primarily responsible for overseeing the taxpayers' significant investment in american inter national group. as you know prior to joining the treasury department i he spent 28 years working in the prife sector focused on financial restructurings. i will use my time today to outline our current investments and commitments to a.i.g., the restruck -- restructuring plan. as of today the federal reserve of new york and federal government have exsendedth 132 billion of financial support to a.i.g. the sprork fed has provided $83 billion of this support.

$26 billion represents loans outstanding the parent company. $25 billion of which represents preferred interest in a.i.g.'s two largest international life insurance subsidiaries, and $31 billion of which represents loans to two special purpose vehicles formed to acquire troubled assets from a.i.g. in november of 2008. the treasury has provided $49 billion in the form of f preferred stock. in addition the a.i.g. credit facility from us established for the benefit of the taxpayers, with the initial funding of the u.s. federal reserve credit facility, holds preferred stock which represents approximately 80% of a.i.g.'s outstanding common stock. substantial financial commitment has enabled a.i.g. 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 product business, it would not have an investment grade rating that is critical to

the competitiveness of its insurance subsidiaries. therefore the objective of the company's restruck turing plan is restructure the balance sheet and business profile so they can sustain a rating on its own, and thereby allows the government to exit. the restructuring plan has six essential components. first the company will have to substantially reduce its debt. next the company will have to demonstrate independent access to the capital markets and secure standby lines of credit. third, the wind down of a.i.g.-f.p. will have to be substantially completed. a.i.g. will have to divest any businesses whose potential cash needs represent a potential drag on the parent company rating. fifth, the company will have to demonstrate its core subsidiaries are profitable, well capitalized, and repaired the damage to their franchises. finally, the company will have to demonstrate that it has

improved its risk management procedures and practices. today as you have heard a.i.g. has made significant progress on each critical front. the pending divest at this tures will result in a substantial deleveraging and facilitate its access to third party capital. a.i.g.'s leading and finance businesses and access to long-term debt markets to allow them to meet their own liquidity needs without recourse to the parent. the wind down of f.p. has made significant progress and targeted to be completed substantially by year-end. financial results have stabilized and begun to improve. and finally, risk management practices have improved. at the conclusion of this process, once genesis stained an investment grade rating without government support. the government will exit as promptly as practical. whether we get all the money back remains open. let me review where we stand today. if the divestiture closes as planned, proceeds of those sales

and the sales of other core assets should be sufficient to pay the new york fed facility and redeem the preferred trt in a.i.a. in full. cash flow from the assets in recent valuations suggest those fed loans, the loss will be paid in full with interest. and that the equity they own in each of those facilities is likely to have real value. as a result, it seems very likely that the $83 billion of outstanding fed support will be paid in full. similarly at current market prices the common stock the series c represents has value. market conditions may change before the trustees have an 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 a.i.g.'s common stock, but the stock market today suggests there is real value there. finally, that leaves the

treasury series e and f preferred, the $49 billion. the bombing of our ability to monetize those investments in a.i.g. will depend on the page the other steps restructuring plan are accomplished. whether treasury ultimately recovers all its investment or makes a profit will in large part depend on the company's operating performance at the time the government sells its doctor. >> you want to just give another witness sentence. >> we are confident that a.i.g. can stand alone we will move to exit these investments as promptly as practicable. ready for questions. >> there we go. i like that. let me just get started here. i want to walkthrough this. i'm hearing you say it is very likely that the american taxpayer will be repaid in full from a.i.g.? is that what i heard? >> what i said is the new york fed which has about $83 billion outstanding today is very likely to be paid in full. the asset values we have seen,

the sales bryces for a.i.a. and alico should be sufficient to pay them in full. >> that's not everyone, though. >> no. the treasury department has $49 billion outstanding in series e and f preferred. 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. >> should you have any estimate at this point? you have heard the estimates -- >> i have. >> referred to them multiple times. >> i have. i think that there are substantial -- there's a lot of things that have to occur before we'll know the answer to that question. as you heard today. the common stock has a value of $5. preferred is paid in full. while that may be a lower stock price than the company is trading at today, that implies the preferred money is good. even if that $5 stock price, the

series c referred held by the series c trust would have a value of $3 billion. that's pure profit to the taxpayers. >> but since i see you whins and hesitate on the second number, that is you feel confident about the $83 billion repayment, a little less about the $49 billion. you feel that mr. benmosche is optimistic? >> no. in fact he knows his best better than i do. if he can -- >> you are principally responsible for overseeing him. >> yes. >> only a little bit? >> no. he's an experienced insurance executive. i'm financial restruck professional. he knows his business better than i do. hi confidence that he can get charter and financial, $8 billion after tax earning, if we can do that we'll be paid in full. >> what's the biggest risk we won't get repaid? i know you have laid out some of

the things that have to happen, where is the biggest risk? you assess risk. >> biggest risk for insurance company are the state of financial markets and the impact it has on their franchise values. .

why has treasury chosen this course? >> the math is a little more complicated than that. we own 80% of the common stock. the giving up of dividends on preferred was really just giving up 20% of them because the value of those -- the value of that dividend would otherwise flow to the common sock if it doesn't go to the preferred. we own 80% of the common stock. >> those pockets don't match. you're saying that we gave away

one well of the five billion to the other a.i.g. shareholders? by not collecting the dividends that belong to the taxpayer? >> chairwoman, with all due respect, we haven't given away anything. these are dividends the company could not afford to pay. >> i'm hearing so much optimistic news. >> i understand. >> that's cost us $5 billion. >> it hasn't cost us anything. these are dividends they could not afford to pay. >> all right. and you're saying, but that's all right because we're still going to sit in the common hair shoulder position -- shareholder position. >> had they been able too pay the dividend they would have to bring the dividends current. that's where we are today. but at this point, at this point, the company's cash flow, its net income after taxes are insufficient to support a preferred dividend. >> where do you anticipate between this optimistic view of a.i.g. repaying the american

taxpayer in full and the position where we are today which is that they can't pay the dividends? where are we going to cross that line where we don't continue to lose money from a company that can't pay us dividends, that it owes us? >> i laid out the six steps of the restructuring. >> i heard those. >> 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. ok? we're selling stuff to pay back debt. we're selling a.i. and alco. we have a sales transaction for the life insurance operations in taiwan. we've sold buildings in real estate around the world. >> i understand all this. i've read the treasury. i've read your report. >> bear with me. it takes time to take a company of this size and scope to get it

down to a footprint where the actually reduced its debt, reduced its leverage, reduced its risk. >> i understand that. that's why i asked a time question. >> what time question? >> and the time question was, i hear this enormous optimism which suggests that you have some kind of plan in mind ann that a.i.g. 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 before the happy day comes that it pays us back in full? >> if the -- if the a.i.a. and alco deals close, they'll close in the third and fourth quarter of this year. ok? so that's -- that will result in an immediate pay dunn of the federal reserve facility -- sorry, of the preferred interest . that's $25 billion, will be immediately retired with the

cash proceeds. and the balance of the consideration can be sold given the terms of the lockup over the course of a year to a year and a half. when thoice proceeds are rea-- 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 bank will be paid in full for all of its existing exposure to a.i.g. >> ok. useful. mr. mcwaters. >> when the deal was struck in september, current shareholders of a.i.g. stayed in place. it was not a bankruptcy, they weren't wiped out.

so, today we have the sort of the nonsituation of prebailout shareholders that may live to collect dividends some day, may live to sell their stock for a profit, even though the taxpayers may lose $36 billion, o.m.b., $50 billion. is that correct? >> well, let me just -- if in fact the preferred stock interests lose money, it's unlikely they're going to get anything in the common. 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, common stock is trading, 20% of it was left outstanding. people are buying it and selling out every day. no dividends are being paid on that stock. so it's a bet on the company's future. >> given that it's straining for $33 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. >> that would be the interference would you draw, yes. so that's good news for the intoxicate payers. the common stock -- people are trading the common stock, are suggesting the preferred stock is money good. >> ok. but the equity, the prebailout equity was not wiped out in this deal. >> it was substantially diluted. >> substantially diluted but not wiped out. >> if i may, though, again, just to take the market price of the common stock, the 80% of the stock that was -- represented by the series c, if you valued that at the $33 a share at which the common stock market is trading the outstanding flow, that's an $18 billion profit to the taxpayer. for the privilege of having made it, all creditors whole, and for

having put a wall up around this company to keep it from failing. if that's how it plays out, i think all of you would agree, all of you would agree that this was a very successful rescue. >> it was always successful because the taxpayers got lucky. if we go back to september 16 and we start looking at the c.d.o.'s, 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. >> listen, i was a private citizen at the time that this rescue occurred. so i have no greater involvement with it than you did and i've stood back at probably the same distance from it that you did. but i think if you listen to the testimony of my cleelings --

colleagues, now my 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 jpmorgan 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. >> i agree. that's the reason i said in my opening statement that if the sub -- supposition is we need to save a.i.g. to save the world financial system, well the world financial system is goldman sachs and jpmorgan and some others. if the world financial system had collapsed, these institutions would have collapsed. so it was certainly in their best interest to get -- to have a.i.g. bailed out and if they can be bailed out 100 cents on the dollar, it's a happy day. >> listen, i understand the am

bive lens -- ambivalence about the view that a.i.g. is a vehicle to pay other large financial institutions. but if you believe that its collapse would have created fear and panic across all financial markets, then it wasn't just goldman sachs and jpmorgan who were being helped by this rescue, it was you and i as depositors in our banks, it was the insurance policy holders across a.i.g. and every other insurance company. it was the pension years -- pensioneers whose pension plans were wrapped by a.i.g.-f.p. it was the holders of staple value funds. >> i agree. i totally agree with what you say but none of those folks got the wire transfer that goldman sachs and the others did. >> in fkt tact -- fact they did. because the $44 -- 44,000 trades that ben talked about include all those staple value insurance contracts that f.p. wrote that f.p. has honored. it includes the various

transactions they did with pension funds to ensure their assets, too. we've singled out because they happen to have held very, very volatile assets on a.i.g.'s -- that a.i.g. had insured and that the decline in the price of which were running through a.i.g.'s income statement and creating enormous losses in the fourth quarter of 2008. so in order to try to mitigate the losses at a.i.g. 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 meeting -- needing more money and it becoming even more unstable. so, yes, goldman sachs and --

[inaudible] 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 a.i.g. >> i understand. i'm done. i'm done. >> you're through? mr. civilers. -- silvers. >> i wasn't planning to ask this, but i now feel compelled to do so. i noticed mr. mcwatters didn't bring up goldman sachs so obviously the on the treasury's mind. is it not the case that in the week of september 15, 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 cause, none of this would have been necessary? and those two lines of business

were -- and it depends on, you know, 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? >> that is not so. let me -- >> are you seriously asserting that if you wipe those two people pieces of business off the books that a.i.g. was nonetheless insolvent? are you accusing him of lying to this council [i'm astounded at the lention you will go to defend something that may be defensible in a perfectly straightforward way. >> i have sat through the entire hearing today. i've heard the testimony of all of 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 that a.i.g.-f.p. are guaranteed by the parent. the parent has $100 billion balance sheet of its own, on september 8, 2008, with $15 billion 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 of commercial paper. $15 billion of commercial paper at the parent company, $80 billion of repo, again, the repo markets went into seizure after the lehman brothers filing. $2 trillion of notional derivatives, $400 billion of credit derivatives, concentrated very much in the real estate part of the market, had a.i.g.-f.p. defaulted on the collateral posting requirements

that it had on september 16, every counterparty, 44,000 trades, could have terminated their -- claiming a cross default. >> you've -- you're not paying attention to what i was asking. you actually agreed with me. what you said 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 the collateral posting obligations that were the triggering issue. right? >> the collateral posting obligations were triggered by the downgrade. >> yes, i know that. but it's -- that's where the cash need was that week. we've -- all of the witnesses all day long have said this. you're not disputing that. >> and the securities lending part. >> we all agree. >> ok. >> 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 losses is likely. it appears from your testimony that what that really means is that they believe that the preferred, the series e, is worthless, or in the better case scenario, the $30 billion loss, they believe that it is worth 40% of the face. >> right. >> am i understanding their point of view correctly? i know it's unfair to ask you what they think but is that what that means? >> it's $50 billion outstanding. there's going to be a $20 billion loss. >> and we're not -- explain to me why you think they are wrong. because clearly you do. >> well, no, i don't think any of us can predict the future. i think that the government accounting office and the o.m.b. have to, under the regulations

there -- they're subject to, they have to make estimates of this for purposes of budgetary accounting and i suspect they're being conservative in their view. you know, i'm working to get the taxpayers' money back. i think we have -- the company has a restructuring plan that they've worked on with us that is going to take time to implement but 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 they suggest they can, they should do very well. >> my time is up. thank you. >> professor trossky. >> we'll continue on a related line. you were here for the testimony as well and his estimate of what

the stock price should be. you can sort of respond to that a little and apparently you disagree with him as well. i don't know if you've had a chance to look at his estimate. there are widely different estimates out there and i recognize that -- i understand how we come up with different estimates and we're making different assumptions about the outcome. >> yeah, i -- i've seen his work and, you know, an analyst report such as that is built on a number of assumptions. >> you can tell me which ones would you quibble with specifically? >> no. in part i'm constrained not to quibble with any particular consumption because i know more than he does. i have much more material, nonpublic information. it is a publicly traded stock and it would be inappropriate for me to do so. >> ok. >> i'm not trying to -- >> no, i respect that. you can give us some broad indication that you're comfortable with where you think

that there are differences that you might have? without sort of -- >> from my point of view of representing the series, i take some comfort from his conclusion that the stock has positive value because it means the interest i'm trying to recover are going to be paid in full and it means that the series c stock has real value. and that's pure profit to the taxpayers. >> ok. so, i guess -- i believe you answered chairman warren's question about when you thought that a.i.g. will no longer need government support. was that your estimate, was in 2011 or -- or i guess that's where you said it was going to cross the line. >> i think the deleveraging that's predicate to it garner a stand alone investment grading is dependent upon these major asset sales closing and are monetizing the value of the stock that we're taking back on those deals. and i see that occurring, you

know, some time between year end this year and year end next year with we've fully monetized those interests. and therefore, you know, if it's got its leverage profile, that is its debt down and coverage to a point, where it looks like be a investment grade company, then i think we can begin, you know, assuming the other elements of the restructuring plan which is independent access to capital, that the parent company starts tapping the credit and markets independent of the government. i think that's when we can start think being exiting the series e and f. >> he also said that he thought that the share price, the current share price, reflected the traders' believes that -- believes that the government was going to walk away -- beliefs that the government was going to walk away leaving, giving another gift to a.i.g. >> i think you can be certain that that is not going to occur. >> ok.

let me change gears just a little. you are an expert in restructuring. and you're not in the room at the time, as you made clear. had you been, would you have done anything different? or -- >> yeah. we 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 lies. during the period from september to november, when he assumes we

had that fremonts of the federal reserve and the government would have those three months to conduct a negotiation, collateral was required to be posted almost every other day. so, the failure, while he's right having put the $85 billion loan in place, bankruptcy was remote, but default was not remote. every day those 16 counterparties or every week those 16 counterparties were making demands for collateral. so in order to have the negotiation, the company would have had to be prepared to say, i'm not paying. and to take the risk that any one of those 16 cousht parties or any one -- counterparties or anyone who had cross default right, the other 44,000 claim ants, or anyone at the parent who had cross default rights, would not exercise their rights to cross default. so, while we could -- while 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 similar negotiation to that which was urged upon a.i.g. 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 a.i.g., 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 cross default at the parent level and at f.p. and, if i may, i know where you're going, if i may, that would have made that company completely unstable. any creditor with the right to declare a cross default could have brought the house of cards down. >> sir, 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 the government backstop behind it? where the government said, i will make sure that between us we get you pay? so long as you don't cross default and bring this company down? does that change the negotiating dynamics somewhat? a carrot the size of manhattan and a stick the size of the global economy. >> yeah. 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. but -- >> i'm sorry. were you uncomfortable with long-term capital management. >> the government didn't put any money in that situation. >> the government had nothing to do with what happened to long-term capital management? i think we heard -- they were in the room and said, nobody leaves the room until there's a deal done here. >> if i -- 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 was something 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. >> and how -- this is -- you weren't there, i wasn't there. this is a crazy conversation to have, but how exactly what is that person going to enforce those rights? either they had collateral in which case they hang onto them or they got to go to court. we have an idea of how long that takes. >> but, i understand that. i understand that. but this is a huge balance sheet. with numerous creditors on it. >> this is what bankruptcy lawyers do for a living. >> i understand that. and i did this for a living. and i can tell you that i would have been very nervous. >> well, who wouldn't have been

nervous? >> 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 derivatives at the table on the first default. >> so, let me see, this may be an inartful pivot but i want to go to another point you made. and that's the question, it's ironic that a.i.g. is in the insurance business. because the american taxpayer ended up in the insurance business here. they ended up insuring, in effect, that a.i.g.'s creditors were going to get paid $1 -- 100 cents on the dollar. 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? you described potentially here an $18 billion profit. except it treats that insurance policy that came from the

american taxpayers as worth nothing. >> no. i think we're coming at this from two different frames of reference. i think, again, just having spent time with the federal reserve and understanding what they thought they were doing at the time, in 2008, i don't think they thought they were underwriting creditor recoveries at a.i.g. they thought they were preventing a meltdown of the financial system. and a consequence of that was that everybody at a.i.g. 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 a.i.g. what would the risk have been then? what would be the irches that other creditors of those institutions would draw? >> i'm sorry, 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 described the profit here as

$18 billion. >> no, i think -- >> potentially $18 billion, and i just want to put it against -- you treat the guarantee from the american taxpayers as if it cost nothing. >> no. i think the benefit, and this is 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 a.i.g. 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 country eyes -- crisis. >> 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 him. 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 different points of view if you can't give us anything more specific? >> well, 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 position 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 i can atone. >> so when people ask us whether or not the american taxpayer is going to get repaid the answer is -- we don't know, we don't really have anything to look at. >> i think i did answer it. 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 -- wait -- you can say that -- it was a coma, not a period, you can say that -- comma, not a period, you can say that an analyst, a well respected analyst came into your hearing and said that basically the e&f is going to be paid in full and the government series c is worth something. >> but there will be losses? >> no. that's not what this gentleman is telling you. >> we're going to be paid in full and that the c.b.o. estimate is simply wrong? >> if he believes the stock has a positive value of $5, that means that what i'm trying to recover is going to get recovered. >> we're going to be paid in full. ok. thank you. mr. silvers. no, marcus. oh, i'm sorry. >> thank you. so, this means that a.i.g. is solvent in your opinion? in the opinion of the department of treasury? >> it's a -- you know, solvent

is a legal term. it has a positive net worth and it's paying its debts as they come due. >> fair enough. a.i.g. to me appears like it is still too big to fail. what are you doing as the majority shareholder to lessen that risk? >> i think if -- 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 operations, f.p. has -- is not a shadow of its former self but it's about 1/3 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 him say, the intercompany loan that last year

was necessary to finance the i.f.c., he hopes to be able to raise money to refinance this year. so, the core business of a.i.g. at the end of this restructuring plan will be sun america financial, the largest property casualty company of 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 and with the help of his board and that is much smaller than the company that the fed can fund it on september of 2008. >> so, a year from now, a year and a half from now, after this has been implemented, if a.i.g. was to fail again for whatever reason, then a chapter filing under chapter 11, followed by the insurance regulators doing whatever insurance regulators do, in other words, working a resolution of a.i.g. and its insurance subsidiaries through

the normal protocol would seem to work. in other words, there's nothing out there that would start triggering the dominoes that take down the other two big to fail institutions? >> 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, the 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. >> what are the consequences on competitors of a.i.g.'s insurance business who have received perhaps a subsidy or at least a.i.g. subsidiaries have received a subsidy from the u.s. taxpayers. if you're competing against a.i.g., an insurance business, what's the consequence? >> the a pretty competitive business and in some sense i think a.i.g.'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 matter jo owner and, you know -- majority owner and when the government of the united states rolls over, you might not like being underneath it. so i think the answer is, i think the sooner they can shed us, the more competitive they will be. >> so there's no indication to you that the rates or the underwriting standards of an a.i.g. -- >> there was some chat about -- you heard some noise about that in the marketplace shortly after, you know, in early 2009, haven't heard that since. >> ok. i'm done. >> mr. silvers. >> a.i.g. is the only participant in the treasury department's ssfi program, systemically significant

failings institution program. what are the -- this may seem silly after this day's worth of testimony, but it's not. one of the characteristics of a.i.g. that made it an ssfi -- what are the characteristics of a.i.g. that made it an ssfi? >> for a company you're going to invest $132 billion to create a program called failing institution, 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 a it -- use it a lot. as the program description, it's the a.i.g. program. >> 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 the 20% of the stockholders in tact. that was pretty tough treatment in terms of what happened later

with people. and treasury at the time articulated to this panel, and i know it's a different administration, but there's some continuity, particularly to this panel, that a.i.g. was different. do you disagree and think a.i.g. wasn't different? >> i really, i can't, i don't know what was in their minds in that regard. you mean in terms of taking the common stock? >> no, just in general. what made a.i.g. -- why is a.i.g. having a unique program all to itself? >> i don't know. i mean, you know, we have -- we -- the federal reserve was the lender of last resort here first. >> this comes back to my question this morning about sort of what's the -- what's the, you know, genesis here. what's the, you know, what's the -- when do things kind of get set in stone? you seem to be saying that the treasury inherited a

circumstance created by the fed. >> i think the sequence actually in my written testimony, i'll lay this out, 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 and -- 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. >> you know, i think it's critical, the fact that you can't give a clear answer to this question -- to the question of -- and i understand why, i'm not -- it's not 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 a.i.g. got unique treatment

is -- it's a problem, i think. and i just -- it's an observation. i want to shift to something you said earlier in response to one of my colleague's 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? >> i was -- i did say that. but i said it in a context of warren's questioning of, we insured all of a.i.g.'s creditors through this bailout. and, again, i -- what i was trying to convey there is i don't think that was a consequence of what we do, i don't think that was the intent of policy. policy's intent was to draw a line and prevent a further collapse of the system. and they drew the line at a.i.g. 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 a.i.g.'s creditors, having intervened in a.i.g., what would that have communicated to the broad market about the government's role with regard to other firms that, you know the other 20 large financial institutions which by then it made an investment in? would it have promoted financial stact 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 intermediateation or discouraged financial intermediateation? would it promotion stability or instability? i submit that if that's where 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. you would have discouraged people from doing business with our large financial institutions. >> 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 hair cut 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 will -- 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. >> but, chairwoman 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

every day. so once you communicate to the financial markets that these large institutions are going to be -- have required hair cuts, the people who are lending money on a short-term basis to them withdraw their credit. they would draw their credit. >> not from a.i.g. what you're now talking about are all the other participants in the financial market. >> no, a.i.g. >> once the government says i'm 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. that's why the decisions made in september had to be followed through in november in the way that they did. >> but, if i may, what you have been urging or at least inquiring about is whether or not they should have done something different and what i'm suggesting to you, had they done their short-term creditors would have run on them before you could have asked them, may i have a discount. >> i think we have simply have to agree to see the world

differently on that. i apologize. professor trosky. >> so, i, as a professional economist, i don't deal in individual companies, i sort of look in broader -- with the economy and going forward, but, i think when i hear that 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 -- when the government consistently makes creditors whole, creditors play an important regulatory role in the 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 make that regulatory role and then obviously 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 probably -- and i would argue much more efficient. can you sort of -- i mean, so you've talked about this instance, you can 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 betting off once you consider that dynamic implication. >> 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 a.i.g. was bailed out. the system that allowed an a.i.g. 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 has ards that certainly has been compounded by what occurred. so, we need to have a regulatory reform package to counter what has occurred and you make sure this doesn't happen. >> i think i would disagree with you. i think that if the government had consistently allowed creditors to fail in long-term capital 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 a.i.g. 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 propose something for the government to go out and hire creditors to go the job -- no, not at all. >> is going to produce a much

more infear jor solution than the one we have. >> no, i actually agree with what you said. but when the firms of this size fail they have spillover effects that are enormous and so the -- 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. >> and that offers me a good segue into my next question which is, again, a fairly general question think a 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 a -- 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 which regulates systemic --

firms that offer 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. >> and i would love to take the bait and join issue with you on that. but i think we don't have the time. 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 -- you think we're going to come up with the definition? because i would be happy if -- happy if we do, in which the government said, these are the firms that we're going to backstop so we know the moral hazard is here with these firms and everybody else we're not and we got this dynamic definition. i guess i'm less confident than you are that that's going to arise. >> i think the premise was wrong. and this some people worry about, that 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 living wills or whatever you want to call it. but severe regulatory oversight to prevent from us having to do what we did with a.i.g. again. >> that's all. >> thank you very much, mr. millstein. i appreciate you being here today. this hearing is concluded. we will hold the record open for questions and additional documentation from our various witnessee. hearing adjourned. [captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute]

>> the congressional oversight panel today focusing on a.i.g. this is one of 20 hearings they have held since late 2008. many of those hearings are available to you online if you go to c-span.org and look in our video library. you can search the troubled asset relief program panel and you'll find lots of those hearings online. the u.s. house has been out of session in recession for -- recess for some four hours plus. they have a number of suspension bills waiting to be voted on. those are expected when they return. members are also planning to take up a bill later that would extend expiring tax breaks and also some social programs. but the debate on that is in the works and on hold just a bit. c.q. politics is reporting that

house leaders put the chamber into recess as they work to finalize changes and nail down votes for democrats who are wary about expanding the federal budget deficit. that's on the extenders bill. so when they gavel back in, we will have live coverage for you here on c-span. we are going to take a live look now in the gulf of mexico, b.p. has begun efforts to try to stop the leak in the gulf of mexico. the associated press reporting that the chief executive of b.p. said earlier that he gave the procedure a 60% to 70% of working. saying the procedure, known as top kill, which has never been tried 5,000 feet under water, could take hours. and by the way, president obama will be visiting the gulf coast on friday to see some of the recovery relief efforts himself. he's expected to hold a news conference on thursday and the president, according to news reports, will outline some of the findings expected from the interior department's 30-day review of what happened with the

gulf of mexico oil spill. again, a live look here at the camera a mile down and the efforts by b.p. to stop the leak. >> and taking a look here at some of the video you've seen lots of all over the news networks and online as well. the b.p. camera focusing on the leak in the gulf of mexico. this morning on "washington journal" we had the chance to speak to outgoing coast guard common dant and the incident commander who joined us for about 45 minutes on "washington journal" for an update. he supree court. >> "washington journal" continues.

host: admiral thad allen is the outgoing commandant of the u.s. coast guard. taking over officially with a new title yesterday as the national incident commander for the deep water rise in oil spill response. thank you so much for being here. we appreciate it. we want to set aside the four gulf coast residents. 202-608-0184. the admiral will answer your questions momentarily. beginning with the front time -- front of "the times picayune." if this does not work it cld make the situation worse. what will happen today? when will you know if it will work? i know that that camera down below for viewers to see what is coming out of there is going to stay on.

will people be able to see what is going to happen today? guest: everyone needs to understand that everything that happens down there is to remote operated vehicles. one of the most maddening sports of -- maddening parts of this response. they wil see portions of a sequence of events. there are two vessels on the surface. they are pumping this blood--- mud-like substan down to the bottom. putting into a metal frame, there are two lines. slowly they will bring pressure down to the frame and it wl be brought through the hoses in the choke and kill lions. at each point the remotely

operated vehicles will be working on the bottom. the public will be able to see whatever they are doing, but without comment. will be very difficult to understand what they're seeing. host: when will they know it works? guest: it will take a few hours. host: when do they start? guest: they are very close to starting. it is one of those things where the sequence of events will go from step latest that be. host: if it fails and makes this worse more could be spewing out according to some reports. what will happen? guest: i do not think they will take it to t point where it will make it worse. i think that they will take it to the point where it does not work they will come up with another way to attack the oil. the only way that it could be worse is if the pressure was so

high that the pipe ruptured. the pressure going down has been carefully calibrated not to exceed the pressure of the pipe. as we mentioned, if this does not work they will be going to a joint shot. -- john -- junk shot. host: what are your impressions so far? we have heard you talking about your relationship with bp. you have flown out in the area. what are your impressions of how bad the oil spill is? guest: is bad. anytime you have oil on the water is an insult to the environment and we should have no illusions that this is a catastrophic event. i have overflown the impacted areas and been out on the drill rigs and relief wells. i have seen the blowout

preventer they are going to use to replace this one. make no mistake, this is a serious issue. bp needs to stop this week. host: -- stop this weeleak. host: what is your response to the people who have criticized theovernment in their response? guest: the response structure is mandated by law from the oil solution laws of 1990 after the exxon valdez. the notion is that they would be contacted and that theyould be identified in plans that there was a spill brought to the scene to be utilized. most of the work being done down there is being done through oil response contractors through the intent of the original law.

the managent of the contractors is a matter of command control through the office of the local federal coordinator. is more of trying to get the resources to where the oil is that. one, stopping the oil where it comes out of the pipes. second, dealing with it on the service and how you deal with that of land. each one of those areas requires a different application of resources. host: the man in charge of katrina has been critical, saying that this should be declared a natural disaster. guest: i am not sure whatould be gained by that. i think he is talking about national disasters after the stafford act. as carried out under the national response mandate it is different.

there is a structure in place by which to execute the spill. ho: some have said tat the military should step in. what is your response to that? guest: it depends on what your talking about. if you are talking about controlling a leak at the bottom of the floor of the ocean, the private sector in terms of oil companies as theaccess, means, and capability to solve a problem. none of that is in a government inventory. the government does not maintain oil drilling equipment. access to the sea floor, to the blowou preventer, it will largely have to be done through the of private-sector. i have had conversations with

salvage from the navy. if you move from the service we are using dod assets. c-17 cargo planes from as far away as alaska. getting down to e beach clean up there is a role for people that might be able to do the work but i do not think that overall this is the type of response that would call for dod oversight. i think it would be an inappropriate use of their authorities. host: let's tu to the phone lines from people eager t speak to the admiral. dave, your first. caller: good morning. things are startg to get ugly down there. the governor has requested that the corps of engineers has requested dredging of barrier island. you mentioned a couple of reasons, one of them being that

it takes a long time to do. it has been over three weeks and we still have not had a decision. the other reason is the consideration over ecology. if you build barrier islands off of a coast you will have a new eco system. i do not understand why the corps of engineers will not approve this. this could go past august. it would be really nice if the corps of engineers would lead us to some dredging. guest: first of all i have been in frequent contact with the head of the corps of engineers. the state requested a permit to cstruct these islands. their responsibility is to

review the permits and look at the implications concerning where the materials wld come from and how the materials were down. making an estimate on the time and costs, so forth. the corps of enginee is doing that right now and they have not released the report yet. it will be an issue of funding. because of that we have been following this in parallel so that there is no extra process at the end. they are near the point where they will be making a recommendation on the permit. we have been looking at this closely. we have some concerns. six-nine months of getting oil on the beach. no one understands the barrier island issue better than i do. we know what they mean to the state of louisiana and the gulf.

the real question is what the most effective response is right now to deal with the oil on the service and coming ashore. after making that determination hopefully we will know more. host: chartte, n.c.. republican line. caller: the military i the voting assets to this disaster. exactly what could the military do? what about fighting fire with fire? an explosion caused this disaster. what would be the navy's response tshooting some sort of torpedo, i guess, something

with a bunker busters' capability. there a way that we could do that? shoot something down, actually? you have to crete a force great enough to stop the pressur as i understand it. what about having to cut off the tap completely and look at it as a last case scenario. host: we want to show the viewers and live video courtesy of bp's web site. go ahead, admiral. guest: first of all, let me clarify what the well is and what it is not. this will was being drilled as an exploratory well.

they were in the process of capping the well to put a production rate on the scene when the accident occurred. he referred to a spider operation, but this was a single real line in this case. regarding the use of explosives, there has been some talk -- i has not been originated in my staff -- about whether that should be do. franklthere are a lot of negatives to that and it is not being realistic reconsider right now. it can be very important to bring that to the service to do forensics with the purpose without the potential use of explosives. host: a live video that we judge owed our viewers of the oil spill that is happening, we are showing that right now. according to the newspapers you

spoke to bp and asked that they keep that camera on during is next procedure. why? guest: there was a lot of discussion about who is really calling the shots and will they listen to the government. i have had a number of conversations with the ceo of british petroleum. he was wonderingwhether or not running this thing alive might put stress on the operators who are tryingeryard to do delicate maneuvers to make sure that these hoses are attached. making sure thathey were not under the pressure of being watched as introducing another level of risk. we were having that discussion was apparently something was leaked out to the public, no pun intended. that was never the case that we were going to take that issues

-- we were going to ta issues over transparency and what we were doing and not doing, we were hoping that they would go live to the feed even with potential additional risk in the interest of the public understanding that when we make agreements like this this is what happens. host: sarah, democratic line. caller: good morning, admiral. first of all i wanted to say that the coast guard, i realize, is such a small part of our military. it is such a difficult organization, i wanted to talk about that. its size. i also wondered if the admiral could put to rest the stories that other countries and organizations, such as the dutch, have offered.

thehave expertise to help control this. i am curious if you have heard this before and whether or not if their health has been offered. host: admiral? guest: let me answer the second one first. we have a team that evaluates and offers to provide equipment. that is according to the state department. if there is a need and an offer that meets in we can do it, we except it -- accept it. bp has the accepted one offer frexico and we have a vetting team that goes through that. if the capability meet their requirement, we will except it. . .

i sink relates to the fact that here is an ititutionalized relationship a cleanup work. there has been visibility at the coast guard. you will see them on the cleanup teams as well to make sure the contractors are performing as they are supposed to. >> can youives a number? guest: we probably have about of on-and people. -- about 1000 people. host: how many people across

agencies are down there? guest: on any particular day approaching 20,000. host: we have an e-mail asking why fema is not in charge? host: guestguest: the source ofr this is bp. after at it is the oil liability trust fund. the cstruct of this response and the way it is constructed is different from be met. host: is bp paying into a fund every day to pay for this? some saye should be finding bp every single day. guest: they are making cost reimbursements as we give them

cost every day. they're proding grant money to the states that are affected. this is in terms of economic impact in the equipment. it's a government or anyone tt is not bpcents eni resources due to the oil spill liability trust fund the costs are refunded. host: jim on the republican line your next. caller: admiral, i would like to kn why no one is using submersie pumps to pick the oil upright at the well. -- pick the oil up right at the well. guest: we are in a way. the problem is we cannot get a good seal because there are tears in the pipe. we are trying to catch the oil as it is coming out of the pie. that is wh they're doing with

2tube.sertion to th if the top kill shot is unsuccessful, there are devices that will pump this to the surface. one of the problems we have with working pump down there is the presence of hydrates. that is a mixture and natural gas and water under pressure at low tperatures that forms ice crystals, which was a problem with the first containment device. in addition to figure in out of pumping device, you have to use ethanol his to make sure they do not freeze in can be pumped to the service. host: louisiana on the independent line. where is river ridge? caller: not too far from new orleans. my concern is the dispersants being used. in the house infrastructure

committee meetings last wednday, the congressmen have td a list of theispersants. he said it is the second most toxic compared to this percent, which was 100% effective. i would like to know the relatiship between bp, the epa, and you in regards to who has the mandate for which dispersants are being used. i know there has been a plane that has flown over and now they're starting different dispersants. i would like your opinion on why the second most toxic one is being used please. guest: bank you. that is a great question. the e approves a schedule of dispersants. -- thank you. prior year to the response, it was on the schedule. one of the things weound is

that this is the first massive use of dispersants and an oil spill since the authority to dispersants was granted after the exxon valdez. under that legislation they wanted to look at alternate nologies. in the case of exxon valdez it took a number of days to negotiate how dispersants would be used. wheat lost the opportunity to optimize their use. what has happened in the past 20 years is we have had a number of pre-approved protocols in certain parts of the countries where certain conditions exist. in this case, british petroleum and the contractors are working out there using dispersants letter on the epa appred schedule less. they started using the what happened is the use of dispersants has gone way beyond we have done everythin-- what hd

is the use of dispersants has gone way beyond what we have ever done in history. it is logical to look at the agricultural impact of those. bp was asked to provide formation on alternative dispersants and their effect but the availability and logistics and the issues wh shifting to a different dispersant. a number of issues were raised. there will be a decision forthcoming. host: union grove, alabama. jim on the democratic line. i have a short question for you. host: go ahead. caller: how big was the dispersant tube? why can't we insert other

tubes to do collection right alongside those? if there force in there, there should be no ice crystal problems. if more tubes could be placed in there, that kepcould have been done a long time ago. guest: thank you for the question. when we were able to surveil the pipe that has crumbled the line on the bottom we found out there with resources of leakage. when was at the very end where it had disconnected from the mobi drilling unit. there are two other places where it was torn and oil was coming out. bp was able to successfully ancp the end of the pipe.

those are the sources of leaks. the insertion to was put into the other week, and what it is is a smaller piece of pipe, eight to 10 inches in diameter with a rubber sealing to seal the pipe. since the opening of the pipe is a regular and it is spent, it does not perfect reseal it but it does a pretty good job of capturi what is ever coming out of that. we have it as high as 6,000 barrels per day based on the studies. at they have to do is pumped ethanol into it to make sure they do not have the hydrate problem. there's a mixture of gas, oil, and water that comes up a pipe that has to be separated by the production vessel on top. that is ongoing. the reason we cannot do it at the other week site is the beels

because of the bend. if they will have to capture it and treated with methanol and bring to the surface. host: the republican line. go ahead. caller: thank you for your service. they put a tube inside, why don't they put one on the outside overt with aflexible material to go over the pipe and seal it? has there been any discussions on that? at the end of the first iraq war halliburton was hailed as heroes for stock and all the burdens and oilfields and i know they're part of the problem, but are they participating in any of the situation to try to help stop this?

you are a very lucky person that president obama is president because you are not going on vacation on memorial dy, are you? guest: when i finished doing press i am flying home to louisiana. i will be on the beach with the cleanup crews, which is where i should be. regarding your first question -- the irregularities nature of the riser pipe that has been spenbe does not make it easy to steal it. almost everything likehat has been considered. we're trying to tap into the pipe, basically cut a hole in the pipe and put a ball on it. that has risk associated with it as well. that may be considered it the top kill is not succeful today as well. host: what are you going to be

doing today? what is your schedule? guest: i have a meeting at the white house i have a private staff. as soon a we have everything stabilize in the new operating environment, i will be off to the gulf coast. i plan to go to the impaed areas where the oil is on tour and i will work with the oil. i will work with contractors. maybe just talk to people on the street. host: will you be running this response from the new nebraska office or down of the gulf coast? guest: command posts have been set up around thgulf. operations are being conducted out of homa louisiana. the other command post is in mobile. when i do is deal with the

issues above that on resources, issuesike dealing with british petroleum on the video feed. dealing with members of the administration. and tried to take as much of the external burden of the commanders down there so they can focus on the task at hand. the chain of command, we are all accountable. host: argue in d.c. or do their? -- are you in d.c. or down there? guest: both. host: how long do you expect to stay at that post as the national commander? guest: i will stay as long as i am needed. i am required to retire by law. host: the suspect you will be in this role for months?

guest: i do not dig it necessarily has to be me having someone has to speak about the critical issues gog on and be in washington and down there when the need ises. host: the you expect this will go on years? guest: months? host: 9 years? g-- not years? guest: it is hard to say. there will be a lot of work going on. it is not unlike at the the initial response in petrina that we shifted to long-term recovery but you're still doing. host: unmanned on the independent line in new orleans. tsk callecaller: with all due ri am in no way of putting blame on you but as far as the response

after katrina and i understand what the doc has to do with oil spill cleanups and there are only so much they are limited with knowledge and capabilities of doing. however, i find it difficult that we're continuing to call this an oil spl. this is an ongoing fawcett. as far as resources go, this is not just an environmental problem, it is going to affect the economy. the way new orleans works, we have a lot of independent fishermen when whenever the economy goes bad, we do farewel well because our guys were all dead. they do a lot of things. i feel like the way this is

going and the lack of response and the fact that no one is accepting any outsiderso put their best foot forward with any ideas they have. if guesguest: you make a good pn the first part of your question and comment. one of thmost problematic things about this bspill -- and then not sure that is rthe right word -- but that threat is in directional and indeterminate. what i mean is it is a series of concentrations of oil that came to this service at different times that may have not been treated with this vdict dispers. there are concentrations of oil and miles of open water that are not impacted.

because of that we hve to have resources ready from basically central louisiana coastline to pensacola, florida. that really raises the degree of complexity and the resources required to do that. what we need to have is more agility and flexibility and bring the resources were there is no impact and put them where we need them, similar to southern parisienne right now. in response to your second point, everyone that has anything to do with this problem is being asked about it. people are being comment -- augmented by people of the national labs. i have beedown there on a couple of occasions to talk to them. the u.s. geological survey is leading a team to establish what the actual flow rate is. i would tell you that the best nds we confined are being brought to problem -- brought to the problem. host: tony on the independent

line. caller: good morning. why can't they just put a bomb and bomb that things tha shut? guest: you could do something kinetic down there. i am not sure we understand what the implications would be. we now have a board that is bringing hydrocarbons up under pressure to the surface of the ocean. even if we were able to close ld and pick the mess and, that oil has thepossibility of going out into the strata, closer to the surface. there are under water practices that are polof water and that could come to the surface through a crack and it would be out of control. i think that is a risk that is too great to take a chance on myself.

host: don on the democratic line. caller: pie have a solution to the problem. using another linyou sink anothp into the pipe so the oil will go tohe t. what you do is to slowly reduce the pressure with that type. you control the oil flow. guest: that is exactly what the solution t the prlem is. the issue is at intercepting the pipe has to be done much lower downo make sure they can relieve the pressure and do what they need to do.

right now there are two relief wells at are being dug to intercept the pipe. that will allow the current welter thl to be capped. it makes impetive we control e league of thetop of the well head right now. you are correct. the solution is to intercept the pipe. host: the independent line pearman caller. caller: are you familiar with the blow and the gulf of mexico in 1979? guest: yes, sir. caller: 10,000 barrels per day for 10 months or so.

all this business about how the world i coming to an end and so on and so forth i am hearing, will you discuss the impact of that and why we're all still alive and those kinds of consequences. guest: i am happy to do that, but let me make something very clear. the current situation is unacceptable. any delay than what it takes to stop the well should not be accepted by anybody. the fact that we had a catastrophic events in the 1970's that puts that much oil out and the notion that we have recovered today, i guess that is ok but saying this is anything less than catastrophic is not indicated here. i would say that that blood was not in the vicinity of the very sensitive marsh lands in barrier islands we have in louisiana. i understand your point but i do not agree to minimize the importance of this event.

host: cornelia on the republican line. caller: my son has a very good idea. he came up with an idea of omehow -- i do not know because i am not mechanical -- but did you have aumber or a way we can reach you and get ideaive i, and also i would like to ask our nation to pray. guest: i will give you a website. it is called deepwerhorizon response.com. everything can be accessed through the site. host: how many people are working on ideas to solve this? guest: we are getting thousands of calls. it is almost more than we can

manage. everyone has an idea. i get messages left on my phone. a lot of ias coming out. host: you are getting messages on your home phone? people have found to? guest: i willnot get into that. i work for them all to the central clearing house of ideas. -- i refer them all to the central clearing house of ideas. host: go ahead. caller: tha you for c-span. i served in e air force for nine years, and also i am a mechanical contractor for pipe fittings. i think everyone needs to settle down. this situation is something that impacts the entire climate. we are all using trains, planes, and cars. we will have this type of thing happen. serving overseas in italy i saw some things happen. we can get this under control.

pointing to each other has nothing to do with it. this is an economic thing we need to do. if we can come together, it will happen and hpen right. host: what are the chances that the top kill or any of other procedures that you are trying any other procedures -- do you think any of them will work or will we have to wait until august until this is finally resolved? guest: waiting until aug. is unacceable to me. i think doug settles estimate 60% success chance. that is what their position is. there are a couple of other things. in the can actually use a rally operated vehicle to cut the riser pipe of of the blowout

preventer and dredge but of a the in. they have not wanted to do that because they do not know how many hydrocarbons will be released. the second is in probably a more substantial fix would to be putting a new glow prevent dirt on top of the other one. it is actually two different devices. that can be parated by a hydrostatics felc valve. host: that is in the sequence of when went with that have been? guest: it would be at the top kill shot is unsuccessful and the use the drugs shot and were not le to reduce the pressure and go bac to the top job. then they would have two choices. one would to be cut the riser pipe and then put a new blow up

for a venture in. the pressure inside the blow up reminder that we have some indication. i was out on the relief role wells last week. -- i was out on the relief drills last week. if this fails, they will be in a position to bet anew blowout preventer aput on a new blowoutr on. you need to understand that whe the diagrams were extremely accurate, the entire package weighs 1 million pounds. it is four or five stories high. while it looks simple, and this very large enough to be suspended down. progressions are being made if

they have to use that. host: the independent line from newersey. caller: the tank looks pretty good, but have you thought of putting several pressure relief valves on the tank so the pressure would blow off until you can pipe them one at a time to the surfa? >> they call that a top hat solution. afollowing the sequence i just talked about, if these things fail, they would also take the top has at deves as well. they have those devic available if they are needed.

host: an e-mail asking, perhaps this is speculation, but what is the worst case scenario? what could happen? guest: if the leak goes up and checked or there is a catastrophic loss, oil would come out of the well until the pressure was equal to the pressure in the reservoir 18,000 feet below. right now the pssure in the reservoir is around 9000. that is the pressure that is forcing the hydrocarbons up. the pressure below the blow up printer isomewhere around 3000. what would happen is that there was open contacts of the oil into the water, it would continue to rise until the pressure of the water cumn was equal to the pressure of the oil pushing up. that would be probably counted in hundreds of days. that would be catastrophic. we need to avoid that at all means. caller: i have a suggestion.

why couldn't you take a share in a piece of pipe together temporarily to slow the flow down. could that be done? guest: theoretically it could but the problem is it would have to go around the ris pipe where it couldn't move the oil. right now there is only 3,000 feet above the riser pipe. then it turns sharply over. that is where one of the leaks are at. the layout of the pipe does not allow you to do that. and what you will ultimately need to do is put another blowout preventer over the existing one. ho: some have called for a government fleet capable of responding to a blown well in

the futur what are yourhoughts about in the future should it be the private sector or the government with some sort of sleefleet that response to a similar condition in the future? guest: i think a lot of this will be looked at. there was a basic decision and foreign some ofhe oil pollution act. we have been working under the paradigm for 20 years that there is a combination of rules for the private sector and the u.s. government. that has confused a lot of people in this response. another than that the assumption was me up most of the oil response and oil production lies the hands of the private sector. this is a assic economic case of should this be public goods or private goods? i think there will be a lot of discussion on this moving forward. host: one more quick phone call. susan on the independent le. caller: what happened to the

black box that nobody seems to be addressing? #2, here in florida they are starting a pre-clean up by gathering of haiup hair puttingo panty hose and putting it into a mesh bag -- will that work? guest: we have done a comparison and we have found that the traditional boom is superior. it does not appear that is an optimal use of that material. when you say black box -- i am assuming you are referring to the control box. a one of the banks that had to be done was to put an new electronic braino be able to operate the choke and kill

lions. for that reason the control panel that was there a failed was brought to the service and repair. it was put back down so it could provide the signanals host: thank you for talking to the public this morning. appreciate your time. thank you. >> hoe the house is in recess as democrats continue to work off the floor on a nearly $200 billion package of tax cuts and social spending. "congressional quarterly" writing that senate majority leader harry reid suggested to house leaders he could get 60 votes for the measure if they scale back a medicare doctor payment provision to 18 months or two queers down from three years. that in "congressional

quarterly"." we'll have live coverage of the house as always here on c-span. in the meantime we go to the defense department a briefing on afghanistan. >> good morning. we have the regional commander in afghan. he assumed hi durtes in afghanistan in december of last year he joined us previously in this format in february he joins us today from his headquarters in kandahar. he will make some comments, then take some questions. with that, general carter, i turn it over to you. >> thanks very much. what i thought i'd do for you this evening in afghanistan, this morning in washington if you'd like, is to give you a sense of where we've got to on this operation.

when i last spoke to youuabout it, it was a week after we did the launching of the clear face of the operation and we find ourselves about three month into that phase. i hope you've got in front of you a diagram explaining the battlefield gentlewoman tri-of the area. if you have, that will be good, i'm going to talk to it. the first point i'd make about the picture you have in front of you is it refers to central helmut, including several districts, the district of marja and other districts. within that area, around 600,000 people live. let me emphasize that figure, around 600,000 people. the reason so many people live there is because of the significant irrigation projects that took place in the 1940's and 1950's, paid for at the time by usaid with the corps of engineers in support. the operations we mounted starting on the 14th of

february were designed to reassert afghan government authority and control over much of central helmut. they were focused principally on a district where 100,000 people, the district of marja and areas ott northeast of marja on that diagram. in that area, around 08,000 people live. we're focused on between 180,000 and 200,000 people. since the operation was mounted, things have moved on. in mar ja, we find ourselves -- in marja we find ourselves in a position where we have a security presence throughout marja. we have, as we planned to do, conducted a relief with the original afghan national army troops that did the operation and replaced them with new afghan national army. we have afghan national civil

order police, still stationed in marja, which again is what we planned to have up until about b-plus 150, they are providing the close protection to the population. most of the security infrastructure is now constructed so that throughout the area you find a series of police check points and small p patrol places, all partnered up with u.s. marines and the afghan national army. you'll find around eight of the 15 schools open with teachers. you'll find all the bazaars are functioning. and you'll find a good deal of cash for work projects going on under some of the usaid projects. and you'll find that the usaid plus project, the agriculture voucher program, is working well. what you'll also find which is important is a district governor who is becoming increasingly assertive and is out reaching to the population, trying to connect himself and

therefore the afghan government to the population. that's all very positive. that said, we are not yet where we need to be. it's very important that the community council becomes genuinely representative of all the people in marja and at the moment,s that not the case. my sense is it will probably take another 90 to 120 days before all the population feels entirely comfortable with representing itself in the council. what is instructed is that -- is instructive is at queues outside the center are constantly at 300 to 400 locals. once again, they are locals from immediately around the district center and what everyone would -- everybody would like to see is people coming from throughout marja to see the district center and the administrative team. the reason they're not

forthcoming just yet is because there's still a level of intimidation in marja which will take the time i've prescribed to sort -- to sort. that intimidation is quite subtle. i'll paint a picture of what life was like on the 11th or 12th of february, before the operation was mounted. i want you to imagine a society in which there's no freedom of movement, you're confined to your house, your compound, your field. in which you are so suppressed and oppressed by the taliban and the narcobarrens you're not able to -- narcobarons you're not able to move away from your famalism the taliban control all the road junctions, they tax you for all the crops and particularly the poppy you're forced to grow. you have no access to education or to any form of welfare or health support. your children, therefore, are growing up without any real

opportunity or future. indeed, if you have a legal issue, you've got no access to fair justice. you might have access to pretty quick jusity, but it's pretty harsh and brutal. i think that's difficult for us to imagine. you're completely locked down and you have to real -- you have really no hope for the future. contrast that now to other parts of the area and the direction that marja is headed. where in the other parts of the operation, you discover we have a representative council led by a district governor. that is the second or third time it's been refreshed now and around 6,000 elders have got together during the course of the last couple of months to elect an electoral college of 600 elders who 10 days ago elected 45 of their number to represent the district. that means the population in that area is now properly connected with the afghan government.

that is the direction of travel that marja is going in. my sense is, when one goes over the hump of intimidation, you'll find marja is in the same place as this district. what's also striking, remember i said we're focused on the central area of 600,000 people, we now have freedom of movement throughout the area. before the 12th of february, it wasn't possible for governor -- for the provincial governor to travel from place to place. he can now do that on his own with his own security detail. before the 11th of february, he'd have had to have done it in a helicopter and he couldn't have gone anywhere near marja at all. indeed, we didn't even fly helicopters over marja ourselves. we're making progress. but in counterinsurgency, it takes time and patience and it's frustrating. that's what we're seeing at the

moment, but nonetheless we're going in the right direction. the next thing i'd like to do is turn to where we're focused next, that is on kandahar city, its subdistricts and the rural areas. i'd ask you to look at the other diagram that shows all of that. to give you a sense of the scale on here, it's about 45 kilometers by about 75 kilometers. the urban area, which is numbered with the 12 districts of kandahar city, is about eight kilometers square. for those of you who know the city of oxford in the united kingdom, it's about the same size at oxford, though i haste ton add that's probably where the parallel ends. we'll talk about the rural areas and highlight a couple of things on there the first one is the river which flows from the northeast side of the diagram to the west. the river is significant. in much the same way as the

helmut is significant. it's significant because you have a great deal of irrigation which provides fer sill ground. what makes life tick in economic terms around kandahar are the fruit crops of grapes in the district, center of the diagram and south, and pom gran -- pomegranates in the or chards that provides a staple economy around kandahar. in terms of the insurgency, the rural area of sari between the river and highway one, shown on the diagram there, is at the moment contested space. in much the same way as marja was, you'll find the area has the insurgent with freedom of movement and the ability to control and suppress and oppress the population as we found in marja. the same applies to the southwestern part of the area,

between the two rivers there on the map. it's also contested to a degree. and the southeastern corner of it where it abus district eight, you'll find insurgents who have a degree of control over the battle space there. it's also a case that the insurgency comes down from the north, not shown on your map, to feed into the northern area. we estimate there are probably between 500 and 1,000 insurgents who operate in that area. and they will be a military challenge to resolve which i shall come back to. the -- return now to the city with its 12 districts. around 500,000 people live in the city as opposed to the 400,000 or so who live in rural areas. what's interesting is that over the last eight years, there's been a significant rural to urban movement of the

population. the districts of nine and 12 to the north of the city are now a bit of a soweto-like area where single story mud build vgs grown up and 80,000 to 90,000 new residents live with not much homogeneity in terms of human culture. i want to paint a picture of the city. kandahar is the historic capital of afghanistan. it has huge cultural as well as other significance. it sits on highway one, the main road that links cities to kandahar and kabul. it also links 50 kilometers to the southeast with pakistan and the border crossing point. it's therefore sitting on the confluence of significant routes and significant traditional silk roads. if you go to the city today, you'll find a thriving,

bustling commercial environment. with bazaars and businesses and people earning a living. what you won't find, though, is much investment, for there's been little investment since the 1970's. you also won't find much electricity and indeed if you measure the kilowatts per year of the community in kandahar, you'll find they get half of what the average person gets in el salvador. so it's pretty challenging in terms of productivity and in terms of quality of life. nor will you find much sanitation or much health care or indeed that much education. for the average afghan who lives in the city, he's challenged again. he has no right of legal redress. his freedom of movement at nighttime is probably challenged by a degree of intimidation but what bothers him most is the level of criminality and it's a problem more of criminality and disorder than it is a problem of taliban and insurgency.

what is required in the city is bringing stability and organization to it. in that city, you'll find no vehicle registration, you'll find no registration for madrasas and seminaries. you'll find no registration for boarding houses, guest houses, hotels or any of the other thing ours societies take for granted. you won't find a police force connected to its population and working in support and protecting its population. what's needed is that this registration and regulation and proper administration is delivered so that the police force has something to get stuck into and to sort out and bring order to the city. what's also noded -- needed is the governance must be approved because at the moment, the mayor's office is not much more than one man deep and similarly, the governor's office and what's required is for the capacity of those offices to be built up so they can begin to bring the sort of

order and administration to the city i have described. now, we will do this using the resources that begin to come online with the second force package of u.s. army reinforce 789s -- reinforcements that arrive in and around kandahar because that provides us with the wherewithal to train additional policemen to improve command and control and information sharing of the forces in the city and importantly to impose a ring of security around the outskirts of the city and to keep any insurgent at bay and keep it out in the rural areas. >> what will be happening in parallel is we'll be turning our minds to the rural areas with a view to pushing a political strategy in its proper sense which will see security being rolled out into those areas where the insurgent

currently has freedom of action. that will be a matter of four to six months' work of -- worth of work from now onwards, i sense. what you'll find also that is interesting about this is that we'll define success here by the extent to which we roll out the provincial governor of the help, credible, inclusive and fair governments that is genuinely connected to the population. while it's partly a security problem, it's a problem that's political, it's -- it involves impunity and the culture of impunity that's grown up in the last eight years and it's about delivering the sort of stabilization and reconstruction projects which go to the heart of removing the causes of the insurgency. how do we get to that point? it's about connecting the population of the people to the government. that requires building representative governments from the bottom up.

in the city, my sense is that the 10 or 12 subdistricts will, over the next six weeks or so, begin to develop these community councils with district leaders who will be able to connect to the mayor and the municipal plan. now by building structures from the bottom up, one will compete with the parallel security structures and the parallel government structures that have grown up as part of this cultural impunity in the last eight years or so. i know when i give you a chance to question me, you'll ask me about karzai, recognizing he does fulfill a constitutional position as the chair of the provincial council, whose proper function is to monitor and provide advice and support to the governor. now clearly what is needed is for the governor's capacity to increase and for the governor to become connected to his population. that's what's happening at the moment. while the provincial council

inport of -- in support of the governor. that's what's currently under way and we'll very much judge success to the extent to which that balance switches and metaphorically speaking the queue outside the governor's office goes up and the queue outside the council's office goes down. this is not going to be terribly exciting for you in the press to look into, nor do i sense you'll see a massive change overnight. but i hope by the fall the average citizen in kandahar will wake up one morning, shake himself down and realize he's got a better right of redress, he's got better security and importantly, he feels connected to his government in a way that he wouldn't feel today. i hope that gives you some context against which you can ask me some questions. over. >> general, can you tell us

whether you are on schedule to begin major operations in june and also can you comment on the story this morning involving the governor who said he was once fired from a job with an american security contractor? >> taking your first question, the answer is that we are on schedule, but of course this has been very much led by afghans and of course it's important that the afghan government of president karzai directs what is happening. really it's them who are setting the schedule, rather than us. we are in support and partnership with them. as things stand at the moment, we are entirely on the line that we expected to be on when we conceived this a month or two ago. turning to governor visa, i read the article. the answer is, i don't know whether there's any truth in the article. at the moment, he's seeing

himself as the governor and he's confidently cutting on and i've got absolutely no evidence to know whether or not that article was true, over. >> general, general mcchrystal visited with your region a few days ago and was quoted as talking about the situation, the public perception of the situation being a bleeding ulcer. he talked about challenging the assumptions on that. what is your sense? is if a bleeding ulcer right now? can you overcome the perception in many quarters of the public that the strategy is not working? did you tell general mcchrystal any changes you'd like to see of the strategy such as more troops? >> yes. last thursday general mcchrystal did come down to have a look at what's going on in central

look at marja, he looked at lashkar gah and he looked at the central element and of course what he wanted to see was how all of central helmond was evolving and how things were or were not improving for the and he asked, as you'd expect a professional commander to ask, some difficult questions about whether we were going as quickly as we can. and the answer is that the process we went through of all those difficult questions we all concluded by the end of the day that we were doing what was needed in the right way, that the strategy was appropriate and that it would deliver results. but as i said in my opening remarks, we have to be patient and during the course of the summer, watching as the intimidation reduces and the population becomes more on side. the point, of course, though, is that this is all about perception. and counterinsurgency is about an argument between the forces