upside exposure. most executive pay plans i'm familiar with that purport to be performance-based or to tie compensation to performance have only the upside of that line. they don't have the downside, and that creates situations my colleague mr. mcwatters was referring to where executives are not really fully exposed to the risk that investors are exposed to in the public is exposed to. i'm just curious if you have a solution to this problem given the stakes involved for aig and for the country? >> i think when you have stock ownership, if you want to have downside, if you look at what happened to the associates at aig people have been there their whole careers, have been totally wiped out. through no fault of their own. keep in mind there were 44,000 trades, less than 125 are dead. almost all the peop at fp, 100,000 employees at aig suffered huge losses in various forms because of what happened. a lot of them are owned aig

stock stock eithern their 401(k)'s, their bonus plans or their stock plans. i would say they were huge losses taken by people that own the company. you on the company and if you screwed up you are going to lose money. >> my time is up but i don't think that is exactly what happened. people lost some of the money they made is not the same thing of their prospective investors at the public risking losing money they brought to the table. it is quite different. thank you. >> professor toske. >> one of the advantages of going last is i get to ask all the questions. i don't have vy many left but i guess i do have one and that would be does a -- make aig fp still pose a threat to the overall company? >> i believe aig fp's threat at the beginning of 09, was probably a 2,222,000,000,000-dollar cash call. that has been reduced to almost

4 billion. >> so there is still delay risked? >> i think the greatest risk is downgrade. that is why operating results are important. i think it is manageable. i will continue to-- and then the rest of it gets absorbed into the rest of the company has investments would have to wait until the duration gets their. >> thank you. >> thank you very much mr. benmosche. we appreciate you coming and we will hold the record open. >> thank you are a much. >> thank you. mr. moriarty. we now call our fifth and for the day final panel. jim moriarty, chief restructuring officer of the u.s. department of treasury. have you found a coortable place? i think you found a low chair, sir.

better you are shorter than i recall. there you go. the we go. much better. when you are ready, if you could give us an opening statement and holder to five minutes please. >> chair warning members of the panel thank you for the opportunity to testify. since joining the treasury department of may 2006 i have been-- 2009, sorry, i've been-- i've been primarily responsible for everything the xpayers significant investment and amican international group. as you know prior to joining the treasury department spent 28 years working in the private sector so basically on financial restructuring. i will use my time today briefly to outline our current commitments to aig, the company's restructurg plan in the exit strategy. the federal reserve bank of new york and treasury department have extended $132 billion of financial support to aig.

the new york that is provided 83 billion upport, 26 billi of which represents loans outstanding to the parent company, 25 billion of which represen preferred interest in aig's two largest international life insurance subsidiaries and $31 billn of which represents loans to two special purpose vehicles form to require troubled assets from aig in november 2000 a.. the treasury is provided 49 billion in the form of cod and preferred stock. in addition the aig credit facility trust established for the benefit of the taxpayers in connection with the original funding of the new york federal reserve credit facility holds aig preferred stock which represents approximately 80% of aig's outstanding common stock of a fully diluted basis. the substantial financial commitment has enabled aig to remain a concern with the investment grade rating however without government support because of the leverage in risk 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 restructuring plan is to restructure its business profile so i can sustain a grade rating on i own thereby permitng the government to exit supportive monetize its investments. the restructuring plan has six essential componts. first the company will have to substantially reducets debt or asset-- next the company will have to demonstrate independent access for the capital markets and secure standby lines of credit. third to to wind down of aig fp willave to be substantially completed. fourth aig will need to do destiny potential cash needs or credit ratings representing a drag on the company rating. fifth the company was to demonstrate its core insurance subsidiaries are profitable ll-capitalized and have repaired the damage to their franchises.

finally the company will have to demonstrate it has improved its risk management procedures and practices. today as you have heard, aig has made significant progress of each critical front. the pending aia and ella co-divestitures wi rult in a balance sheet of facilitated access to third-party capital. aig's this is that taxes for long-term debt market allowing them to refinance maturing debt and makeheir own needs without recourse from the parent. the wind downof fps made significant progress in targeted completion by. the core businesses of aig's future and its risk management practices have improved. at the conclusion of this process once again sustain an investment grade rating witht government support the government will-- whether we get all of her money back is an open question. let me briefly review where we stand today. if they ella co-to best assures

should be sufficient to repay the new york fed facility and retain the preferred interest and calico with interest and dividends. cash flow. [inaudible] as a result that it seems very likely that the $83 billion of outstanding fed support will be paid in full. simirly at current market prices common stock at at the sirri c represents has value. market conditions may change before the trustees have the opportunity to sell the stock and a very selling of the stock given how much they have will put significant downward selling pressure on the price of aig's common stock at the stock rucker today suggest there is real value there.

finally that leaves the treasury and f.-- 49 billion. the timing of our abilities to monetize will depend on the pace at which the restructuringlan our conference. whether treasury recovers all of its investment makes a profit while in large part depend on the company's operating performance and market multiples for insurance companies have the time the government sells its interests. >> mr. milstein, do you want to give me another sentence? >> one more sentence. assumes we are condent aig can stand alone we will move to exit is promptly as practicable. now i am ready for your questions. >> there we go. let me just get started here. i want to walk through this. i'm hearing you say it is very likely the american taxpayer will be repaid in full from aig? is that what i heard you say? >> what i said is that the new york fed which has $83 billion outstanding today is very likely

to be paid in full. the asset values we have seen, the sales prices for aia and ella co-should be so distant to pay them in full. >> that is not everyone though. >> the treasury department has 49 billion outstanding and as i sa in my testimony the recovery will depend on the performance of the remaining businesses and how those businesses are valued in the market at the time. >> so do you have any estimate at this point? you have heard the estimates and refer to the multiple times from cbo. >> i have. i think there are substantial, there are a lot of things at have to occur before we will know the answers that question question and as you have heard from the ktbw analyst today common stock has a value of $5. while that may be a lower stock price than the company's trading today, that implies the money is

good and even at that 5-dollar stock price, this series c preferred held by the series c tress which have a value of $3 billion is pure profit to the taxpayer. >> since i i see you wince and hesitate on the second number, that is you feel confident about the 83 billion-dollar repayment and a less confident about the $49 billion? do you feel that mr. benmosche is a bit optimist? >> he knows the business better than i do, and if he can in fact. >> you are principally responsible for overseeing him though. >> he is an experienced insurance-- he knows his business is better than i do and his mpetence confidence that he can get sunamerica financial to an 8 billion-dollar net afr-tax hurting if he can do that we are going to be paid in full. >> all right. what you see as the big shrift

here? i know you have laid out some of the things that pretty see the biggest risk? >> the biggest risk for an insurance company are the state of the financial markets and the big infected has some big anchise values. remember a insurance company writes long dated risk and it takes premiums and invest in a variety of financial assets. the markets go up, the assets go down, the assets are impaired so the fortunes of this company impart rise on theperformance of the financial markets. we are obviously in follows will mes now, so to me that is the greatest risk. >> so the american taxpayer is on this ride, along with the up-and-down of the stock market? >> there is no question we have made a substantial investment in the largest insurance company in the world. and we did that r in my view to prevent a further catastrophe in the financial market.

i think it has been very successful. we have stabilized aig, and he returns on that investment and on that policy approach will depend on the future performance of the company which in part depends on theperformance of the market. >> actually since we are hearing a lot of good news here, the preferred stocks helped the treasury are not paying for accumulating dividends, and that means that we the american taxpayer had given up abo $5 billion in foregone cash? why is treasury chosen that cour? >> that is a little more complicated than that. remember we own 80% of the common stock so the giving up dividends on the preferred is really just giving up 20% of them because the value of that dividend would otherwise go to the preferred and we own 80% of the common stock or could. >> wait, wait though. you are saying we gave away

$1 billion of the aig shareholders by not collecting the dividends that belonged to the taxpayer? >> chair warren with all due respect we haven't given away anything. the company could not afford to pay. >> i am hearing so much optimistic news. that cost us $5 billion. >> hasn't cost us anything. they were dividends they could not afford to pay. >> all right, and you are saying that that is the right because we are still going to sit in the common shareholder position? >> had they been able to pay the dividend they would first have to bring the preferred dividend current before they could pay a dividend to the common stock and that is where we are today, but at this point, at this point the company's ca flow, its net income after taxes are insufficiento support his preferred dividend. >> where do you anticipate between this optimistic view of

aig prepaying the american taxpayer in full and the position where we are today which is they can't pay the dividend owed? where are we going to oss that line, where we don't continue to lose money from a company that can't pay is dividends that it owes us? >> i laid out sick steps in the restructuring plan. if you would 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. we are selling stuff to pay back debt. selling aia and alico. we have a sale transaction through the life insurance operations in taiwan. we have so buildings in real estate around the world. >> i understand that. i afraid to report. >> bear with me. it takes time to take a company of this size and scope to get it down to a foot print where it is

actually reduced its debt, reduces leverage, rduced its risk. >> understand that, that is why ask the question. the question was, i hear this enormo optimism was suggesting that some kind of plan in mind and aig has a plan in mind. for where it will end up and what i see today is that it is not able to pay the dividends on those preferred shares so what i'm asking is when in this downsizing do expect those two to cross over so it can at least meet its obligation before the happy day comes that pays us back in full? >> if they aia it à la co-deals closed it will likely close sometime in the third or fourth quarter of this year, so that will result in an immdiate paydown of the federal reserve facility, the preferred interest at à la co-and that is 25 billion will be immediately

retired with the cash proceeds, and the balance of the consideration can be sld given the terms negotiated over the course of a year to a year and a half. when those proceeds are realized they should be sufficient to pay off the credit facities parent level in full so sometime i would expect in 2011 that if those deals close, the federal reserve bank will be paid in full for all of its existing exposure to aig. >> mr. mcwatters? >> thank yo. mr. moriarty, when the deal was struck in september, current shareholders of aig stayed in place. it was not a bankruptcy. they weren't wiped out. so today we have the situation

of pre-bailout shareholders. they may live to collect dividends sund, and may live to sell their stock for-profit come even though the taxpayers they lose cbo $36 million, omb $50 million. is that correct? >> well, let me just-- if in ct the preferred stock interest loses money it is unlikely they are going to get anything in the way of balance sheet is construct did, the preferred stockholders are going to get paid first before the common stockholders get anything. it is true that the stock is trading, common state-- stock is trading. no dividends are being paid on that sto, so it is a bet on the company's future. >> given it is trading for $33 a share today, there must be a lot

of people, a lot of smart people, a lot of analysts who ink the current stock will be repaid. >> that would be the inference you withdraw, yes. so that is good news for the taxpayer. the common stock is suggesting preferred stock is money good. >> okay, but te equity, the pre-bailout equity was not wiped out in the steel. >> it was substantially diluted. substantially diluted but not wiped out. >> if i may though, you have to take the price of the common markets that. the 80% of the stock that represents, represented either theory see, if you value that at the $33 a share at which the common stock market is trading the outstanding flow, that is an 18 billion-dollar profit to the taxpayer for the privilege of having made all creditors whole and for having put a wallop

around this company to kp it from failing. you know, if that is how it plays out i think all of you would agree, all you would agree that this was a very successful rescue. >> was only ccessful because the taxpayers got lucky. if we go back to september the 16th and we start looking at the credit cbo's and start looking at the rmbs, that was junk. nobody wanted it because it was not a market. we had no idea what it was worth it was simply purchase because it had to be purchased. the fact that it appreciated, that is to our benefit and that is great but that was far from insured or guaranteed at the time. >> listen, i was a private citizen at the time this rescue occurred, so i have no greater involvement with it than you did and i stood back probably the same distance from it that you did but if you listen to the

testony of my colleagues, my now colleagues at the federal reserve what you hear them tell you is 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. for the protection of the financial system of this country to try to prevent a panic. the panic that had already started that would would have bn worsened and exacerbated had this company failed. and i believe that. >> i agree on that is the reason i said in my opening statement that if you-- at the subsidies-- supposition iso save the world financial system, the world financial system is goldman sachs and jpmorgan in some other so the world financial system had collapsed, these institutions would have collapsed so it was certainly in their best interest to have to have aig buildout and ifthey can be bailed out at 100 cents on the dollar it is a happy day. >> i understand the ambivalence

about the view that aig 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 with you and i, the depositors in our banksand insurance licyholders across aig and every other insurance company. it was the tension ayers whose pension plans were racked by aig fp. it was the holders of stable value funds. >> i totally agree with what you are saying that none of those those folks you just mentioned got the wire transfer from goldman sachs and the others did >> in fact though they did comment that they did because the 44,000 trades that mr. benmosche talked about include all the stable value insurance that fps on it. it includes the various

transactions they did with pension funds to assure their assets to back. three single them out because they happen to have held very volatile aets on aig insured and the decline in the price of which were running through aig's income statement and creating enormous losses in the fourth quarter 2008. so in order to try to mitigate the losses that aig and in rder to try to stabilize its balance sheet, the federal reserve went after these two asset classes that were causing losses in such an stability and try to buy them at those prices, to terminate the losses going forward so as to try to keep his company from needing more money and becoming even more unstable so yes goldman sachs and the other counterparties to those rmbs and to the cdo's got paid, but it

was part of a broader effort to stabilize this company so they could honor everybody's contracts and pull. they weren't the only parties whose contracts were honored in full. everybody's in september 2008 have had their contracts honored by aig. >> mr. mcwatters? >> i understand. now and then. >> mr. silvers? >> i wasn't planning to assess but i feel compelled to do so. i notice mr. waters didn't bring up goldman sachs or jpmorgan so obviously it is on treasury's mind. is it not the case that in the week of september 15, hat the cash calls that the company could not meet were in the two lines of business in two lines of business only and but for the cash calls none of this would have been necessary and those two lines of business, and

it depends, believe it or not but you can argue against the insurance state regulators. they certainly were they-- in may have been the securities lending and but for those two enterprises, none of this would have occurred. >> not so. >> are you seriously asserting that if you wipe those two pieces of business is off the book that aig was nonetheless insolvent? are you accusing the insurance commissioner of lying? i am astounded at the links you will go to defend something that may in fact be indefensible. >>ctually have sat through the entire hearing today. i have ard the testimony of all the expert witnesses and fact witnesses before you, and i have 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 aig has pr guaranteed by parent. the parent has a 100 billion-dollar balance sheet of its own and on september 82008 with $15 billion a commercial pay, we know what happened to the commercial aper markets after lehman brothers filed and defaulted on $5 million in commercial paper. $15 billion in commercial paper at the parent copany, $80 billion of free poe, gimme repo markets went into seizure after lehman brothers filing and am much smaller amount of repo. $2 trillion of derivatives, 400 billion of credit derivatives concentrated very much in the real estate part of the market. had aig fp defaulted on the collateral requirements that it

have on september 16th, every counterparty, 44,000 trades could have terminated. >> mr. milstein, you are not paying attention to what i was asking. you actually agreed with me. what you said is that you set all kinds of terrible things would have happened had they defaulted on the collateral posting obligations but the collateral posting obligations were they triggering issues, right? >> the collateral posting obligations were triggered b the downgrade. >> guess i know that but that is where the cash need was that we. all the witnesses, all day long have said this. >> in the security-- refused to roll over. >> we all agree. let me move to the presence. as my colleagues have expressed,

there are these estimates from the government accounting bodies that 30 billion or 50 billion-dollar losses is likely. it appears from your testimony that but what that really means is, that they believe that they preferred, the series e. mack is worthless and in a better case scenario they believe thait is worth 40% of the face. and my understanding their point if you correctly? i know it is a little unfair to ask you what they think that is that essentially what that means? >> it is only worth 30 and there will be a 20 billion-dollar loss. >> explain to me why do you think they are wrong, because clearly you do. >> well no, i don't think any of those can predict the future. i think the government accounting office, under the

regulations bear subject to they have have to make estimates for the budgetary accounting, and i suspect they are being conservative in their view. i am working to get the taxpayers money back. i think we have, the company h a restructuring plan that they have worked on us and it is going to take time to implement, but and we have spent a lot of time on it, if they can implement it leaves them as an investment-grade company and that they can perform, if the two core businesses can perform the way mr. benmosche suggested they can, they should do very well. >> my time is up, thank you. >> professor toske. >> to continue on a related line and you were here for

mr. gallant's testimony and his estimate of what the stock price should be. can you sort of respond to that a little? apparently you disagree with him as well. i don't know whether you have had a chance to look at his estimate and they are widely different estimates. i recognize, understand how we come up with different estimates and we are making different assessments about the outcome. >> i have seen at work, and it is built on a number of assumptions,. >> can you tell me which one she would quibble with? >> in part i'm constrained not to quibble with any particular assumption because i actually know more an he does. i have much more nonpublic information. is a publicly traded stock and it would be inappropriate for me to do so. >> okay. i respect that. can you give us some broad indication that you are comfortable with, where you

think there are differences that you might have? >> from my point of view representing the-- i take comfort from his conclusion that the stock had positive value because it means the interest time trying to recover goingo be paid in full and it also means the stock has real value and that is pure profit to the taxpayers. >> okay. so i guess, i believe you answered chairman warren's question about when you thought the aig will no longer need government support. was your estimate in 2011? you said it would cross the light and. >> i think the deleveraging that is predicate to be able to garner a stand-alone investment rating is dependent upon these major asset sales closing and are monezing the value of the stock we are taking back in those deals. and i see that occurring

sometime between year-end this here and here in the next year when we fully monetize those interests. >> therefore, if it has got his leverage profile, that is its coverage to a point that looks like an investment great company that i thinke can begin assuming the other elements other structuring plan that i outlined which is this independent access to capital. the parent comany starts tapping the credit and capital markets independent of the government. i think that is when we can start thinking about exiting. >> mr. gallant also said he thought the share price, the current share price affected the traders believe that the government was going to walk away leaving, giving another gift to aig and. >> i think you can be certain that that is not going to occur.

>> okay. let me change yours just a little. you are an expert in restructuring. and you were not in the room at the time, as you made clear, but had you been, would you have done anything different? >> yeah, mr. benmosche and i go back a long way together. we have been on opposite sides of the table and 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. during it, in part because they think he's simplified some of the assumptions on which his analysis relies. during the period from september to november, when he assumes we have that three months the

federal reserve and government would have had the three months to conduct a negotiation, collateral was required to be po almost every other day. .. cross default.

so while you could have gathered to the 16 major counterparties in a room and have a negotiation at the time i was concluding a similar negotiation after nine months of negotiating with that very same group over the extent of their discounts and how it would be done in an entirely different situation. most importantly for aig, the company would have had to be prepared to take the risk of nonpayment and have that nonpayment put at risk every other debt instruments it had across the board. that would have made that company completely unstable. any creditor with a right to declare default would have brought the house of cards down. cards down. >> if i can just follow up on

that, you were talking about negotiating the same thing. were you negotiating something like that with the government backstop behind it where the government said i will mature between us we get paid so long as you don't cross default and bring the company down. does that change the negotiating dynamic somewhat? the care it the size of manhattan and a stick the size of the global economy. >> i'm not sure uncomfortable with as a citizen with the federal reserve using that power to pick and choose winners. >> i'm sorry for you uncomfortable with the long term capital management? >> the government didn't put money on its attrition. >> the government had nothing to do with what happened on the management? they were in the room and sat nobody leaves the room until there is a deal done here. >> i know it is tempting to believe the government could have made this possible and

extracted discounts, but just assume with me for the moment among the creditors have crossed the fault rights with not the territorial limits of the united states who held material claim and didn't care about the government of the united states or its policies wanted just to protect its rights to payment. >> and this is -- you weren't there, i wasn't there this is increase the conversation to have but how was that person ing to enforce those rights? either they had collateral which to hang on to them or they have to go to court and i think you and i have an idea how long that takes. >> by understand that. i a understand that this is a huge balce sheet with numerous creditors. >> is this what bankruptcy lawyers do for a living. >> i understand and i did this for a living. i can tell you that i would have been very nervous.

>> who wouldn't have been nervous. >> about threatening the fault or even defaulting without being prepared to put in the bankruptcy because he would be putting the holdersof claims and $100 billion of 2 trillion a notional derivative of the table on the first default. >> let me see this may be an an artful but from that point i want to go to another one that you make and that is the question -- its i ron mix aig is in the insurance business because the american tax payer and it up in the insurance business. they ended up answerin in effect that aig's creditors were going to get paid 100 cents on the dollar, and so i'm wondering what was the value of that insurance? what is the value of the guarantee wewon't let your company fail? you described potentially hearin18 billion-dollar profit accept it treats the insurance policy that came from the

american tax payers worth nothing. >> i think we are coming at this from two different frames of reference and again having spent time with the federal reserve and understanding what they thought they were giving up the time and in 2008, i don't think they thought they were underiting the creditor recovery and aig. they thought they were preventing a meltdown of the financial system, and a consequence of that was that everybody at aig had to get paid because just imagine that the government had tried to extract concessions from major counterparties, other systemically significant firms get business with aig. but with the risk have been then? what would be the inference ther creditors of those institutions would drop? >> i'm sorry, mr. millstein. we've been around this before but the question is what is the value of the guaranteed that the

american tax payer put into this? you describe the profit of 18 billion. potentially 18 billion, and i just want to put it against -- you treat the guarantee from the american taxpayers as if it costs nothing. >> i think the benefit -- this is the benefit to the american taxpayer the crisis we have lived through had been horrible impact on the economy wasn't worse and it turns out the cost of this operation with aig is that there is some cost to read 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 worse crisis. >> i have one small question to finish wh and that is you can't tell us why mr. gallant is wrong, and i understand the reason for that. others agree with mr. gallant and others do not the market is treating someone else but i would like your advice what he

would offer to an oversight panel. are we supposed to your word fr it that it's going to work out fine? how do we've got to be the different points of view if you can't give us anything more specific? >> the question i think you need to ask yourself today is as a result of the government's actions is the country to the 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 itsgovernment support and stand alone? yes. are there risks? certainly. a company of this size and scope can't help have risk to its come and a financial performance but in terms of where it was and where it's going it's making progress. >> so when people ask whether or not the american taxpayer is going to get repaid, the answer is we don't know we don't have anything to look at? >> i think you can say with confidence the federal reserve is going to be paid in full.

you can say that the -- you can say -- it was a comma, not a period -- that a well spected analyscame into your hearing and said basically the emf is a to be paid in full and the government sees it is worth something. >> but there will be losses. you think they are going to get paid in full and that the cbo estimated it is simply wrong? >> if he believes the stock as a potive value what i am going to get recover discreet be recovered. spec okay. thank you, mr. speed. mr. silvers? no, i'm sorry -- [inaudible] >> this means that aig is solvent in your opinion? in the opinion of the department

of treasury. sprick it is a legal term that has a positive net worth and is paying the debt as they come due. >> fair enough. >> aig appears to me like it is still too big to fail what are y doing as a majority shareholder to the risk? >> 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 are selling off its international life operations, the efp has not a shadow over its former self but it isabout one-third of its former self, and those risks should be wound down substantially by the end of the year. the aircraftand consumer finance businesses are now nancing theelves not drawing on the government to finance them and as you heard mr. benmosche say the company last year wasn't necessary to

finance. he hoped to people to raise money to refinance this year. so the core business of aig at the end of the plan will be on the largest financial casualty company of the world and a very strong annuity and life insurance provider in the united states. a much small, much simpler and the company that he's confint he can manage with the health of his board and its much smaller than the company defended confronted in september, 2008. >> so if, let's say a year fro now, year-and-a-half from now after this has been implemented ifig was to fail again for whatever reason, then a chapter filing under the chapter 11 followed by the insurance regulators to make whatever insurance regulators to in other words, working for a resolution of aig and its insurance

subsidiaries would seem to rk. in other words, there is nothing out there that would start triggering the dominoes that take down the other too big to fail to institutions. >> it's the plan i don'mind that has been implemented and the environment stage is relatively friendly as it is today. i think it's not to me to make a systemic risk determination that it seems to me this will be much less of a risk to the system than it was in september 2008. >> what are the consequences on the competitors of aig's insurance business who have received perhaps a subsidythat least with aig subsidies from the u.s. taxpayers if you are competing against aig insurance business what is the consequence? >> it's a pretty competitive business and in some sense i think aig is burdened by its

government ownership in the competition it has with other insurance companies. i think we are not and natural holder we are a reluctant owner but still a majority and you know when the government of the united states rolls over, you might not like being underneath so i think the answer is -- i think the sooner they can shed us the more competitive they will be. >> there's no indication to you that therate or the underwriting standard aig -- >> there was some chter, and you heard some noise about that in the market place shortly after in the early 2009. you haven heard that since. >> okay. i'm done. >> mr. silvers. >> mr. millstein, aig is the only participant in the treasury department program, systemically significant failing institutions

program. what are -- this might seem silly after the day's worth of testimony but it's not. what are the characteristics of aig thatade it an ssfi? >> for a company that you're going to taka majority of and invest $32 billion to create a program called failing institution it is a little contrary to the objective of getting your money that. i don't know her name did that. i, myself, don't tend to use it a lot as the program description it is e aig program. >> but the fact that was the only participant in that program, the only institution my colleagues have made -- mr. mcwatters was talking about how the treasury left 20% the common stockholders intact that was actually pretty tough treatment in relation to what happened with other people

and treasury at the time articulated to this panel and i know it is a different ad in a station that there is continuity, to this panel aig was differe. you disagree and tink that aig wasn't different? >> i don't know what was in their mind in that regard. in terms of taking the common stock? >> why does aig have a unique program all to itself? >> i don't know. i mean you know, we have -- the federal reserve was with the lender of last resort here first -- estimate this goes back to my question this morning sort of about what is thought, you know, what is the genesis of here? what is the -- when do things get set in stone? you seem to be seeing you guys

in the treasury inherited circumstance created by the fed. >> i think the sequence in written testimony later found n the tataris, and again this is a sort of advertisement for a regulatory reform resolution regime, because in september 2008 the government didn't really have the tools to resolve an institution of this size. the federal reserve could make a loan but you didn't really have the tools to put it to it quietly -- put it to bed quietly. >> a think it's critical fact thatou can't keep a clear answer to the question of-- and i understand why. it's not a criticism of you necessarily. but the fact that there is not a clear answer that can be articulate it across the administration's to why was it aig got unique treatment is a

problem negative and. and i just -- it's an observation. i want to shift to something you said earlier in response to one of my collgue's questions. you said you had to think about the impact on other systemically significant firms during the period in september, 2008. but firms are you taing about? >> i did say that but i said it in the context of warren's estioning that we assure all of aig creditors for he bailout. and again, what i was trying to convey their is i don't think that was a consequence of what we do. i don't think that was the intent of policy. the intent was to draw a line and prevent further collapse of the system and they drew the line at aig. and at the next point i was going to try to make was that if

and as some have urged the government in november or somewhere else along the way try to extract concessions from the aig creditors having intervened in aig would that have communicated the broad market about the government role with regard to other firms the other large institutions which by then have made investments in what they have promoted financial stability to think for the markets to think that the government was going to turnaround for all of the large financial institutions which it didn't own the preferred stock and demand a creditor concessions? would that have encouraged financial intermediation or discourage? what it promote stability or promote instability? i submit it for an official government policy the we were going to use o ownership stakes in these large institutions to demand concessions from their creditors

i think you would have had risk running away from those companies that the contagion associated with the government policy would he been he enormous. >> i'm sorry i think -- >> it would have discouraged people from doing business with our large financial firms. >> the point is about the death the lead could that it existed prior to the government putting its money on the table this s like financing the haircut is for those who were dealing with the company so that you get market discipline so you keep some market discipline and the government says we are going to provide the backstop and forward but we are not paying off the people who understood the risks they were taking at least not taking them off 100 cents on the dollar. >> but, chairwoman, you know and i know the task knows the financial and institutions don't ve a long-term debt. the debt is coming in and out

every day. so once you communicate to the financial markets that these large institutions are going to be required eckert kutz, the people lending money on a short-term basis withdraw ther credit. they withdraw their credit. >> not from aig. you are talking about the other participants in the market. but 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 never backed off from that and indeed we worked repeatedly in every meeting we had with the fed that they could not back off. that is why the decisions made in september had to be followed through in november in the way that they did. >> but if i may, you may have been urging or at least inquiring whether or not they should have been something different and what i am suggesting to you that they have done their short-term creditors would have run on them before you could have asked me i have a discount. >> i.t. we simply have to agree

to see the world differently. i apologize. professor troske? >> as a professional economist, i don't deal with individual companies. i sort of look in the economy and going forward, but when i hear comments that my colleagues on the panel are making what i think about it is the moral hazard problem going forward, the fact that when the government consistently makes creditors whole, creditors play an important regulatory role in the market ecomy and that they regulate the performance of the people they are lending money to. if the creditors don't believe that's important because the government is going to bail them out the no longer mix of regulatory role and then we have to create a government structure to regulate which is challenging and it's cheaper for the taxpayers and creditors actually to do the regulation for them

and i would argue much more efficient. can you sort of -- you talked about this instance pick can you may be expand a little on the moral hazard that is introduced by what we have done? i'm not sure i would agree with your statement that even if we get paid off and make a profit we are better off once you consider that dynamic. >> i think if we felt this episode with american economic history with strong reulatory reform we will have created d compounded the problems that exist in early september 2008 before aig was bailed outhe system that allowed without any capital behind that allowed it to leverage itself up the we've had without any effective holding company regulator pervising it and demanding

that it have the capitol and liquidity to support the risks it was underwriting. that system you could argue created the moral hazard that certainly has been compounded by what occurred. so we need to have the regulatory reform package to counter what has occurred and make sure this doen't happen. >> i would disagree with you. i think that if the government has consistently allowed creditors to fail and long-term capital back over the last 30 years, then we would have regulators the would be called a creditors and the problem but in texas than the first place because the creditors of aig would have taken an active role in assing that the company didn't get in the problems in the first place and the solution you're proposing is for the government to do what and how your creditors to do the job to how your regulators to do the job the creditors should have been doing is going to produce a much more inferior solution to

the one we have if we allow the market to function. >> i aee with what you said. but when firms of this size fail defects that are enormous so when i say as strong for the tory reform i mean everything that can contain the effect of the failure the size of the firm. >> and then offe a sad way to my next question which is a fairly general question i want to ask. i have heard the term systemic used more often since i've been appointed to this panel than i have in m entire previous life. but i have yet to se an operational definition that would allow me to know what systemic front looks like and what one doesn't look like and if you seem to be arguing that we need regulatory regime that

regulates systemic firms to offer systemic risk to do that i think we need a definition. and i would love for someone to give me one and you are sitting here so i'm asking you, sorry about that -- >> i would love to take the bait and join issue with you on that but i think we don't have the time. and i think it's important to the bill passes. i think you will see what emerged from the systemic risk regulator that is -- >> you think we are going to come up with a definition. >> i would be happy if we did and which the government basically says these are the firms we are going to backstops we know the moral hazard is here and it reveals were not and we got this dynamic. i guess i am less confident than you that that is going to our life. >> i hink that premise is wrong and some people worry about the sysmatic dissipation that no we are not going to backstop, you were in their revolution

regime where your going to be put to bed and have living wills or whatever you want to call it but severe regulary oversight to prevent having to do with aig again. >> thank you. i appreciate you being here today. this hearing is concluded. we will hold the record open for questions and additional documentation from the various witnesses. hearing adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2010]

>> "washington journal" is next. and then our coverage of the u.s. house would debate on the extenders' bill and defense program. in about 45 minutes, we will talk to a reporter about the obama administration's counterterrorism strategy. also on the program, senator from louisiana. will also discuss plans