OUR PLAN IS EXPLICITY DESIGNED TO AVOID HAVING TO DIVEST AIG ASSETS AT FIRE-SALE PRICES

TO BE NOTED: Via Zero Hedge:

"1
TESTIMONY BY MR. EDWARD M. LIDDY,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
AMERICAN INTERNATIONAL GROUP
BEFORE THE U.S. HOUSE OF REPRESENTATIVES COMMITTEE
ON OVERSIGHT AND GOVERNMENT REFORM
WEDNESDAY, MAY 13, 2009
MR. CHAIRMAN, RANKING MEMBER ISSA, MEMBERS OF THE COMMITTEE,
THANK YOU FOR THE INVITATION TO APPEAR BEFORE YOU TODAY.
I APPRECIATE THE OPPORTUNITY TO DESCRIBE FOR THE COMMITTEE THE
BUSINESS PLAN WE ARE EXECUTING IN ORDER TO PUT AIG’S TROUBLES
BEHIND IT, REPAY THE MONIES THAT WE OWE THE AMERICAN TAXPAYER,
AND SECURE AN OUTCOME THAT HELPS TO PUT THE AMERICAN
ECONOMY BACK ON TRACK.
AS YOU KNOW, I WAS ASKED LAST SEPTEMBER TO OVERSEE A
RESTRUCTURING OF AIG FOLLOWING THE GOVERNMENT’S DECISION TO
RESCUE THE COMPANY.
2
WE ARE WORKING HARD TO DETERMINE THE DESTINY OF THE
COMPONENT PARTS OF AIG. OUR PLAN CONTEMPLATES THAT AIG’S BEST
BUSINESSES WILL ESTABLISH SEPARATE IDENTITIES FROM THE PARENT
HOLDING COMPANY. THE PARENT COMPANY WILL BECOME SMALLER.
THE FINANCIAL PRODUCTS UNIT WILL NOT EXIST. THE MAJOR
INSURANCE COMPANIES WILL EMERGE WITH DIVERSE PRODUCTS,
STRONG MANAGEMENT, AND CLEAR GROWTH STRATEGIES WORTHY OF
INVESTOR CONFIDENCE.
HOW LONG THE PLAN WILL ULTIMATELY TAKE WILL VERY MUCH DEPEND
ON HOW QUICKLY AND HOW STRONGLY THE GLOBAL ECONOMY
RECOVERS. AND, BECAUSE WE ARE ALL COMMITTED TO ENSURING THAT
THE MISTAKES OF THE PAST ARE NOT REPEATED, WE MUST TAKE THE
TIME AND EXERCISE THE DILIGENCE TO DO THIS RESTRUCTURING
PROPERLY.
LET ME BE CLEAR – OUR PLAN IS EXPLICITY DESIGNED TO AVOID HAVING
TO DIVEST AIG ASSETS AT FIRE-SALE PRICES. IN FACT, JUST THE
OPPOSITE IS TRUE. WE INTEND FOR TAXPAYERS TO REALIZE THE FULLEST
POSSIBLE VALUE FROM EVERY ASSET DISPOSITION. AND WE INTEND THAT
EVERY COMPANY THAT EMERGES AT THE END OF THE RESTRUCTURING
WILL BE STRONG, TRANSPARENT, AND A CREDIT TO ALL OF ITS OWNERS.
3
WE HAVE ALREADY MADE SUBSTANTIAL PROGRESS IN THIS
RESTRUCTURING EFFORT, PRINCIPALLY IN FOUR KEY AREAS:
1. WE HAVE REDUCED, BUT NOT YET ELIMINATED, THE SYSTEMIC
RISK THAT AIG PRESENTS TO THE GLOBAL FINANCIAL SYSTEM;
2. WE ARE SELLING ASSETS AND BUSINESSES, DESPITE ADVERSE
CONDITIONS IN GLOBAL FINANCIAL MARKETS;
3. WE ARE STABILIZING AIG’S LIQUIDITY SO THAT WE DO NOT NEED
SUPPORT BEYOND THOSE AMOUNTS THAT THE GOVERNMENT HAS
ALREADY AUTHORIZED, ALTHOUGH AS I HAVE SAID BEFORE THE
STATE OF THE ECONOMY WILL BE A FACTOR; AND
4. WE ARE RESTRUCTURING SOME BUSINESSES FOR PUBLIC
OFFERINGS, FOR LATER DISPOSITION, OR TO BE WOUND DOWN SO
THAT FUTURE LOSSES CAN BE MITIGATED OR AVOIDED.
ACROSS THESE FOUR AREAS, WE HAVE, IN RECENT WEEKS, ACHIEVED A
NUMBER OF IMPORTANT MILESTONES, WHICH UNDERSCORE THE
PROGRESS WE ARE MAKING.
IN PARTICULAR, WE ARE TRANSFERRING TWO MAJOR FOREIGN LIFE
INSURANCE COMPANIES – ALICO AND AIA – INTO SPECIAL PURPOSE
VEHICLES IN EXCHANGE FOR A SUBSTANTIAL REDUCTION IN AIG’S DEBT
TO THE FEDERAL RESERVE BANK OF NEW YORK. WE EXPECT TO
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COMPLETE THE CONTRACTUAL ARRANGEMENTS FOR THESE TRANSFERS
IN THE NEAR FUTURE.
WE ARE ALSO TRANSFERRING THE GLOBAL PROPERTY & CASUALTY
INSURANCE FRANCHISE, AIU HOLDINGS, INTO AN SPV. THIS MOVE WILL
SECURE THE VALUE OF THAT VERY SUBSTANTIAL BUSINESS IN
PREPARATION FOR THE POTENTIAL SALE OF A MINORITY STAKE, WHICH
ULTIMATELY MAY INCLUDE A PUBLIC OFFERING OF SHARES DEPENDING
ON MARKET CONDITIONS.
AND WE CONTINUE TO MAKE SIGNIFICANT PROGRESS IN WINDING DOWN
THE COMPLEX DERIVATIVES PORTFOLIO AT AIG FINANCIAL PRODUCTS.
WE HAVE REDUCED THE FINANCIAL PRODUCTS RISK POSITIONS FROM
44,000 TO 27,000, AND HAVE REDUCED THE NOTIONAL EXPOSURE FROM A
PEAK OF APPROXIMATELY $2.7 TRILLION TO APPROXIMATELY $1.5
TRILLION TODAY.
WE CONTINUE TO EXPLORE MULTIPLE OPTIONS TO BREAK APART THESE
TRADING BOOKS SO THAT WE CAN REDUCE THE REMAINING RISKS, SELL
OFF PORTIONS OF THE BUSINESS, REPAY OR OTHERWISE RETIRE THE
AIGFP DEBT, AND EXIT THIS SEGMENT OF THE FINANCIAL PRODUCTS
BUSINESS.
5
WE CONTINUE TO WEIGH EVERY DECISION REGARDING THIS
RESTRUCTURING WITH SEVERAL CRITERIA IN MIND: WILL THIS ACTION
FACILITATE A REDUCTION IN SYSTEMIC RISK? IS THIS ACTION THE BEST
USE OF THE FEDERAL ASSISTANCE WE ARE RECEIVING? WILL THIS
ACTION ENHANCE OUR ABILITY TO PAY BACK THE GOVERNMENT? THE
RESTRUCTURING EFFORTS I HAVE DESCRIBED ARE A REFLECTION OF THIS
THOUGHT PROCESS.
SO, TOO, ARE THE GOVERNANCE IMPROVEMENTS WE ARE WORKING TO
BRING TO THE COMPANY. AIG IS AN INCREDIBLY COMPLEX ENTITY. IT
HAS A GLOBAL FOOTPRINT AND AN INTRICATE CAPITAL STRUCTURE
CHARACTERIZED BY OVER 4,000 LEGAL ENTITIES, CROSS-OWNERSHIP,
AND MYRIAD SPECIAL PURPOSE STRUCTURES( NB DON ). OUR RESTRUCTURING
PLAN MUST MAKE AIG LESS COMPLICATED. WE ARE WORKING EVERY
DAY TO STREAMLINE THE ORGANIZATION AND CREATE EFFICIENCIES
THAT WILL ENHANCE OUR CORE BUSINESSES AND IMPROVE
TRANSPARENCY.
THE INFUSION OF SUBSTANTIAL U.S. GOVERNMENT CAPITAL TO AIG
BROUGHT WITH IT A SUBSTANTIAL NEW SET OF RELATIONSHIPS FOR THE
COMPANY: FIRST AND FOREMOST, WITH THE AMERICAN TAXPAYER AS
AIG’S LARGEST SINGLE SHAREHOLDER; WITH THE TAXPAYERS’
REPRESENTATIVES HERE IN CONGRESS; WITH THE FEDERAL RESERVE
6
AND U.S. TREASURY AS OUR PRIMARY DAY-TO-DAY PARTNERS IN
GOVERNMENT; AND MORE RECENTLY, WITH THE TRUSTEES ALSO
APPEARING TODAY.
GIVEN AIG’S UNIQUE SITUATION, THESE RELATIONSHIPS ARE NOT ONLY
NEW, THEY ARE IN MANY WAYS UNPRECEDENTED. WE WORK CLOSELY,
FOR EXAMPLE, WITH THE FEDERAL RESERVE BANK OF NEW YORK AND
THE U.S. TREASURY. REPRESENTATIVES OF THE FED AND TREASURY,
AND THEIR ADVISERS, ARE ENGAGED WITH VARIOUS AIG OFFICES EVERY
DAY. WE VIEW THEM AS OUR PARTNERS.
YET, AS WE FORGE THIS PARTNERSHIP, THE PARTNERS KEEP TO THEIR
RESPECTIVE ROLES: THE FED, LIKE ANY RESPONSIBLE CREDITOR,
MONITORING CAREFULLY AND ADVISING UPON OUR STRATEGIC
APPROACH. AND AIG’S EXECUTIVE LEADERSHIP DEVISING AND
EXECUTING OUR STRATEGIC PLAN AND MANAGING THE COMPANY IN
CLOSE CONSULTATION WITH THE BOARD OF DIRECTORS.
WE ALSO CONSULT VERY CLOSELY WITH THE TRUSTEES – AND WE
APPRECIATE THE TIME THEY HAVE DEVOTED TO IMMERSING
THEMSELVES IN THE INTRICATE DETAILS OF OUR RESTRUCTURING PLAN
AND OTHER CRITICAL ISSUES. THEIR MATURE BUSINESS JUDGMENT IS AN
ASSET TO THIS SITUATION.
7
I HAVE LED AIG FOR EIGHT MONTHS NOW. AND I WANT TO ASSURE YOU
THAT THE PEOPLE AT AIG TODAY ARE WORKING AS HARD AS WE CAN TO
CONTINUE TO SERVE OUR POLICYHOLDERS AND CUSTOMERS, AND TO
SOLVE AN EXTREMELY COMPLEX SET OF PROBLEMS FOR THE BENEFIT OF
AMERICA’S TAXPAYERS.
WE NEED YOUR HELP AS WELL TO ACHIEVE THE RESTRUCTURING OF AIG
SUCCESSFULLY. IT IS CRITICAL THAT WE NOT LOSE SIGHT OF THE FACT
THAT WE ARE PARTNERS. WHEN THE EMPLOYEES OF AIG MAKE
MISTAKES, WE EXPECT TO BE CRITICIZED. BUT RAMPANT,
UNWARRANTED CRITICISM OF AIG SERVES ONLY TO DIMINISH THE VALUE
OF OUR BUSINESSES AROUND THE WORLD – TO THE DETRIMENT OF OUR
SHAREHOLDERS, INCLUDING TAXPAYERS, WHO OWN SOME 80% OF AIG.
WE RECOGNIZE OUR RESPONSIBILITY TO WORK HAND IN HAND WITH THE
GOVERNMENT TO PRESERVE THAT VALUE, AND I ASSURE YOU THAT IS
OUR GOAL. WE CONTINUE TO WELCOME A FRANK AND OPEN DIALOGUE
WITH CONGRESS ON OUR PROGRESS IN RESTRUCTURING, SO THAT YOU
CAN BE IN A POSITION TO SUPPORT OUR EFFORTS. THIS SUPPORT IS
ESSENTIAL AND WILL HELP US TO PRESERVE THE VALUE OF AIG
FRANCHISES FOR THE BENEFIT OF AIG’S STAKEHOLDERS – THE AMERICAN
TAXPAYER MOST OF ALL.
8
WE CANNOT CONTROL THE MARKET CONDITIONS THAT WILL PARTLY
DETERMINE THE TIMING OF AIG’S RESTRUCTURING. BUT WE ARE
CONFIDENT THAT OUR APPROACH IS RIGHT, AND THAT IF WE DO THIS
TOGETHER WE CAN DEMONSTRATE TO THE WORLD THAT RESPONSIBLE
GOVERNMENT AND CAPITALISM ARE STILL THRIVING IN THE UNITED
STATES.
WITH THAT, MR. CHAIRMAN, I THANK YOU AGAIN FOR THE OPPORTUNITY
TO APPEAR BEFORE YOU TODAY AND AM HAPPY TO ANSWER ANY
QUESTIONS YOU AND THE COMMITTEE MAY HAVE."

what hope does that offer for the value of the rest of AIG?

TO BE NOTED: From The Aleph Blog:

"What to ask AIG May 12th, 2009

The Committee on Oversight and Government Reform has asked Ed Liddy and the AIG trustees to testify Wednesday. Here are the questions that I would ask, given my recent piece on AIG.

• Are you going to be able to use all of your deferred tax assets? What level of sustained profitability does that imply, and how are you going to get there?
• Are you going to destack your Life and P&C subsidiaries to avoid double counting of subsidiary capital on a statutory basis?
• If relatively clean and simple subsidiaries like Hartford Steam Boiler and 21^st Century got sold for bargain prices near where AIG bought them, and below book value, what hope does that offer for the value of the rest of AIG?
• You’ve lost a lot of money recently. What do you project to be your level of annual sustainable profitability to be over the next three years?
• There are rumors that AIG is slashing pricing to stay alive in the short run on a cash flow basis. Many competitors are alleging this. Is this true?
• What have happened to your efforts to sell AIA and your asset management arm?
• What has happened to your efforts to sell International Lease Finance?
• How is United Guaranty going to survive amid mounting residential mortgage losses?
• As you wind down AIG Financial Products are you finding “deadweight losses” where the subsidiary was fundamentally mishedged?
• How are you dealing with defections of key personnel, and bad employee morale?
• How are you dealing with increased surrender activity in your domestic life subsidiaries? Will you need more capital as a result?
• Are you going to try to sell Alico?
• Are you going to try to sell AIU?
• What are the core businesses that you are going to keep, and why are they worth keeping?
• How will AIG repay the US Government in full?
• How have you reduced risk in your asset portfolio?

That’s all, and I hope Mr. Liddy, who I have met and I think he is a bright guy, will do well. He is a bit of a bagholder in the AIG mess."

since the AIG name is so tarnished that customers might balk at it

TO BE NOTED: From Business Week:

Liddy on AIG's Long Road Ahead
In an exclusive interview with BusinessWeek, CEO Edward Liddy says he expects AIG's turnaround to take years, but adds, "This is not a life job for me"

By Joseph Weber

Edward M. Liddy, the would-be rescuer of American International Group (AIG) who has become a target of wrath over Wall Street excesses and the ravages of the recession, knows all too well what is driving that anger. "There's fear in America," says Liddy, who came out of retirement last September to run AIG for the government for $1 a year. "People are very concerned about their jobs, their homes, their pensions."

And Liddy, who is no fan of the multimillion-dollar bonuses agreed to by his predecessors at AIG even while he tolerates them, knows very personally what such fear and want mean. Liddy, who earned more than $130 million over eight years leading Allstate (ALL) until 2007, grew up so poor that he, his mother, and sister were thrown out of their homes at times after his father died when he was 12. There were days, he says, when food was short in his native New Brunswick, N.J. "We'd have dinner for three and food for two and my mother would say, 'I don't feel well right now. You two go ahead,' recalls Liddy, now 63. "You can believe I know the angst of the American taxpayer and what's happening in economically uncertain times."

But rage and fear, he says, should not blind people to the best way out of the AIG mess. In an exclusive interview with BusinessWeek, the reluctant AIG chief says he and others at the company want only to pay off the $80 billion that the government has poured into the company so far and help it make money on another $50 billion in investments the government has made in AIG-related operations.

A Very Difficult Case to Make

The approaches AIG management is taking, even if they seem to only ramp up the furor, should do just that over time, he says. And Liddy says they should also leave surviving companies that will be able to keep many of AIG's 116,000 global workers employed and its policyholders protected.

Making that case has been enormously difficult for Liddy, a tough-minded executive whose professional climb has been a modern Horatio Alger tale. He worked his way through Catholic University and launched his career at Ford (F) after collecting an MBA at George Washington University. He worked at pharmaceutical company G.D. Searle & Co. and later helped take Allstate out from under Sears, Roebuck and Co. He then led Allstate.

Liddy's tenure at AIG, since taking the helm at the request of former Treasury Secretary Hank Paulson, has been marked by public relations disasters that he didn't create. Only a few days after the federal government launched the bailout of AIG last September, top executives—not including Liddy—wined and dined independent agents at a posh California resort for a week, costing some $443,000. In more recent days, of course, disclosures about some $165 million in retention bonuses have drawn the ire of no less than President Barack Obama.

Liddy himself was skewered over the bonuses this week in a daylong hearing in which he was grilled by a couple dozen congresspeople. One, reflecting the public outcry, says AIG nowadays stands for "arrogance, incompetence, and greed." Says the chronically understated Liddy, "It was a very uncomfortable experience."

Would've Handled Bonuses Differently

Many critics have said the brouhaha over bonuses and marketing meetings also reflects populist rage against Wall Street, anger at how the pinstriped set seems to be making out lavishly at public expense in a game that's rigged against the public. But, as Liddy sees it, it also reflects the huge cultural gap between doing business in the private sector and doing it publicly and in ways answerable to politicians and bureaucrats.

Take the marketing meetings. Such meetings, he says, are the way business is done in the insurance world. Companies such as AIG want independent agents to pitch their policies and other products instead of those of rivals, and bringing those agents to resorts to both school them in the products and reward them for selling them is just ordinary business practice. "Do you hold them in nice places? Yes, because you want people to come," he says. While they are there, he adds, the agents get hefty doses of education in so-called suitability, so they don't wind up selling risky long-term products—say variable annuities—to 85-year-old widows.

As for the bonuses, Liddy would have handled them differently. He says he would have offered less generous payments, made them contingent on performance, and included a "clawback" provision to take the money back if people left. But he says he inherited the contracts for the bonuses from his predecessors who arranged them as long ago as late 2007 and early 2008. He says he feels bound to honor the contracts, arguing that in insurance, in particular, a company is only as good as its ability to keep its promises.

Can Ill Afford Key Staffers Leaving

He adds that the staffers who have collected the bonuses—more properly called retention payments—are needed, too, to wind down some $1.6 trillion worth of complex derivatives contracts so the company can exit that business without facing multimillion-dollar losses.

This, too, reflects the gap between Wall Street and Main Street, he suggests. On Wall Street, multimillion-dollar bonuses are the way people get paid, as they handle business that can cost a company far more if a trade is mismanaged. The people handling the derivatives contracts—whom he pointedly says are not the ones who got the company in trouble over them last fall, since those folks have been canned—have so far managed that business down from $2.7 trillion at the end of December.

"Those people don't want to work for free," he says. They must be paid well, he says, to stay on—especially since they are managing themselves out of work, in effect. The amount of money AIG can lose if they walk or people unfamiliar with the business take over is just too great, he argues. "You can lose 10 times the $165 million in a day on a bad trade, and that's just not a good risk in our judgment," he says.

AIA and Alico to the Fed?

Liddy's game plan to restructure AIG also has run into disastrously bad timing. He has refused to sell a well-regarded Asian subsidiary, AIA, for lowball offers( NB DON ). Though some critics argue that the attempt to sell the unit came too late and involved giving far too little information to prospective buyers, he insists there was plenty of detail and ample time. He himself tried to pitch it to Chinese investors, though they were scared off by the market meltdown in the U.S. The problem, he says, is that would-be buyers—big insurance companies, mainly—have seen a huge slide in their stocks, so they don't have the up to $25 billion to do a deal for the company.

Liddy is now planning to put AIA and another big subsidiary, Alico, into a trust and turn that over to the Federal Reserve. The move would take the units off AIG's balance sheet—though AIG would continue to run the companies—and reduce or eliminate AIG's debt to the Fed. Eventually, he says, the Fed could sell the trust or spin off the companies in a public offering. As for the rest of AIG, he expects to change the names of its many insurance companies and perhaps the parent, since the AIG name is so tarnished that customers might balk at it.( NB DON )

Liddy expects that the turnaround of AIG will take several years. Given what he has had to endure, he says he may not be around in the top job to finish the task. But he insists he will stay, despite all the grief and occasional threats he gets, until he positions the company on the road to recovery. "This is not a life job for me," he says, adding he'd much rather be promoting Chicago for the Olympics, helping hospitals back in the Chicago area, and enjoying his family. "I want to get it moving in the right direction."

The CEO took the position because former Treasury Secretary Paulson, a longtime friend, asked him to. He says he felt a need to give back to the country, since it has taken him from rags to riches. Pulling AIG out of trouble would be something good, he insists, for the nation. "The country needs a victory," he says.

Joseph Weber is BusinessWeek's chief of correspondents, based in Chicago."