House AIG Hearings; AIG Shares Up 44 Percent
LEMON: All right. We are monitoring developments today on Capitol Hill. There you see to the right of your screen, testimony on Capitol Hill from those in charge of AIG. They are getting questioned, really grilled, by lawmakers about how AIG got to this point, and what of that $160 million, $170 million in bonus money that are going to AIG employees -- that is going to AIG employees, because -- why did it happen? AIG got millions and millions of dollars in taxpayer money. Taxpayer money because of the bailout. So we're following that to see what happens. The outrage over the bonuses at AIG sweeping the nation. That is no doubt about that. But on Wall Street, investors are reacting in a very different way of. Susan Lisovicz at the New York Stock Exchange with a look at AIG's shares. Susan, the shares are up?</s>SUSAN LISOVICZ, CNN BUSINESS CORRESPONDENT: The shares are soaring, Don. AIG shares...</s>LEMON: What is that all about?</s>LISOVICZ: Well, they're up 44 percent right now. That translates into about 44 cents. AIG shares right now are about $1.40.</s>LEMON: Can you say that's soaring, though? I mean, I guess from where they were.</s>LISOVICZ: Well, that's a very good point.</s>LEMON: Yes.</s>LISOVICZ: I mean, when you're talking about a gain of 44 cents, I suppose you do have to put a little asterisk or a footnote next to it. The fact is, AIG shares were trading well under $1.00, just days ago. So the stock is more than doubled this week. It's been one of the beneficiaries of the rally that we've seen. But having said that, whether you say it's soaring or not, they're much higher today. You have to remember, this is a stock that was trading at $70.00 just a few years ago. But then again, it reported the largest quarterly loss in U.S. history. Overall, check out the Big Board. The Dow Industrial has given back some of the gains we've seen in the last week, but a nice sprint it was. Blue chips up. They were about 850 points in five of the last six sessions, Don.</s>LEMON: All right, Susan Lisovicz. Hey, Susan, thank you very much.</s>LISOVICZ: You're welcome.</s>LEMON: We're going to check in with Susan in just a little bit. We want to get back to Capitol Hill where Congressman Barney Frank has been doing some questions to executives at AIG. Let's listen in.</s>FRANK: Now, I -- this may be beyond the scope of what the GAO got involved in, but you know, Ms. Williams, that the rationale for the intervention by the Federal Reserve was to prevent systemic risk, if there was a total collapse. Does the GAO have any opinion on whether or not that was about fear (ph)? Or was that beyond the scope of your mandate?</s>ORICE WILLIAMS, DIRECTOR, FINANCIAL MARKETS, COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE: It really is beyond the scope. We were attempting to identify what the goal was...</s>FRANK: I appreciate it. That's valid. I -- there's no question, you know, it's fair. I would just note -- and it's clear that there should have been some conditions. But I was rereading the transcripts, probably to remind myself of what had happened. We should note that the Federal Reserve and the secretary of the Treasury at that time, Secretary Paulson and Mr. Bernanke, were being criticized, because they had not intervened to stop Lehman Brothers from falling apart and not paying off. So, they are, to a certain extent, damned if they did and damned when they didn't, because there was a consensus forming -- well, first, Bear Stearns. There was intervention for Bear Stearns, and there was a lot of criticism. And people said, this is capitalism; you've go to let people go belly-up. And then Lehman Brothers went belly-up, and it turned out bellies didn't look so good to people. So, when the next one came up, which was Merrill -- the AIG -- they intervened. Now, that doesn't mean they did it right or wrong. But we ought to give that context. And there was a significant consensus that letting Lehman Brothers fail with no intervention was a problem. But this is the question I want to ask our various witnesses. And it's not exactly what they were asked about, but we do, in addition to doing everything we can to get the money back, an important part of our job is to minimize this kind of damage, and in particular, not to have either the Bush administration or the Obama administration -- any administration -- forced with the choice: either you let Lehman Brothers go completely under and have a problem, or you bail out AIG's counterparties and have a problem. We have under the law reasonable means for reacting when a bank is going bad. It's called resolving (ph) -- one of those nice antiseptic words. We can resolve banks. Wachovia went under during this period, Washington Mutual. Neither of those and other banks caused the kind of disruption one way or the other that we saw from Bear Stearns or Merrill Lynch being bought by the Bank of America, et cetera. What Secretary Geithner has asked for in a recent to the speaker -- and Mr. Paulson was for this, and he's testified about it, Mr. Bernanke has. An argument is, I think, very strong, that there should be a statutory framework, so that regulators can step in and unwind an institution, and not be faced with the all-or-nothing choice that they had with regard to -- I think people would find both the Lehman Brothers outcome and the AIG outcome somewhat unsatisfactory. I'm wondering -- again, it wasn't on your agenda. It may be beyond the scope for some. But on the other hand, from OTS and others. Do you have opinions as to whether or not we ought to be moving towards some statutory framework, so that you can unwind these troubled institutions without the kind of choices we've had? And Mr. Polakoff, I want to begin with you.</s>SCOTT POLAKOFF, ACCONTING DIRECTOR, OFFICE OF THRIFT SUPERVISION: Yes, sir. We do believe that there should be that statutory process. We do believe that, if there is sufficient discussion and debate within Congress and a decision to move forward with the systemic regulator, that the power should fall within the systemic regulator to examine, and, if necessary, for receivership activities. Yes, sir.</s>FRANK: Anyone else? Yes, commissioner?</s>JOEL ARIO, INSURANCE COMMISSIONER, PENNSYLVANIA INSURANCE DEPARTMENT, ON BEHALF OF NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS: Yes. Within the insurance subsidiaries, there's a clear process, too, for unwinding, just like there is with the banks.</s>FRANK: Right.</s>ARIO: And two things would happen with AIG in this kind of situation. One, most of their business would go to competitors, so there'd be a smooth transition for policyholders. And, to the extent that didn't happen, there would be a guarantee fund protection behind it (ph). So, we would think, as part of any -- we agree with OTS that there ought to be a systemic approach to this. And we would think if...</s>FRANK: And let me just say, one of the advantages of a guarantee fund is it can come with limits, so that people are not rewarded un- ended (ph) -- with open-ended funds. But in the guarantee funds, there are usually limits, which is a guide to prudent investing. I have -- my time has expired, Mr. Chairman. If either one has a brief comment, but I think it's probably not a GAO issue.</s>WILLIAMS: Well, actually, I would just like to comment. The framework that GAO rolled out in January of this year for the financial regulatory system, has an element that directly...</s>FRANK: Well, thank you.</s>WILLIAMS: ... speaks to that. And that's the provision to make sure that the exposure to taxpayers is limited in any framework going forward. So, this would fall into that category.</s>FRANK: I thank you. That's something this committee will have to focus on.</s>REP. PAUL E. KANJORSKI (D-PA), CHAIRMAN: Thank you very much, Mr. Chairman. And now the gentleman from Alabama, Mr. Bachus, five minutes.</s>REP. SPENCER BACHUS (R), ALABAMA: Thank you. Ms. Williams, Chairman Kanjorski and I, part of our request to you is to determine whether there had been any measurable progress in recouping the taxpayer dollars. Have you seen anything, any optimistic signs or positive signs? And one of the things I will ask you in that question, or even choose to use this or not. But in the Fed's special purpose vehicle, Maiden Lane, I notice that those assets, or those contracts and credit default swaps, may be performing, at least apparently, at a higher level than when they were acquired. But would you comment on the broader question, and maybe that detail question?</s>WILLIAMS: Our work in this area is going on and on an ongoing basis, in terms of the status. We looked at where they are, and we noted the challenges. And that's kind of -- at this point, we see a number of challenges that AIG continues to face in terms of restructuring itself. So, you know, I would say at this point, we're kind of neutral until we continue to do some more work in terms of the outlook.</s>BACHUS: OK. Thank you. And Mr. Polakoff, you acknowledged that, I believe, that you were somewhat aware of the worsening situations of the financial products subsidiary. But you had, I think admit that OTS didn't foresee the extent of the risk to AIG. Is that correct?</s>POLAKOFF: We did -- yes, sir, we did not foresee the extent that mortgage market would deteriorate and the impact on the liquidity of</s>AIG-FP. BACHUS: Did you understand the complicated use of the credit default swaps? Did you -- and the exposure that they were creating for the company, the amount of risk -- was there an appreciation of that?</s>POLAKOFF: Yes, sir, absolutely. We reviewed the models. We understood the models. We worked...</s>LEMON: All right. You have been watching and listening to what's happening on Capitol Hill today. Really, testimony of -that's going to come up from the head of AIG as to why these bonuses are being paid out, why exactly this happened. What you were listening to mostly was Congressman Barry Frank questioning members. This is really the group that oversaw the bailout money, the money that was given to AIG. The people that you saw there, the African-American woman, her name is Orice Williams, she's the director of Financial Markets and Community Investment and Government Accountability Office. Also, the Honorable Joel Ario, insurance commissioner of Pennsylvania, also the Insurance Department on behalf of the National Association of Insurance commissioner, explaining to the politicians here exactly what went on, and why it ended up this way. And the person who heads that is Scott Polakoff, he is the acting director of the office of Thrift Supervision. Two different panels here. This is the first panel. The second panel will be the more interesting panel, because that's when Edward Liddy, who is chief executive officer of AIG, the American International Group, is going to take questions from these folks. Let's move on now. We're going to monitor that and if any news comes out, we'll bring it back to you. Another politician on the forefront of bonus rage is New York Attorney General Andrew Cuomo. And CNN Radio's Steve Kastenbaum is live in New York now. Steve, I was reading this letter - reading the letter from - that he wrote Mr. Cuomo, to Barney Frank. And he's saying, his office reviewed the legal opinion that AIG obtained from its own counsel, and it is not all that clear that the lawyers even considered the argument that the only -only by grace of the American taxpayers, that members of the financial products even have jobs, let alone a pool of retention bonus money. He feels that these - this bonus money should not have been paid out.</s>STEVE KASTENBAUM, CNN RADIO CORRESPONDENT: That's true, Don. And it's really interesting to read this letter and see where New York's attorney general is going here. He believes that that would be a fraudulent conveyance. He thinks that if AIG officials made a commitment to pay the bonuses, knowing full well that the company was going down the tubes and wouldn't be financially capable of making those payments without aid from the government, that that would be a fraudulent conveyance. He told this to reporters in a conference call just a few days ago. And that would be his angle, if he were to pursue this in court. The New York attorney general's office has a history of going after businesses on Wall Street, so it's not unusual for the attorney general of New York to get involved in cases like this.</s>LEMON: And he goes on to say that we know that AIG was able to bargain with its financial products employees, since these employees have agreed to take salaries for $1.00 for 2009 in exchange for receiving their retention bonus packages. So he's saying, all of this is negotiable and it's not set in stone. Just because you have a contract doesn't mean you have to pay that money.</s>KASTENBAUM: That's right. That's his argument. Although, you know, I spoke to guys who work in the financial sector on Wall Street who get bonuses every year. And they say that these bonuses are not directly tied to the financial health of the company, but rather to the amount of business each individual brings into the company. Not surprising that guys on Wall Street would be defending...</s>LEMON: But Steve, don't you think that the two would go hand-in- hand? If you're bringing in business, that's performance? Wouldn't that bring in more money into the company?</s>KASTENBAUM: You would think so, right? Yes, exactly. But some of guys I have spoken to, they say that, you know, they signed the contracts, they bring in the money. What the folks investing the money -what the folks who invest the money do with it, it's their fault that the money doesn't earn them more. So, you know, they bring in the business, and then it's handed off to somebody else. You know, that's the argument they're making. Whether or not that holds water with the American public, probably not right now.</s>LEMON: Yes, and you know, the interesting thing was that - as I pointed out earlier, if it were the worker bees who were getting bonuses for all of this, if it were people who were not making that much money, then I think the American people would say, OK, these people, you know, are in dire straits, as well. But these are already people who are getting huge salaries and now getting millions in bonuses. Very quickly, Steve, go ahead.</s>KASTENBAUM: Yes, and it's hard to find sympathy for them here in New York. The attorney general, there's some questions about why Andrew Cuomo is going after them in a case that appears to be national in scope. There is a history of the A.G.'s office going after Wall Street businesses - sure, Don.</s>LEMON: Yes, I'm going have to get back to the hearing. Hate to cut you off...</s>KASTENBAUM: No problem.</s>LEMON: ... but we want to get Representative Ackerman from New York taking questions now on New York. Of course, Mr. Cuomo there, as well. So, let's listen in.</s>REP. GARY ACKERMAN (D), NEW YORK: So, there's two guys out on a life raft. And they're adrift at sea, and a storm blows up. And their raft is surrounded by sharks, and the waves are 10 feet high. And the first guy says, "I'm scared." So, the second guy sells him a policy. That's a credit default swap. You're selling something with absolutely nothing to back you up. You have no money, possibly, in your pocket or your wallet. And if everything goes right, you're collecting a premium. And if everything goes wrong, so what. It makes no sense. It's like snake oil salesmen selling you jars of snake oil. And they don't even have the oil in the jar. I mean, there's a great company called I Can't Believe It's Not Butter. You know, at least they have the decency to tell you it's not butter.</s>ARIO: I'll give you an answer from the insurance perspective, as a downstream recipient of the risk that was created here. AIG's essentially on top of the pyramid. AIG's the one that everybody else looks at this stuff and says, "We're not quite sure if this is going to perform or not. We better hedge on it." You buy the policy from AIG, and AIG -- and then people -- like Mr. Garrett said, even people who bought policies from AIG then hedged in case AIG couldn't pay.</s>ACKERMAN: They went to AIG because these guys...</s>ARIO: But AIG...</s>ACKERMAN: ... rated -- these guys rated AIG AAA, and so everybody assumes that -- that their subsidiary's AAA which you haven't rated. It's like -- it's like -- it's like if I have an 800 credit score you're going to lend my kid money because you think he has an 800 credit score.</s>ARIO: Congressman, if I could offer a -- a couple points for your consideration, of the bailout that's occurred -- and -- and AIG recently did a press release breaking down the money -- 52 billion went for credit-default-swap-related issue. Forty billion went for security lending issues. So there are multiple issues associated with AIG. There are many large financial institutions in the United States today that underwrite credit default swaps. The -- the issue is not the product. We do recommend that credit default...</s>ACKERMAN: So they're underwriting the underwriters that are doing the underwriting?</s>ARIO: No. No, they're issuing or selling credit default swaps on various products. It -- it -- it's a -- it's a well-known, well- respected product if done properly.</s>ACKERMAN: If it were regulated.</s>ARIO: Well, I do agree with you, sir, that the product itself should be a regulated product.</s>ACKERMAN: Well, bingo. That's -- that's the whole problem. Why don't we -- why don't we say that it has to be regulated? Otherwise it can't be insurance.</s>ARIO: We agree on that.</s>POLAKOFF: Well, the -- yeah, the CFTC commissioner a number of years ago came before Congress to ask that, indeed, credit default swaps become regulated, and -- and I think many members at this table would endorse that it should be a regulated product.</s>ACKERMAN: The New York -- the New York state insurance supervisor, Eric Dinallo, came before a different committee of Congress back in October and -- and -- and said that. I mean, where's the guy on television that does the bells and whistles and gongs? We need all these things going off here. Otherwise there's nobody getting our attention. The thing that -- that we have to be doing, Mr. Chairman, I think, is taking a look at how we regulate a completely runaway financial giant that's going on so that when people buy -- I think I'm buying insurance -- are buying insurance and not something else. I yield back the balance of my time.</s>KANJORSKI: Thank you very much, Mr. Ackerman. Gentlemen, as you know, we have some votes on. We have probably eight minutes left, seven minutes left -- seven and a half minutes left. Are you a fast talker even though you're from Georgia, Mr. Price?</s>REP. TOM PRICE (R), GEORGIA: (OFF-MIKE) KANJORSKI: In two and a half you can do five? OK. We'll -- we'll recognize Mr. Price for his five minutes reduced to two and a half.</s>PRICE: Thank -- the -- the -- the first vote will go for a while, so I appreciate that, Mr. Chairman. I think I -- I'm pleased to hear the chairman of the committee announce that Mr. Geithner will be here before our committee within a couple weeks. I think that there are a lot of questions that we would like to ask him today. I want to thank the panel for -- for their perspective. Ms. Williams, one of the most pivotal roles that we can play is oversight. And so I think it comes as a surprise to some members of our committee that the GAO is prohibited by law from certain reviews of certain federal financial activities. Would you elaborate on that? And -- and -- and I know you responded to Mr. Garrett on this, but what -- what is it specifically that GAO cannot do?</s>WILLIAMS: The -- this is an area that we actually have a prohibition, and it's quite unusual, and it's in the Bank Audit Agency Act. And it articulates the -- the limits of our authority in this area, and there are specific areas prohibited. And one of -- and I think there are four. One of the four articulated in the act is we are prohibited from looking at the Federal Reserve's monetary policy activities, and...</s>PRICE: And you -- you -- you mentioned that you'd be happy to do that if we gave you the authority to do so. Would it be helpful for you to be able to do that?</s>WILLIAMS: In -- in this current environment, I would say yes.</s>PRICE: So you'd be able to give us and the American people a better sense of what has happened and what's going on if you were able to look at that.</s>PRICE: We would be able -- we currently in our conversations with the Fed are limited to the information they've provided publicly. We don't have the same prohibition, for example, with their supervisory and regulatory activities. We can actually go in and look at what they're doing. GAO does appreciate the fact that, you know, the reason the Fed has the -- the protections that it has is to ensure its independence.</s>PRICE: Sure.</s>WILLIAMS: But I think we're in extraordinary times, so when the Fed has evoked activities under their emergency powers, that's an area that -- that perhaps it would make sense...</s>WILLIAMS: ... for GAO to have more...</s>PRICE: Thank you.</s>WILLIAMS: ... Visibility.</s>PRICE: I want to address your report, and -- and I just got it this morning, so I -- it -- it's -- I'm trying to digest it all. But in -- I didn't see any sense of an exit strategy that AIG has reported by GAO in -- in -- in -- in your report. Would you -- is that an accurate assessment of -- of what's going on over there?</s>WILLIAMS: I mean, at this point, the plan is for restructuring. I think given the assistance that the government's provided so far, and kind of the ongoing restructuring that has happened, there are real questions about what the exit strategy is. But our work in this area is ongoing.</s>PRICE: But -- but the American people can't look at it and say, "There's an exit strategy that's in place." Is that an accurate statement?</s>WILLIAMS: Not that we have seen.</s>PRICE: OK. Thank you. Now, Mr. Polakoff, you mentioned that -- that OTS should have stopped the whole book of business back in '04, and I think you responded to a couple members saying that -- that you -- OTS didn't appreciate how bad liquidity was going to get in '08. Was there any -- any change in the assessment between '04 and '08?</s>POLAKOFF: Yes, sir. Yes, sir. What we didn't understand or -- or appreciate significantly with our analysis was how bad the real estate market was going to get from 2004 to 2008...</s>LEMON: Listening to testimony on Capitol Hill today talking about AIG, the insurance giant that got millions and millions of your tax dollars and then gave bonuses - millions and millions - to its employees. They've been doing a lot of talking about unregulated credit default swaps. Exactly what is that? We'll explain seconds away.