RAY SUAREZ: Of all the companies rescued by the government and the taxpayer in recent weeks, none has received a bigger guarantee than the insurance giant AIG. In the last month, the Federal Reserve provided the company with more than $120 billion so that it can survive and deal with a dwindling supply of cash.
There have been numerous questions about the way AIG ran its business before and since the financial meltdown.
American International Group is not only the largest U.S. insurance company; its businesses range from aircraft leasing to retirement plan management.
HEIDI MOORE, The Wall Street Journal: Their balance sheet, which means their assets, are about $1.04 trillion. They do business with almost every other financial institution in the United States, and they help insure the debt on those financial institutions.
RAY SUAREZ: It was the housing crisis and AIG’s staggering mortgage-related losses that led to the government’s enormous rescue.
The company was also heavily vested in so-called credit default swaps. The swaps are traded in an unregulated market valued at more than $50 trillion.
They are, in effect, a form of insurance against bond defaults. But as they became a more prominent financial instrument, bought and sold many times over, AIG suddenly was unable to cover billions in potential swap insurance when the market collapsed.
That point was driven home at a congressional hearing earlier this month. Martin Sullivan was the president and CEO of AIG until June.
REP. CAROLYN MALONEY (D), New York: There was no capital reserve behind the swaps, right?
MARTIN SULLIVAN, Former CEO, American International Group: Right, that’s…
REP. CAROLYN MALONEY: So you were just gambling billions, possibly trillions of dollars?
MARTIN SULLIVAN: Well, I wouldn’t refer to it as gambling. I would — you know, these transactions were individually underwritten very carefully. And maybe I can provide some more background to you that may be helpful.
REP. CAROLYN MALONEY: If they’re very — if they were carefully underwritten, how come no one wants to buy them?
RAY SUAREZ: At that same hearing, it was revealed the company treated its staff lavishly to spa retreats in California and a hunting trip in England costing over $500,000.
REP. HENRY WAXMAN (D), California: The federal bailout occurred on September 16th. Less than one week later, AIG held a week-long retreat for company executives at the exclusive St. Regis Resort in Monarch Beach, California.
Rooms at this resort can cost over $1,000 per night. Invoices provided to the committee show that AIG paid the resort over $440,000, including nearly $200,000 for rooms, over $150,000 for meals, and $23,000 in spa charges.
RAY SUAREZ: In a letter, AIG said the event was mischaracterized in the hearing. It’s since cancelled 160 conferences and meetings that were to cost $80 million.
AIG involved with dangerous assets
RAY SUAREZ: AIG's practices remain the focus of an investigation by New York Attorney General Andrew Cuomo. And in connection with that investigation, the company confirmed today it will freeze compensation for its former chief executive.
The man now in charge of cleaning up AIG is Chairman and CEO Edward Liddy. He was appointed to that position about a month ago following the bailout. He was previously the CEO of Allstate Corporation, and he joins me now from New York.
Mr. Liddy, welcome.
EDWARD LIDDY, CEO, American International Group: Thank you.
RAY SUAREZ: How did it happen so quickly that a vast and previously profitable company had to turn to the United States government for an injection of capital to avoid collapse?
EDWARD LIDDY: Ray, I think two things happened. First, we kind of lost our way, AIG did, and we got out of the basic insurance business that we know so well and we remain very, very strong in and we moved into financial products that in your opening remarks you touched on.
Those financial products exposed us to the collapse or the seizure in the credit markets and we simply ran out of cash. That running out of cash was recognized by the Federal Reserve, and they threw us a lifeline, which we desperately needed, so that the rest of the financial system wouldn't be contaminated.
RAY SUAREZ: Lehman Brothers failed. Washington Mutual was seized by the FDIC and then its parts quickly sold. Bear Stearns absorbed into another financial giant. Why was AIG not allowed to either bust itself up and start selling off pieces or allowed to fall and then let others pick up the profitable bits?
EDWARD LIDDY: Well, I think it was a wise decision on the part of the Federal Reserve and Treasury to throw that lifeline to AIG so that we could emerge from this crisis in an orderly way.
AIG touches an awful lot of other financial companies around the world with the credit default swaps and some of the financial products which you alluded to earlier.
What this does is it does enable us to bust ourselves up, as you mentioned, and sell some of our extraordinary assets to pay back that debt to the federal government and to the taxpayers.
RAY SUAREZ: But if you're going to start making those kinds of sales, selling off those businesses that are not related to the core business, as you mentioned, wouldn't they be on the market at a depressed price, given where things stand now?
EDWARD LIDDY: Well, first, they're extraordinary assets; they really are. We have some of the most enviable positions in life insurance in Southeast Asia, in other parts of the globe. We're the largest airplane owner and leaser in the world. So I think these assets will have tremendous value.
Clearly, we'd prefer to be doing this asset sale a year ago or two years ago than right now, but I think there will be plenty of excellent demand for what are really very, very good assets.
Fed funding quickly used at AIG
RAY SUAREZ: The price of all this to the American taxpayer is often put at about $120 billion, but that's really two different pots of money, isn't it?
EDWARD LIDDY: Yes, it is. There's really the $85 billion loan, and then there's what's known as a liquidity facility. Because there's no commercial paper around right now, it's a liquidity facility where we give the Federal Reserve assets, they give us cash.
RAY SUAREZ: And you've already used a lot of that money, haven't you?
EDWARD LIDDY: Well, of the $85 billion, we were -- within the first two or three weeks of taking that loan, we were at the $69 billion level. So anyone who thinks we didn't need the Federal Reserve as a lifesaver simply doesn't understand the precarious nature of where we were.
RAY SUAREZ: Do you think that's going to be enough, though, the $120 or so billion or might you need more?
EDWARD LIDDY: You know, I think so and I sure hope so, Ray. It's very much a function of two things, one, our ability to stop the bleeding that we have in the financial products areas, and we've made good progress in that.
But it's also what happens to the capital markets. To the extent they continue to go down and we have to keep posting collateral, as it's called, the vernacular in the industry, it's possible it may not be enough.
To the extent some of the moves that the Federal Reserve has put in place over the last couple of weeks since our rescue, they seem to be working, they seem to be lubricating the markets, and I think we should be OK.
RAY SUAREZ: Help us understand mechanically what this money is being used for. You mentioned $69 billion that's already been used out of the $85 billion initial injection. How does that help, given the position that you were in when you went to the government for help?
EDWARD LIDDY: Well, it's primarily in the financial products area, where as the value of those assets go down -- maybe they're residential mortgages or what have you -- as they go down, we have to keep filling up the bathtub to make certain that the assets that we've underwritten remain the same.
So if the value goes down, you have to make it up with something. We make it up by writing a check. So we've had to write more and more checks to keep the bathtub full, and that's primarily what's cost us the $69 billion.
Fed now has large ownership stake
RAY SUAREZ: So now it's said that the federal government owns roughly an 80 percent stake in your company.
EDWARD LIDDY: Yes.
RAY SUAREZ: What's the nature of the relationship? Is there a federal representative on your board, in your highest councils?
EDWARD LIDDY: You know, there's not a federal representative on the board, but I'll tell you what we do. Any time someone extends an $85 billion loan to you, the smart thing to do is to treat them as a full partner. And that's exactly what we do.
We are very transparent with the Federal Reserve. They do have people looking at our cash flows. We're interacting with the Federal Reserve in a very integrated way on a daily basis, and it's working quite well.
RAY SUAREZ: Well, if Carl Icahn buys a position in a company, if Kirk Kerkorian buys a position in a company, they look for some say-so in that company, ditto Warren Buffett. How come when Uncle Sam buys an 80 percent stake in a massive company, he doesn't get a similar sort of say-so at the board level?
EDWARD LIDDY: Well, they will. The federal government is going to put in -- the Federal Reserve is going to put in, not on the board, but -- they can't own equities, per se, so they have to put them in a trust.
There will be trustees who oversee the performance of AIG, with respect to those -- the loan that they've put in. So the Federal Reserve will be very much involved in everything that we do at AIG.
RAY SUAREZ: Is the credit default swap business over? Is some new model for insuring debt going to emerge from this crisis?
EDWARD LIDDY: Well, it's certainly over as far as we are concerned. We are not in the credit default swap business any longer. And what's known as our financial products division, that division has been shut down.
Our core competency is insurance. It's regulated insurance. We're really good at it. Those businesses are very strong today. We're going to make sure that they stay strong. And we're going to revert back to the things that we know very, very well.
RAY SUAREZ: Will there be insurance for those kinds of instruments? I mean, does the market still need that kind of product?
EDWARD LIDDY: I think the marketplace does. My instincts are it will be regulated in the future, where it was not regulated in the past. And I think the design of the products will be shifted in a way that you don't have to keep, as I said before, posting the collateral, which is what's brought us to our knees.
Liddy looking to cut spending
RAY SUAREZ: The New York attorney general, Andrew Cuomo, said something today. He said, once a company accepts tax dollars, there are different rules, and the taxpayers didn't get to invest voluntarily.
Do you have to behave yourself differently when it comes to things like the spa trips, and the hotel meetings, and that sort of thing?
EDWARD LIDDY: Oh, Ray, we sure do. You know, with respect to those things, we're embarrassed by it. And I apologize to the American taxpayers for it.
You have to understand, AIG is a huge place. It's over $100 billion in revenue. We do business in something like 130 countries. And those events occurred within a couple of days of us taking the federal bailout.
The analogy of the battleship comes to mind. It just takes a while to slow things down or to get it turned. But we have to behave in a much different way, which is why we have been canceling any type events like that going forward.
We are tightening our belt. Just as the American consumer, the American taxpayer is tightening their belt, we are doing the same thing. But we're not stopping at one notch; we're going three and four and five notches.
RAY SUAREZ: Edward Liddy of AIG, thanks for talking to us, sir.
EDWARD LIDDY: Thank you.