Washington

It will take at least three-to-five years for AmericanInternational Group to repay the tens of billions spent bytaxpayers to keep the beleaguered company afloat–and that's only ifthe capital markets cooperate, AIG's head informed Congress lastweek.

"Asset values have to stay strong," AIG Chairman and ChiefExecutive Officer Edward Liddy told the House Committee onOversight and Government Reform. "There has to be a capital marketthat allows us to take businesses public."

He testified after an opening statement by the panel's chair,Rep. Edolphus Towns, D-N.Y., in which the congressman said ordinarytaxpayers are indignant about the government's need to bail out AIGand are demanding transparency in the payback process. "We arehearing, 'Trust us,' but we are not willing to let $180 billion gojust on trust," Rep. Towns said. "We will question. We willinquire. We will verify."

Mr. Liddy testified that "if the marketplace holds the way it isright now, we think that the American taxpayer will be fullyrepaid."

He said AIG is now using $40 billion of funds available underthe government's Troubled Asset Relief Program, has a $43 billionloan from the Federal Reserve Bank of New York, and has access to$30 billion more from the Fed.

He did not speak of other guarantees–for example, the fact thatthe government is guaranteeing short-term credit needed by itsinternational leasing subsidiary.

In addition, the government has also advanced cash to AIG inreturn for certain assets formerly collateralized by devaluedresidential mortgage-backed securities owned by its life insurancesubsidiaries. Those assets are being held in "Maiden Lane"facilities created by the Federal Reserve Bank of New York.

At the same time, he said the Treasury Department is completingregulations that will govern AIG's bonus policy–a flashpoint in therecent past that has generated intense criticism not only for thecompany, but also for Obama administration and Fed officialsinvolved in the bailout.

In other comments, he said that Treasury and Federal ReserveBoard officials are playing a key role in strategic and policydecisions at AIG, and that the company should never have gottenitself involved in the trading of derivatives and securities.

Instead, he said, the company should have stuck to its coreinsurance business.

In response to a question from a member of the committee, hevoiced support for state insurance regulation. However, he said, itis critical that Congress add to that a systemic regulatory processas proposed in testimony earlier this month before the SenateBanking Committee by Sheila Bair, chair of the Federal DepositInsurance Corp.

In response to questions from Rep. Towns and Rep. Darrell Issa,R-Calif., ranking minority member of the committee, Mr. Liddy alsocommitted himself to sharing with certain members of Congress orstaff the company's confidential "Project Destiny" reorganizationplan that he has described "as a multiyear road map for therestructuring of AIG."

After conferring with AIG's outside counsel, he said he wouldprovide the document only if the particular officials who wouldhave access sign the same kind of confidentiality agreement signedby officials at the Fed and Treasury who have had a hand indeveloping the strategic plan.

He said that to let the document become public knowledge wouldhurt AIG's competitive position by providing confidential marketingdata to competitors, and would as a result impair the company'sability to fully repay the government.

"We intend to pay back the government as soon as possible," Mr.Liddy said in response to another question.

"We hope we can start that in a matter of months," he added,noting that Treasury and Fed officials "are very involved" with AIGin meeting with internal committees and its board.

According to an advance copy of his testimony prepared fordelivery to the committee obtained by NU a day before hisMay 13 congressional appearance, Mr. Liddy said AIG's game plangoing forward is to establish "separate identities" for its "bestbusinesses" and to shut down its financial products unit. Theadvance copy noted, however, that the spinoffs will only occur overtime and not at fire-sale prices.

"Representatives of the Fed and the Treasury, and theiradvisers, are engaged with various AIG offices every day," Mr.Liddy said in the advance testimony. "We view them aspartners."

At the same time, the breaking apart of strong constituentinsurance units is now underway, his testimony noted.

As disclosed in its March year-end 2008 earnings report, AIG isaccelerating the transfer of its two major foreign insurancecompanies–ALICO and AIA–into special-purpose vehicles. "We expectto complete the contractual arrangements for these transfers in thenear future," his testimony stated.

Stock in these units, according to the March filing, will beexchanged for a special reduction in AIG's debt to the FederalReserve Bank of New York. But, as previously outlined, AIG willretain management of the units.

At the same time, AIG is planning to transfer AIU Holdings, itsglobal property and casualty insurance franchise, into aspecial-purpose vehicle with a possible stock offering.

"This move will secure the value of that very substantialbusiness in preparation for the potential sale of a minority stake,which ultimately may include a public offering of shares, dependingon market conditions," his testimony noted.

Mr. Liddy stated that the timing of outright divestitures willdepend on market conditions. "We intend for taxpayers to realizethe fullest possible value from every asset disposition," he said."And we intend that every company that emerges at the end of therestructuring will be strong, transparent and a credit to all itsowners."

Under the plan, the parent company will become smaller and itsmajor insurance companies "will emerge with diverse products,strong management and clear growth strategies worthy of investorconfidence," his testimony noted.

In his prepared text, Mr. Liddy said the company is makingprogress in winding down the complex derivatives portfolio at AIGFinancial Products–from a peak notional exposure of $2.7 trillion,the current exposure is $1.5 trillion.

He said AIG continues to explore multiple options to "breakapart these trading books so that we can reduce the remainingrisks, sell off portions of the business, repay or otherwise retirethe AIGFP debt, and exit this segment of the financial productsbusiness."

Mr. Liddy also said AIG officials are working to simplify thecomplex structure of AIG, which currently has a "global footprintand an intricate capital structure characterized by over 4,000legal entities, cross-ownership and myriad special purposestructures."

SYSTEMIC RISK

As for Ms. Bair's reform proposal, she suggested that acommittee of federal regulators have the authority to preempt aninstitution's primary regulator if that institution engages inactivities that could constitute a systemic risk.

While Ms. Bair supports a committee, the Obamaadministration–especially Treasury Secretary TimothyGeithner–indicated last week that they support the Federal ReserveBoard for that role.

In her testimony, Ms. Bair also proposed creation of aresolution authority that would have the power to take control of apotentially systemically risky institution–regardless of size andthe products it sells–and either rehabilitate it or liquidateit.

A representative for Rep. Barney Frank, D-Mass., chair of theHouse Financial Services Committee, said it is unclear whenCongress will act on such legislation.

"As you know, we have not scheduled legislative hearings or amarkup yet on the creation of a systemic risk regulator," said therepresentative, Steve Adamske.

"We will be prepared to move as soon as the legislation isready," he said. "Mr. Frank has discussed July 4 as a tentativetime to complete our committee's work, but that is not set instone."