AIG CEO Liddy Calls Bonuses 'Distasteful'; Asks Execs to Return Money

Will Taxpayers Get Their Money Back?

How successful AIG will be in repaying the government was called into question today by Orice M. Williams, the director of Financial Markets and Community Investment at the Government Accountability Office, who testified before the house this morning.

In prepared remarks, Williams said that AIG's ability to repay the government has "been impaired by its deteriorating operations, inability to sell its assets and further declines in its assets. All of these issues will continue to adversely impact AIG's ability to repay its government assistance."

In addition to Liddy and Williams, those testifying at today's House AIG hearing include Scott Polakoff, the acting director of the Office of Thrift Supervision; Joel Ario, the insurance commissioner for the Pennsylvania Insurance Department; and Rodney Clark, managing director of insurance ratings at Standard & Poor's.

AIG's financial turmoil has been blamed not only on the company itself but on the government, which critics say failed to adequately regulate the insurance giant and its financial products unit.

Watchdog Failed to Predict How Bad Things Were

Scott Polakoff, the acting director of the Office of Thrift Supervision, acknowledged failures by his office to predict the risks facing AIG's credit default swaps, financial instruments that essentially act as insurance policies on other investments.

"In 2004, we failed to predict how bad things would get in 2008," Polakoff said.

Meanwhile, Joel Ario, the commissioner for the Pennsylvania Insurance Department, touted the stability of AIG's traditional insurance businesses, which were separate from AIG's financial products unit.

Stable Insurance Companies, Shaky Hedge Fund?

Ario said he agreed with Federal Reserve chairman Benjamin Bernanke, who has described AIG as a hedge fund attached to a large, stable insurance company.

In an earlier interview with, Ario said there is a "difference between the financial products which are regulated -- to the extent it was regulated at all, by the federal government -- and the insurance companies which are regulated by, we think, a very effective state-based regulatory system."

That hedge fund, said Ario, was AIG's financial products unit and that is "what's caused systemic risk in this case."

"The larger, stable insurance company is the 71 separate domestic insurance companies of AIG," Ario said. "They've had some difficulty because of the problems at the holding company level but basically they were not the cause of the systemic risk and they remain large and stable insurance companies."

The problem of "systemic risk" is what AIG and bailout proponents cite in arguments in support of the government's multibillion-dollar AIG rescue.

In a report submitted by AIG to the government earlier this year, AIG described a systemic risk as one that "could potentially bankrupt or bring down the entire system or market."

But critics say that there were better ways to manage the flailing insurance giant and potentially spend less in the process.

Hank Greenberg, AIG's former CEO who left the company in 2005, said in a recent interview with that he didn't understand why the government decided to pay cash to AIG's counterparties -- the banks that did deals with AIG -- instead of offering them guarantees as it did in the case of Citigroup.

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