AIG: "Mistakes Were Made"

Excerpts of AIG CEO Edward Liddy's letter in Wednesday's Wash Post: The government rescue of American International Group (AIG) and other financial firms has produced a palpable wave of anger on the part of Americans and a rising public demand for accountability from corporate and government leaders.

The anger is understandable, and I share it. I have been fortunate in more than three decades in business to see firsthand the wealth creation that well-managed American companies bring to their employees and their communities. I have seen the good side of capitalism. But over the past six months, since agreeing to take the reins of AIG and reviewing how it was run in prior years, I have also seen instances of the bad side of capitalism.

Mistakes were made at AIG, and on a scale that few could have imagined possible. The most egregious of those began in 1987, when the company strayed from its core insurance competencies to launch a credit-default-swaps portfolio, which eventually became subject to massive collateral calls that created a liquidity crisis for AIG. Its missteps have exacted a high price, not only for the company and its employees but for the American taxpayer, the federal government's finances and the global economy. These missteps brought AIG to the brink of collapse and to the government for help.

What also became clear is that once AIG's relationship with the government and taxpayers changed, our behavior as a company needed to change. So, of our own initiative, we suspended our federal lobbying activities and halted corporate political contributions. We also restricted executive compensation. In all, total 2008 compensation for the top 47 executives is 56 percent lower than their total 2007 compensation. My annual salary is $1. My only stake is my reputation.

No one knows better than I do that AIG has been the recipient of generous amounts of government financial aid. We are acutely aware not only that we must be good stewards of the public funds we have received but that the patience of America's taxpayers is wearing thin. Where that patience is especially thin is on the question of compensation.

I am mindful of the outrage of the American public and of the president's call for a more restrained compensation system. I am also mindful that every decision we make at AIG has consequences for the American taxpayer. We weigh decisions with one priority in mind: Will this action help or hurt our ability to pay money back to the government?

Although we have wound down more than $1 trillion in the portfolio of the AIG Financial Products unit that is at the root of the company's troubles, there remains substantial risk in that portfolio. The financial downside for taxpayers is potentially very large, and that's why we're winding down this business.

To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place. As has been reported, payments were made to employees in the Financial Products unit. Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago. It was distasteful to have to make these payments. But we concluded that the risks to the company, and therefore the financial system and the economy, were unacceptably high.

Where does that leave us?