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CNBC TRANSCRIPT: CNBC'S "SQUAWK BOX" SITS DOWN WITH NEW YORK GOVERNOR DAVID PATERSON TODAY

WHEN: Today, September 16, 8AM ET

WHERE: CNBC's "Squawk Box"

Following is the unofficial transcript of a CNBC interview with New York Governor David Paterson today on CNBC's "Squawk Box." In the interview Governor Paterson discusses AIG, among other topics.

All references must be sourced to CNBC's "Squawk Box."

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CNBC’s Carl Quintanilla: JOINING US IS NEW YORK GOVERNOR DAVID PATERSON, JOINING US FROM NEW YORK. GOVERNOR, GOOD TO HAVE YOU ON THE PROGRAM.

Gov. David Paterson: GOOD MORNING. AS THE AUTHOR BEDARD ONCE WROTE, WHEN SORROWS COME, THEY COME NOT SINGLE SPIES, BUT IN BATTALIONS.

Quintanilla: THAT SAYS A LOT. ESPECIALLY THIS MORNING. CAN YOU PLEASE GIVE US ANY INSIGHT INTO WHAT IS GOING ON AT THE TABLE BETWEEN AIG AND WHATEVER PARTIES THEY'RE NEGOTIATING WITH?

Paterson: WELL, I THINK UNTIL THEY CAN REACH A DEAL -- AND WE ARE HOPEFUL THAT THEY CAN -- THAT THE STOCK PRICE IS GOING TO FALL, THAT YOU'RE GOING TO SEE FURTHER EVIDENCE OF THE CREDIT DEFAULT SWAPS, AS YOU POINTED OUT EARLIER BEING A PROBLEM, AND OBVIOUSLY, THEIR STOCK VALUATION WENT FROM $32.6 BILLION TO $14 BILLION IN JUST A VERY SHORT PERIOD OF TIME. BUT I THINK THAT IS ANCILLARY TO THE IMPORTANT ISSUE THAT WE HAVE TO RECOGNIZE THAT AIG IS NOT LIKE LEHMAN BROTHERS, IT IS RETAIL. IT OPERATES IN 130 COMPANIES, HAS 116,000 EMPLOYEES, IT HAS 74 MILLION CUSTOMERS. THIS WOULD BE AN EFFECT ON THE ENTIRE MARKET IF AIG GOES DOWN. IT AFFECTS JOBS, IT AFFECTS POLICYHOLDERS IT AFFECTS DRIVERS. EVEN IF YOU AREN'T A CUSTOMER OF AIG, YOU GET IN AN ACCIDENT WITH SOMEONE, THERE IS AN EFFECT THERE. SO, THIS IS A HUGE, HUGE SITUATION THAT WE'RE TRYING TO CONFRONT.

Quintanilla: YOU GET NO ARGUMENT FROM US, BUT WE'RE WATCHING THE STOCK PRICE ALONG WITH YOU, AND SOMEONE IS MAKING A BET, OR PERHAPS SOMEONE EVEN KNOWS THAT THOSE DISCUSSIONS ARE NOT GOING WELL THIS MORNING. IS THAT TRUE?

Paterson: WELL, I THINK THAT IN THE CASE OF LEHMAN BROTHERS, FOR INSTANCE, BARCLAYS TOOK A LOOK AT IT AND PULLED BACK BECAUSE THE MORE THEY PEEL BACK THE ONION, THE MORE DEFICIT THEY FOUND, AND I THINK THAT SETS A TREND. BUT IN THIS PARTICULAR SITUATION, IF IT'S POSSIBLE TO PUT A DEAL TOGETHER, I THINK THAT A LOT OF THE INDEXES THAT YOU'RE REFERRING TO THIS MORNING WOULD REVERSE. WHAT WE DID IN NEW YORK WAS WE TRIED TO CLEAR THE WAY FOR AN OPPORTUNITY FOR SOME KIND OF A DEAL BY ALLOWING AIG TO COLLATERALIZE ITS ASSETS AND THEN POST THOSE ASSETS TO COME UP WITH LIQUID CASH. THEIR ARGUMENT IS THAT THEY'RE FUNDAMENTALLY SOUND, BUT THEY

JUST DON'T HAVE CASH RIGHT NOW.

Michelle Caruso-Cabrera: GOVERNOR PATERSON ON THAT NOTE, IF THEY DO FAIL, NOW YOU HAVE MADE THIS DECISION THAT THEIR INSURANCE SUBSIDIARIES IN YOUR STATE NOW HAVE LESS MONEY TO ACTUALLY HELP WITH THOSE CLAIMS. ARE YOU GOING TO REGRET HAVING HELPED THEM OUT WITH THAT LIQUIDITY POSITION, IF IT TURNS OUT IT DOESN'T ACTUALLY HELP?

Paterson: NO, BECAUSE THE DEAL ISN'T DONE. IN OTHER WORDS, WE ALLOW THEM TO ACCESS THEIR $20 BILLION, BUT THEY HAVEN'T ACCESSED IT YET, BECAUSE THE DEAL HASN'T BEEN STRUCK. SO, IF THEY'RE UNABLE TO STRIKE ONE, NO TAXPAYER OR NO RESIDENT OF NEW YORK CITY IS GOING TO SUFFER IN THE LEAST BIT.

Caruso-Cabrera: HAVE YOU CALLED OTHER GOVERNORS AROUND THE COUNTRY, BECAUSE THEY ARE -- THEY HAVE TO DEAL STATE BY STATE WITH REGULATION? COULD THERE BE A COLLECTIVE RESPONSE FROM PEOPLE LIKE YOU ACROSS THE COUNTRY?

Paterson: I SPOKE WITH GOVERNOR CORZINE. THERE ARE 25 STATES IN DEFICIT RIGHT NOW. THOSE STATES HAVE A $52 BILLION DEFICIT.

Caruso-Cabrera: OH, THAT'S RIGHT, THEY DON'T HAVE MONEY.

Paterson: SO IT'S NOT AS IF THE STATES CAN COME IN AND HELP ANYBODY. AND WE UNDERSTAND THAT THE FEDERAL GOVERNMENT HAD TO DRAW A LINE IN THE SAND WITH LEHMAN BROTHERS THE OTHER DAY. BUT I THINK WHAT'S MISSING FROM THIS DISCUSSION IS THE ANCILLARY EFFECT OF WHAT WILL HAPPEN IF AIG GOES DOWN, BECAUSE IT'S NOT AN INVESTMENT BANK. REALLY, TO THE DETRIMENT OF OUR ECONOMY IN SO MANY WAYS, THEY HAVE $1 TRILLION IN ASSETS. I KNOW THAT THAT WOULD HAVE TO REVERBERATE IN A LOT OF OTHER AREAS, SMALL BUSINESSES, MORTGAGES, CREDIT DEFAULTS, HEDGE FUNDS. I MEAN, THIS IS A CATASTROPHIC PROBLEM WAITING, IF WE AREN'T ABLE TO CURTAIL IT.

David Faber: GOVERNOR PATERSON, DAVID FABER HERE. BEYOND THE BALANCE SHEET RAMIFICATIONS, AS YOU'RE POINTING OUT, NOBODY REALLY KNOWS. NEW YORK CITY RIGHT NOW DEALING WITH LEHMAN BROTHERS' BANKRUPTCY, MERRILL LYNCH GETTING BOUGHT, AIG, IF THAT WERE TO HAPPEN. YOU'RE ALREADY STRAPPED AT NEW YORK STATE IN TERMS OF THE BUDGET. YOU'RE TRYING TO MAKE CUTS. TELL ME WHAT THE EMPLOYMENT NUMBERS GOING DOWN LIKE THAT WILL MEAN FOR NEW YORK CITY AND NEW YORK STATE.

Paterson: THE EMPLOYMENT NUMBERS COULD GO DOWN ANOTHER 30,000 ON TOP OF THE 11,000 WE LOST IN THE PAST YEAR. OUR BUDGET, WHICH WE WERE ABLE TO CUT $1 BILLION OFF OF JUST IN A SPECIAL SESSION OF THE LEGISLATURE A MONTH AGO, AND THE LEGISLATURE RESPONDED VERY FAVORABLY, BUT WE PROBABLY LOST $1 BILLION YESTERDAY WHEN YOU RECOGNIZE THAT EVERY TIME THE BONUSES FROM THE STOCK MARKET GO DOWN 10% AND EVERY TIME THE CAPITAL GAINS GO DOWN 10% IT COSTS NEW YORK STATE $750 MILLION, SO IT'S PRETTY BLEAK.

Quintanilla: HOW MUCH TIME DO YOU THINK THEY HAVE? AIG.

Paterson: I THINK THEY HAVE A DAY. BUT I THINK THAT THIS IS THE MOMENT. WE'RE IN THE MOMENT RIGHT NOW TO WHETHER OR NOT THEY CAN PUT SOMETHING TOGETHER. I GUESS IT WOULD BE $75 BILLION TO $80 BILLION, WHICH IS -- THE DEGREE OF DIFFICULTY, AS SOMEBODY SAID EARLIER, IS PRETTY STRONG. BUT I THINK THE FEDERAL GOVERNMENT HAS TRIED TO GET INVOLVED, BUT I DON'T KNOW IF ANYONE IS REALLY UNDERSTANDING THE RAMIFICATIONS OF THIS CRISIS. WE MAY NOT KNOW IT FOR WEEKS OR MONTHS OR MAYBE EVEN YEARS, BUT RIGHT NOW WE'RE IN A TERRIBLE SITUATION IF WE LET THE WORLD'S LARGEST INDUSTRIAL AND COMMERCIAL INSURANCE COMPANY GO DOWN.

Quintanilla: AND I ASSUME TO THE DEGREE YOU CAN, AS GOVERNOR, YOU HAVE LEANED ON THE FED TO GIVE A BRIDGE LOAN, YOU'VE LEANED ON JP MORGAN AND GOLDMAN TO MAKE THIS FACILITY POSSIBLE. ARE YOU MAKING THOSE CALLS?

Paterson: WE'RE MAKING THOSE CALLS. I TALKED TO SECRETARY PAULSON YESTERDAY. I TALKED TO THE HEAD OF AIG. I'VE TALKED TO A NUMBER OF INDIVIDUALS. MY SUPERINTENDENT OF INSURANCE WENT DOWN AND TALKED TO THE FED. WE'RE TRYING, AND WE'RE TRYING NOT ONLY ON BEHALF OF NEW YORKERS, BUT ON BEHALF OF AMERICANS, BECAUSE THIS IS A VERY SERIOUS CRISIS.

Quintanilla: GOVERNOR, WE APPRECIATE YOUR TIME. THANK YOU FOR BEING WITH US THIS MORNING.


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