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CNBC INTERVIEW WITH AIG CHAIRMAN & CEO EDWARD LIDDY ON SQUAWK BOX TODAY

WHEN: Today, Monday, March 2nd

WHERE: CNBC's "Squawk Box"

Following is the unofficial transcript of a CNBC interview with AIG Chairman & CEO Edward Liddy on CNBC's "Squawk Box".

All references must be sourced to CNBC.

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DAVID FABER: JOINING ME NOW IN HIS FIRST INTERVIEW SINCE THIS MORNING'S CONFERENCE CALL IS EDWARD LIDDY. HE'S CHAIRMAN & CEO OF AIG. MR. LIDDY THANKS FOR BEING WITH US.

EDWARD LIDDY: GOOD MORNING:

FABER: LIQUIDATION OF AIG. IT SEEMS AS THOUGH OVER THE LAST FEW MONTHS AND PERHAPS EVEN WEEKS THAT IS NOW FRONT AND CENTER. WOULD YOU AGREE? ARE YOU SORT OF UNDERTAKING WHAT IS AN ORDERLY LIQUIDATION OF THIS COMPANY?

LIDDY: DAVID, I WOULDN'T REFER TO IT OR THINK OF IT AS A LIQUIDATION. I WOULD THINK OF IT AS PROTECTING OUR POLICY HOLDERS FIRST AND FOREMOST, THEN TAKING THESE VERY VALUABLE INSURANCE BUSINESSES AND SETTING SOME OF THEM OUT ON THEIR OWN AS WAY TO SATISFY THE DEBT THAT WE OWE THE FEDERAL RESERVE, WE'LL PAY BACK THE T.A.R.P. MONEY.

FABER: HOW LONG ULTIMATELY DOES THIS PROCESS PLAY OUT OVER? CLEARLY IT'S GOING TO TAKE QUITE SOME TIME TO TAKE SOME OF THOSE UNITS PUBLIC AND TO CONTINUE TO, AS YOU SAY, TRANSFER RISK AND EVERYTHING ELSE. WHEN DO WE GET TO THE END OF THIS?

LIDDY: WELL, I THINK YOU'LL SEE SOME VERY SIGNIFICANT PROGRESS VERY QUICKLY. SO AS A PART OF WHAT WE ANNOUNCED THIS MORNING, WE'RE GOING TO TAKE TWO OF OUR BEST ASSETS, AIU AND AIA, I'M SORRY AND ALICO, PUT THEM IN A TRUST AND GIVE THEM TO THE FEDERAL RESERVE. THAT WILL SERVE TO REDUCE THE DEBT THAT WE HAVE OUTSTANDING. THEY'LL GET VERY VALUABLE ASSETS AND WE GET A REDUCTION IN THE DEBT. WE CAN DO THAT QUITE QUICKLY. SOME OF THE OTHER ISSUES, SAY, TAKING COMPANIES PUBLIC, THAT MAY TAKE NINE TO 12 MONTHS IN ORDER TO BE ABLE TO REALLY MAKE MEANINGFUL PROGRESS ON THAT. BUT IT GETS US SET DOWN A PATH THAT DOESN'T NECESSARILY DEPEND UPON THE OVERALL CAPITAL MARKETS WHICH ARE IN SUCH A STATE OF DISREPAIR RIGHT NOW.

ERIN BURNETT: MR. LIDDY I WANT TO FOLLOW UP ON DAVID'S QUESTION. WHEN YOU'RE MENTIONING BUSINESSES THAT YOU MAY EITHER SPINOUT TO THE PUBLIC MARKETS OR YOU'RE LOOKING FOR BUYERS. THE HEADLINE TODAY OFF YOUR CONFERENCE CALL, SAYS THAT YOU HAVE SEEN BUYER INTEREST IN YOUR ILSC UNIT. THAT UNIT IS THE BIGGEST BUYER OF 787 BOEINGS IN THE WORLD AND YOU'RE IN THE BUSINESS OF LEASING THOSE. WHEN I DO SEARCHES ON THAT I SEE THAT THE BIDDERS FOR THAT UNIT COULD COME FROM CHINA. AS A MATTER OF FACT, WHEN I DO A SEARCH OF ALL THE BUSINESSES THAT YOU'RE LOOKING FOR SELLING, YOU SEE A LOT OF SOVEREIGN COUNTRIES BIDDING. ARE YOU CONCERNED THAT YOU'RE BEING PUT IN A POSITION WHERE YOU'RE BEING FORCED TO SELL FOR INCREDIBLY DEPRESSED PRICES KEY ASSETS THAT ARE FUNCTIONING TO PERHAPS FOREIGN GOVERNMENTS AND AMERICA HAS NOT REALIZED THE CONSEQUENCES OF THIS?

LIDDY: YOU KNOW, ERIN, NO. IN FACT, WHAT WE'RE TRYING TO DO IS AVOID THAT FIRE SALE ASPECT. SO ON THE ALICO AND AIA PIECE, BY TRANSFERRING THE OWNERSHIP OF THOSE AT THEIR INTRINSIC VALUE TO THE FEDERAL RESERVE, WE DON'T HAVE TO SELL THEM RIGHT NOW AT FIRE SALE PRICES. WE'RE TRYING TO PREVENT THE EXACT SITUATION THAT YOU MENTIONED. ILSC, IS A HECK OF A BUSINESS, IT'S NUMBER ONE IN IT'S INDUSTRY, IT'S GOT A GREAT MANAGEMENT TEAM AND IT'S A MORE DIGESTIBLE BITE. IT IS NOT A 15 OR $20 BILLION PURCHASE. SO THERE'S GREAT DEMAND FOR A PROPERTY LIKE THAT. GENERALLY WHAT WE'RE SEEING, SMALLER PROPERTIES, GREAT DEMAND. CASH CAN BE THE MEDIUM THAT'S USED FOR PAYMENT. LARGER PROPERTIES, THESE COMPANIES ARE LIFE INSURANCE COMPANIES THAT WOULD NORMALLY BUY THOSE. THEY'VE BEEN SEVERELY HURT BY THE EQUITY CONTRACTION OVER THE LAST COUPLE OF MONTHS AND QUARTERS AND THEY DON'T HAVE THE CAPITAL TO BUY THE ASSETS.

BURNETT: AND SO AIG WOULD EMERGE STILL AN AMERICAN COMPANY FROM THIS. WHAT ABOUT THE QUESTION, THE BIG QUESTION, WHICH IS WHY ARE YOU TOO BIG TO FAIL? I KNOW THAT DAVID'S BEEN TALKING THIS MORNING. $162.5 BILLION POTENTIALLY OF TAXPAYER MONEY. YOU'VE GOT A 50% GREATER PRESENCE THIS THIS ESOTERIC DERIVATIVE MARKET THAN LEHMAN BROTHERS HAD, SO EVERYONE TAKES IT AS A FACT THAT IF YOU FAIL, THE GLOBAL FINANCIAL SYSTEM WOULD FALL. IS THAT A FACT?

LIDDY: YOU KNOW, ERIN, A LITTLE MORE COMPLICATED. WE HAVE AN INSTITUTIONAL ASPECT TO AIG. YOU JUST REFERENCED THAT. BUT THEN THERE'S THE RETAIL ASPECT. WE'RE THE LARGEST SELLER OF ANNUITY PRODUCTS AND 401(k) PLANS TO TEACHERS IN THE K THROUGH 12th GRADE.WE DON'T WANT THOSE PEOPLE IN ANY WAY THREATENED BY THE FAILURE OF AIG. THIS IS THE UNITED STATES OF AMERICA. WE SIMPLY CAN'T HAVE A PROVERBIAL RUN ON THE BANK. THAT SHOULDN'T BE ALLOWED TO HAPPEN.

MARK HAINES: WHAT WILL AIG LOOK LIKE WHEN YOU'RE FINISHED? WHAT KIND OF COMPANY IS IT GOING TO BE?

LIDDY: YEAH. NOT EXACTLY SURE. IT WILL BE A MUCH SMALLER COMPANY. CLEARLY WITH THE SALE OR DISPOSITION OF AIA AND ALICO, THAT'S A LARGE CHUNK OF OUR WORLDWIDE LIFE BUSINESS, WE'LL GET SMALLER. WE'D LIKE TO TAKE UP TO 20% OF OUR PROPERTY CASUALTY BUSINESS PUBLIC, GIVE IT A SEPARATE BRAND NAME, A SEPARATE IDENTITY. WE'LL BE A MUCH SMALLER COMPANY. THAT'S WHAT WE HAVE TO DO IN ORDER TO PAY BACK THE TAXPAYER. AT AIG WE BELIEVE WE SHOULD PAY BACK THE MONEY THAT HAS BEEN LOANED TO US.

HAINES: I'LL GO BACK TO A QUESTION THAT ERIN ASKED BUT ASK IT IN A DIFFERENT WAY. AS YOU DESCRIBE IT, IT SOUNDS LIKE IT'S NOT A FIRE SALE, A SALE UNDER SOME DURESS, AND THE FACT THAT YOU REALLY AREN'T SURE WHAT AIG'S GOING TO LOOK LIKE FIVE YEARS DOWN THE LINE, KIND OF REINFORCES THE IMPRESSION THAT YOU'RE JUST RAISING CASH AND NOT REALLY THINKING ABOUT WHAT'S GOING TO BE LEFT OVER?

LIDDY: NO, MY ANSWER MORE REFLECTED THE FACT THAT IT'S SO DIFFICULT TO FIGURE OUT WHAT ARE THE CAPITAL MARKETS GOING TO DO TO THE WORLD ECONOMIES OVER THE NEXT FIVE YEARS, IT'S HARD ENOUGH TO FIGURE OUT WHAT THEY'RE GOING TO DO OVER THE NEXT FIVE HOUR OR FIVE DAYS. THAT WILL HAVE A LARGE IMPACT ON EXACTLY WHAT GETS DONE. AN AIA, THAT COULD BE SOLD TO A BUYER, IT COULD BE TAKEN PUBLIC. THAT SPECIFIC ANSWER WILL VERY MUCH BE A FUNCTION OF WHAT'S THE HEALTH OF THE WORLDWIDE CAPITAL MARKETS.

FABER: MR. LIDDY, SPECIFIC TO THE FOURTH QUARTER RESULTS, 61 PLUS BILLION DOLLAR LOSS, A DECENT AMOUNT OF THAT COMING FROM WRITEDOWNS ON YOUR COMMERCIAL MORTGAGE BACKED SECURITIES PORTFOLIO. CAN YOU GIVE US A BIT MORE INFORMATION ON THAT IF POSSIBLE? ARE YOU TAKING MARKS MORE AGGRESSIVELY PERHAPS THAN SOME OTHERS GIVEN YOUR UNIQUE POSITION? AND JUST HOW MUCH WAS IT IN TERMS OF COMMERCIAL MORTGAGE BACKED SECURITIES OR COMMERCIAL REAL ESTATE COSTING THE COMPANY?

LIDDY: THE $62 BILLION IS A LARGE NUMBER. LET ME TELL YOU WHAT I THINK IS REALLY IMPORTANT ABOUT THAT, IS WE ARE BEING CONSUMED BY THE SAME ISSUES THAT ARE DRIVING HOUSE PRICES DOWN AND 401(k) STATEMENTS DOWN AND WARREN BUFFETT'S INVESTMENT PORTFOLIO DOWN. ASSET VALUES ARE IN A FREE FALL AROUND THE GLOBE. WE'RE THE LARGEST INSURER IN THE UNITED STATES. ONE OF THE LARGEST. ARGUABLY THE LARGEST IN THE WORLD. WE HAVE A MASSIVE INVESTMENT PORTFOLIO. ALL ASPECTS OF THOSE ASSETS ARE GOING DOWN IN VALUE. WHEN THEY GO DOWN IN VALUE, WE TAKE THAT DECLINE THROUGH OUR P & L. , SO CNBSs, RNBSs, HYBRID SECURITIES, CONVERTIBLE SECURITIES, WE OWN ALL OF THEM, WHEN ANY OR ALL COME UNDER SOME SORT OF DURESS, IT HITS OUR P & L. AND SINCE WE'RE SO LARGE IT GETS MAGNIFIED.

BURNETT: MR. CUSANO IS A NAME THAT'S BECOME VERY FAMILIAR IN THIS COUNTRY, THE MAN IN LONDON WHO RAN THE UNIT OF AIG THAT HAS CAUSED THIS PROBLEM. ACCORDING TO REPORT THERE WERE 377 PEOPLE IN HIS UNIT. THERE ARE 116,000 EMPLOYEES OF AIG WHICH SORT OF BRINGS HOME HOW ONE ACTION CAN IMPACT SO MANY. THE OTHER REPORTS INDICATE THAT OVER A FEW YEAR TIME FRAME MR. CUSANO'S UNIT GOT $3.6 BILLION IN COMPENSATION. YOU WEREN'T THERE WHEN THIS HAPPENED. SO YOU CAN BE AN OBJECTIVE EYE. DO YOU THINK THIS WAS A CASE WHERE THE AMERICAN PEOPLE, AND IN THIS CASE ALSO THE PEOPLE IN EUROPE, SHOULD BE DEMANDING THAT MR. CUSANO AND HIS GROUP GIVE BACK THAT COMPENSATION?

LIDDY: ERIN, IF I WAS HERE, THE COMPENSATION AS YOU SAY GOES BACK MULTIPLE YEARS, I WOULD HAVE DONE THAT WHOLE THING DIFFERENTLY. BUT WE KIND OF ARE WHERE WE ARE. WE HAVE SOME RETENTION ARRANGEMENTS FOR PEOPLE IN OUR FP BUSINESS. WE HAVE TO HOLD SOME OF THOSE PEOPLE IN PLACE. THAT BOOK OF BUSINESS IS NOW $2 TRILLION. AND WE WANT TO WIND IT DOWN. WE ARE SHUTTING IT DOWN, WE ARE WINDING IT DOWN IN A VERY ORDERLY WAY. WHEN YOU LOOK BACK ON THE HISTORY OF THIS, THERE WAS NOT ENOUGH VISIBILITY, NOT ENOUGH TRANSPARENCY ON WHAT WAS GOING ON IN THE FP UNIT. THAT'S WHAT GIVES RISE TO THE ANGER AGAINST MR. CUSANO AND THE WHOLE UNIT.

HAINES: ARE WE DONE NOW? IS THIS THE LAST TIME WE'RE GOING TO HAVE TO WRITE A CHECK TO KEEP AIG AFLOAT?

LIDDY: WELL, I WOULD LIKE TO SAY 100% YES SO THAT, BUT IT'S DIFFICULT TO DO THAT. IT REALLY DEPENDS ON WHAT HAPPENS TO THE CAPITAL MARKETS FROM HERE. SINCE SEPTEMBER, WE'VE MADE ENORMOUS PROGRESS. BACK IN SEPTEMBER WE HAD A LIQUIDITY CRISIS OF UNBELIEVABLY LARGE PROPORTIONS. THAT'S BEEN STABILIZED. OUR CASH AND LIQUIDITY IS FINE RIGHT NOW. BUT NOW BECAUSE THE CAPITAL MARKETS ARE IN SUCH A FREEFALL, WE'RE FIGHTING ANOTHER ISSUE WHICH IS DO WE HAVE ENOUGH EQUITY TO SUPPORT THE DEBT THAT WE HAVE. THAT'S WHAT THIS WHOLE RESTRUCTURING IS ALL ABOUT I THINK IT WILL BE IN VERY GOOD SHAPE, BUT IT IS VERY DEPENDENT ON WHAT HAPPENS TO THE CAPITAL MARKETS IN THE NEAR TERM.

FABER: MR. LIDDY, WE'RE LOOKING AT THE CAPITAL MARKETS OR THE EQUITY MARKETS. THEY CONTINUE TO BE IN FREE FALL. THANK YOU FOR YOUR TIME THIS MORNING. WE APPRECIATE IT.

LIDDY: THANK YOU.

FABER: ED LIDDY, THE CHAIRMAN AND CEO OF AIG




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