Reporting from Washington —
A watchdog panel Thursday blasted the government's $182-billion bailout of insurance giant American International Group Inc. for its continued "poisonous effect" on financial markets and said it's still unclear whether taxpayers ever will be fully repaid.
The Congressional Oversight Panel, set up by lawmakers to monitor the $700-billion bailout fund, also was sharply critical of Treasury Department and Federal Reserve officials for failing to exhaust all other options in 2008 before rescuing AIG as it teetered near bankruptcy. Taxpayers are still on the hook for $132.3 billion in the AIG bailout, and the Congressional Budget Office's latest estimate is for a $36-billion loss.
At a hearing by the panel last month, AIG executives and federal officials expressed optimism that taxpayers would get most, if not all, of their money back. Fed Chairman Ben S. Bernanke reiterated that point at a congressional hearing Wednesday, saying, "AIG, I believe, will repay."
But in its 328-page report on the AIG bailout Thursday, the oversight panel wasn't nearly as optimistic.
"For now, the ultimate cost or profit to taxpayers is unknowable, but it is clear that taxpayers remain at risk for severe losses," the report said.
The panel was highly critical of the decision to bail out AIG, which happened shortly after the chaotic failure of investment bank Lehman Bros. in September 2008. The report noted that federal officials in the past "had placed a high priority on avoiding direct taxpayer liability for the rescue of private businesses," citing the successful efforts to get private firms to help rescue Long-Term Capital Management in 1998 and Bear Stearns in early 2008.
"With AIG, the Federal Reserve and Treasury broke new ground. They put U.S. taxpayers on the line for the full cost and the full risk of rescuing a failing company," the report said.
Treasury and Fed officials should have acted earlier and been more aggressive in seeking a private rescue of AIG, it said. Agreeing to a government rescue that included full payment to AIG's creditors, such as Goldman Sachs, has "distorted the marketplace" and "fundamentally changed the relationship between the government and the country's most sophisticated financial players."
"The AIG rescue demonstrated that the Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America's largest financial institutions, and to assure repayment to the creditors doing business with them," the panel said.
The effect on the marketplace has been "poisonous," it said.
Fed and Treasury officials disputed the conclusions, saying that the AIG bailout was crucial to preventing a financial meltdown and that officials had little time to act as the crisis took hold.
"We respectfully disagree with the view that there were any better alternatives that were workable in the extreme circumstances of the time — in the middle of the worst financial panic in modern history," the Fed said.
Treasury spokesman Andrew Williams said that "in retrospect, it is easy to speculate about how things might have been done differently, had there been more time." Government officials had limited "choices and tools" to react to AIG's potential failure, and little time to act, he said.
The Federal Reserve used its emergency lending power to help rescue AIG with $85 billion. That was supplemented with $70 billion from the Troubled Asset Relief Program, which was created later in 2008, as well as additional Fed money. As part of the rescue, taxpayers own 80% of AIG, which is trying to pay back the investments by selling off its profitable business units.
Williams said Treasury officials have learned from the AIG bailout and have pressed for new government authority to seize and dismantle huge financial firms on the brink of bankruptcy. Those powers are in the financial regulatory overhaul legislation being finalized by Congress.