A new report blasts the Federal Reserve and the Treasury for their handling of the AIG crisis. Panel: AIG bailout 'poisonous'

A new report by the panel created to oversee spending under the Troubled Asset Relief Program blasts the Federal Reserve and the Treasury for creating the too-big-to-fail problem with its handling of the American International Group crisis in 2008.

The Congressional Oversight Panel report condemns government officials for the initial September 2008 decision, backed by then-Treasury Secretary Hank Paulson, to save the company from collapse by lending it $85 billion in taxpayer funds from the Federal Reserve to save the insurance behemoth. While the loans from the Treasury and Fed eventually grew to over $200 billion, the report aims its fire at the initial decision to bail out AIG, rather than letting it fail.


"The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace," the report says. "The AIG rescue demonstrated that 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’s report was issued just after midnight Thursday morning, the same day that members of the House and Senate will be conferencing to reconcile their versions of the Wall Street bill aimed at preventing future AIGs.

Federal Reserve and Treasury officials should have tried much harder to save AIG without using taxpayer money, said Elizabeth Warren, a Harvard Law School bankruptcy professor and chairwoman of the panel.

"The negotiations would have been difficult, and they might have failed," she said Wednesday in a conference call with reporters. "But the benefits of crafting a private or even a joint public-private solution were so superior to the cost of a complete government bailout that they should have been pursued as vigorously as humanly possible."

The panel has embraced its role as watchdog, to the discomfort of federal officials. In March, it roundly criticized the Treasury for what it calls lax oversight of Citigroup.

"If the regulators don't ask for the information that reveals the gaps in the firm's own understanding of its risks, then the regulators have failed profoundly," Warren said.

On June 1, AIG announced that its plan to sell its Asian insurance business had fallen apart, slowing the process of returning money to the government. As of May 27, the company still owed the Fed $26.1 billion, according to the report.

Federal officials have defended their oversight of the insurance giant, which reported total losses of $110 billion in 2008 and 2009 and is nearly 80 percent owned by taxpayers. Fed Chairman Ben Bernanke said in a hearing before the House Budget Committee Wednesday morning that he believes AIG will eventually repay taxpayers fully.