US oversight panel slams AIG rescue

The US government’s bailout of AIG in September 2008 has had “a poisonous effect on the marketplace” and could still lead to “severe losses” for US taxpayers, according to a report released Thursday by the bipartisan Congressional Oversight Panel.

The panel, set up to monitor bailout funds doled out to financial institutions by the Treasury Department’s Troubled Asset Relief programme, said that the financial rescue firmly established the notion that some firms were too large to be allowed to fail. The rescue initiated by the Bush administration “demonstrated that Treasury and the Federal Reserve could 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 said. “Billions of taxpayer dollars were put at risk, a marketplace forever changed, and the confidence of the American people was badly shaken”.

As for AIG, the panel cited a recent Congressional Budget office estimate that the company’s repayments to the government would be $36bn short of its total current obligations. Of the $132bn in rescue funding, AIG is trying to repay around $101bn through asset sales. The New York Fed is to recoup the remaining $31bn or so from mortgage securities acquired from AIG. In opting to rescue AIG, the Bush administration failed to “exhaust all options” and ended up distorting the marketplace, the panel said.

The Treasury and the New York branch of the Fed, by not asking AIG counterparties Goldman Sachs and Merrill Lynch to share some of the financial burden, “fundamentally changed the relationship between the government and the country’s most sophisticated financial players”, the report said.

The panel projected that the government, with a near 80% stake in AIG, would remain “a significant shareholder” through 2012.