WASHINGTON — The federal government didn't exhaust all its options before it committed tens of billions of taxpayers' dollars to bail out the American International Group during the height of the 2008 financial collapse, according to a new report from a congressional watchdog panel.
The Congressional Oversight Panel, which was created to monitor the spending in the 2008 bank bailout bill known as the Troubled Asset Relief Program, or TARP, detailed in its latest monthly report the government's extraordinary rescue of AIG and its lingering effects on taxpayers and the financial markets.
AIG, once one of the largest and most successful insurance companies in the world, collapsed in 2008 when it couldn't meet the collateral demands of its customers. The firm, the oversight panel said, had an "insatiable appetite for risk" but a "blindness to its own liabilities."
When it was clear that AIG was going to collapse, the Federal Reserve and the Treasury Department stepped in to save it. The government provided more than $100 billion in assistance, and the oversight report says it's unclear whether taxpayers will ever be repaid in full.
McClatchy reported Tuesday that then-Treasury Secretary Henry Paulson and senior Federal Reserve officials pushed the rescue either without understanding AIG's financial situation and the risks it posed to taxpayers — or were less than candid about one of the largest corporate bailouts in U.S. history.
In addition, McClatchy reported that AIG, the company through which more than $90 billion in federal money flowed out the back door to some of the same Wall Street banks whose risky behavior fueled the nation's financial crisis, is now being accused of short-changing its customers.
Attorneys for hundreds of injured workers say AIG is dragging out insurance payments that their clients need to cover home mortgages, failing to pay full compensation benefits and refusing to pay medical bills.
A key finding of oversight panel's new report is that the government "failed to exhaust all options" before committing the first $85 billion to the AIG rescue.
The government has said — and said again Wednesday in response to the report — that it was under extraordinary pressure and had to move quickly to prevent the chaos that would have resulted from a meltdown of AIG, which was linked to major financial firms around the world.
Elizabeth Warren, the Harvard professor who chairs the oversight panel, said the panel doesn't agree with that all-or-nothing conclusion.
"The panel rejects that analysis," she said in a conference call Wednesday. "Time was short in part because of the decisions that had been made over the preceding three days and the preceding three months."
As early as the summer of 2008, for example, there were signs that AIG was in serious trouble. The government could have acted earlier and more aggressively to organize a private rescue of AIG, but it was focused on another company at the time and left AIG to try to arrange its own private financing.
Treasury spokesman Andrew Williams countered that it's "easy to speculate about how things might have been done differently, had there been more time."
However, he added, the "choices and tools available to the government were extremely limited and the potential outcomes were deeply uncertain. At that perilous moment, we took the actions that were most likely to protect American families and businesses from a catastrophic failure of another financial firm and an accelerating panic."
He also said that "we learn nothing new from this report," and that the Treasury Department "has spent more time in meetings with (the oversight panel) answering questions about the decisions made on September 15 (2008) than the government had to make those decisions."
In a statement, the Federal Reserve said, "“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. Our decision to use the emergency lending authority granted by Congress fully protected taxpayers, who are even now being repaid by AIG.”"
AIG said in a statement that, "We are well on our way to remaking AIG into a more streamlined and focused company. AIG is focused on repaying taxpayers, strengthening our companies, and building shareholder value."
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