AIG Bailout had “Poisonous Effect on the Marketplace” Says Congressional Committee

“Something is rotten in the state of Denmark New York”

Remember back in April when reports surfaced that indicated AIG might be able to repay its share of the bailout money?  Or when Ben Bernanke said on Wednesday that he believed that AIG would be able to repay its bailout money?  Don’t hold your breath, because it turns out that this may not be the case.

In a report issued today, the Congressional Oversight Panel, which is a watchdog group that is reviewing the taxpayer bailout of AIG, said that we “remain at risk for severe losses” and that government did not do enough to guard against taxpayer losses during the 2008 bailouts.  AIG is 80 percent owned by the government, and the panel said the government is going to “remain a significant shareholder in AIG through 2012″ and “even at this late stage it remains unclear whether taxpayers will ever be repaid in full”.

The Federal Reserve Bank of New York and the Treasury Department have given more than $132 billion to AIG since 2008.  The Panel concluded that while some form of relief was necessary to stabilize the economy, “the government failed to exhaust all options before committing $85 billion in taxpayer funds” and that “the government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace”.

Furthermore, the Panel levelled this damning criticism of the bailout:

“Throughout its rescue of AIG, the government failed to address perceived conflicts of interest. People from the same small group of law firms, investment banks, and regulators appeared in the AIG saga in many roles, sometimes representing conflicting interests. The lawyers who represented banks trying to put together a rescue package for AIG became the lawyers to the Federal Reserve, shifting sides within a matter of minutes. Those same banks appeared first as advisors, then potential rescuers, then as counterparties to several different kinds of agreements with AIG, and ultimately as the direct and indirect beneficiaries of the government rescue. The composition of this tightly intertwined group meant that everyone involved in AIG’s rescue had the perspective of either a banker or a banking regulator. These entanglements created the perception that the government was quietly helping banking insiders at the expense of accountability and transparency”.

It is worth reading that section twice.  Then take a gander at this piece from Greg Gordon of McClatchy Newspapers.  He asserts that “it now appears that Paulson and senior Federal Reserve officials either plunged ahead 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”.

Of the money the bailout money that went to AIG, more than $90 billion went to its creditors, who would have received far, far less had AIG been allowed to restructure or go into bankruptcy.  NPR has a nice breakdown of who got what here.  The number one recipient on that list is none other than Goldman Sachs. Guess where Hank Paulson, who was Secretary of the Treasury when the bailout was orchestrated worked before he started at Treasury?  You guessed it, Paulson was CEO of Goldman Sachs.  Let me be clear: I’m not accusing Paulson of any misdeeds (the awesome Barry Ritholtz does that far better than I ever could) but this could be one of the “perceived conflicts of interest” the Panel was referring to.

Anyway, this whole thing provides some food for thought on a Thursday.  What do you think?  Let us know in the comments section below.