AIG bailout "poisonous," Fed oversight panel says

"Billions of taxpayer dollars were put at risk, a marketplace was forever changed, and the confidence of the American people was badly shaken," the report said.

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According to the report, the Feds had delayed in understanding the magnitude of AIG's liquidity problem. As early as July 2008, Robert Willumstad, then-CEO of AIG , had spoken with Timothy Geithner (then Governor of the New York Federal Reserve Bank) about accessing the Fed's discount loan window that was available to primary dealers but not to insurers.

On Sept. 9, Willumstad again asked Geithner about how to become a primary dealer for Fed lending access. Finally, on Sept. 12, the insurer informed the Fed that it was in a severe liquidity crunch. Fed officials contend that AIG, which they did not regulate, never informed them of the severity of its financial problem until the morning of Sept. 15th, a day before Geithner approved an $85 billion Fed loan for AIG, the first of several such installments.

The report has also criticized the government for putting "the effort to organize a private AIG rescue in the hands of only two banks (Goldman Sachs and JPMorgan Chase). Those banks would have had severe conflicts of interest because they would have been among the largest beneficiaries of a taxpayer bailout."

"By failing to bring in other players, the government neglected to use all of its negotiating leverage," the report noted.

The report also highlighted the overlapping roles of various parties that were involved in the AIG bailout. For instance, it noted that lawyers representing a group of banks that had considered providing a rescue package to AIG ended up becoming lawyers to the Fed, while banks such as Goldman Sachs and JPMorgan Chase, which were potential rescuers, became the main beneficiaries of the bailout.

"These links have led to many allegations that the rescue was orchestrated in order to assist friends and former colleagues of those leading the rescue," the report said, though it added that after reviewing scores of documents, it found "no evidence of any...concerted effort."

According to the report, the US government, which owns nearly 80 percent of the insurance giant, is likely to "remain a significant shareholder in AIG through 2012" and it is unclear if taxpayers "will ever be repaid in full."

"The government's actions in rescuing AIG continue to have a poisonous effect on the marketplace," it said, as "more significantly, markets have interpreted the government's willingness to rescue AIG as a sign of a broader implicit guarantee of 'too big to fail' firms."

The report also suggests American taxpayers stood literally as guarantors during the AIG rescue and the subsequent payment-in-full to Wall Street and international banks to cancel credit default swaps they had bought from AIG.