The U.S. government guaranteed as much as $4.3 trillion in financial assets last year, making such backstops the biggest and riskiest part of Washington's response to the financial crisis, a bailout watchdog panel said on Friday.

The Congressional Oversight Panel said in its latest monthly report that the asset guarantees from the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corp helped calm panic in financial markets at minimal cost to taxpayers so far.

To date, the programs have generated fees of about $17.4 billion, while only up to $2 million is expected to be paid out for a default under the FDIC's bank debt guarantee program. .

The report said for program that once guaranteed a pool of $301 billion in Citigroup assets, initial actuarial estimates point toward a possible loss of $34.6 billion under a moderate stress scenario.

But since Citigroup must absorb the first $39.5 billion in losses from these assets, taxpayers would not be liable for any of this. A severe stress test scenario would result in losses of $43.9 billion, of which taxpayers would have to absorb nearly $4 billion.

The panel, charged with overseeing the U.S. Treasury's $700 billion Troubled Asset Relief Program, said that as financial markets stabilize and the scope of the guarantee programs decrease, the likelihood of major expenditures also diminishes.

This apparently positive outcome, however, was achieved at the price of a significant amount of risk, the panel said in the report. A significant element of moral hazard has been injected into the financial system and a very large amount of money remains at risk.

Elizabeth Warren, the Harvard Law School professor who heads the Congressional Oversight panel, said the guarantees also produced significant distortions in private markets, drawing funds to assets that had backstops.

The fact that there is no upfront cost is both the beauty and danger of guarantees, she told a conference call on the report. They are perhaps too tempting.

The majority of the $4.3 trillion that the government guaranteed came from a money market mutual fund guarantee program aimed at preventing massive withdrawals of such funds in the fall of 2008. At its height, the program guaranteed $3.217 trillion in money market fund assets.

Among other programs reviewed in the report, the FDIC debt guarantee program currently backstops about $307 billion in outstanding obligations.

The watchdog panel said it did not identify any significant flaws in the Treasury's implementation of its programs and noted that Treasury has taken a more aggressive stance in safeguarding taxpayer funds.

But it recommended that the Treasury disclose more information on the rationale and justifications for creating the money market guarantee program, and explanations of why Citigroup and Bank of America were the only institutions selected for asset guarantee protection.

It also asked for more updates on the pool of Citigroup assets, now estimated at $266.4 billion, including total and projected losses.