Congress condemns 'poisonous' AIG bailout

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The Independent Online

The US government's 2008 bailout of the insurance giant AIG has had a "poisonous" effect on financial markets, a Congressional panel overseeing the Wall Street bailouts declared yesterday.

But the panel's conclusion that there were private-sector options for saving the company from collapse was immediately challenged by the US Treasury, which said the report overlooked the basic fact that the global economy had been on the brink of collapse.

The war of words reflects the continuing political potency of the AIG bailout, which could leave US taxpayers out of pocket to the tune of tens of billions of dollars. In all, the Treasury put about $180bn (£120bn) on the line in loans, equity funding and guarantees on AIG's assets. Because the insurance firm had written credit default swaps covering large swathes of the mortgage market, officials feared that its collapse, just days after the bankruptcy of Lehman Brothers in September 2008, could have led to a financial and economic disaster.

The Congressional Oversight Panel said Tim Geithner, then chairman of the New York Federal Reserve and now Treasury Secretary, left the task of finding a private bailout for AIG to two Wall Street banks, JPMorgan Chase and Goldman Sachs. Within hours, the firms had concluded no private sector deal was possible.

These were "banks with severe conflicts of interest as they would have been among the largest beneficiaries of a taxpayer bailout", the report said. The bailout poisoned markets by encouraging firms to believe the government would step in if they got into trouble.

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