http://www.businessweek.com/news/2010-06-10/aig-s-rescue-had-poisonous-effect-u-s-panel-says-update1-.htmlJune 10 (Bloomberg) -- American International Group Inc.’s bailout had a “poisonous” effect on the U.S. financial system because it demonstrated the government would protect Wall Street firms from their own risk-taking, said a Congressional panel.
The Federal Reserve could have acted earlier to find a privately funded solution for New York-based AIG before the September 2008 rescue, the Congressional Oversight Panel said today in a report. The bailout, which has swelled to $182.3 billion, transformed banks’ financial bets into fully guaranteed obligations, the panel said.
“The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace,” said the panel, led by Harvard University law professor Elizabeth Warren. “The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.”
The rescue helped prevent an “utter collapse” of the U.S. economy, Treasury Secretary Timothy F. Geithner said in January. Geithner, 48, executed the bailout while he led the Federal Reserve Bank of New York in 2008. Lawmakers called the move a “backdoor bailout” because banks including Goldman Sachs Group Inc. and Societe Generale SA received payments from AIG to settle derivative contracts tied to subprime mortgages.
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