The Federal Reserve and Treasury failed to exhaust all options before undertaking their taxpayer-funded rescue of New York-based American International Group (AIG), a new report finds.

“In previous rescue efforts, the government had placed a high priority on avoiding direct taxpayer liability for the rescue of private businesses,” the report, issued by the Congressional Oversight Panel, states. “With AIG, the Federal Reserve and Treasury broke new ground by putting U.S. taxpayers on the line for the full cost and risk of rescuing a failing company.”

The panel also charged that the rescue set a bad precedent by enshrining “too big to fail” as de facto government policy. “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.  So long as this belief continues to hold sway among investors, the worst effects of AIG’s rescue on the marketplace will linger.”

Moreover, the report concludes that it remains unclear whether taxpayers will ever be repaid in full for the $182.3 billion given to the company and its creditors. “AIG and Treasury have provided optimistic assessments of AIG’s value,” the report states. “The Congressional Budget Office, however, currently estimates that taxpayers will lose $36 billion. The uncertainty lies in whether AIG’s remaining business units are will able to generate sufficient new business to create the necessary shareholder value to repay taxpayers in full.”

Indeed, AIG efforts to repay taxpayers seemingly took a hit last week when a proposed $35.5 billion sale of its Asia division, AIA Group Ltd., was scuttled. AIG may hold an initial public offering for the division, which serves 23 million customers throughout Asia, the report states.

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