AIG bailout spared Wall Street, watchdog says

NEW YORK (CNNMoney.com) -- The federal government could have pressed the private sector to help rescue AIG when the company was on the verge of collapse in September 2008, a government watchdog has found. Instead, it let Wall Street off easy.

The government's $182 billion bailout of the global insurer has left taxpayers holding the bag, while ensuring that all of AIG's creditors and business partners are paid in full, said a Congressional Oversight Panel report released Thursday.

The oversight panel, which is charged with monitoring the government's use of Troubled Asset Relief Program funds, criticized the Federal Reserve and Treasury Department for repeatedly saying they had to choose between letting the world's largest insurer fail or rescuing it.

The government chose not to push major lenders to privately bail out AIG or propose a rescue that combined public and private funds. Nor did it require AIG to negotiate with its business partners, or counterparties, as a condition of its rescue.

Since AIG's counterparties emerged unscathed, sophisticated investors who participate in the risky derivatives market now think that taxpayers will come to their rescue as well, the report said.

"The government distorted the marketplace by transforming highly risky derivative bets into fully guaranteed transactions, with the American taxpayer standing as guarantor," the panel wrote.

It remains unclear whether taxpayers will recoup the funds they extended AIG, the panel said. Just last week, the sale of AIG's Asian life insurance unit for more than $35 billion went bust when the buyer, Prudential PLC, sought a lower price.

"It is clear that taxpayers remain at risk for severe losses," the panel wrote.