$85B not enough to bail out AIG

WASHINGTON - At the peak of the 2008 financial crisis, then-Treasury Secretary Henry Paulson and top Federal Reserve officials told the nation that there was an urgent need for the government to lend $85 billion to the American International Group so the giant insurer's temporary cash squeeze wouldn't trigger global financial chaos.

Nearly two years later, taxpayers are on the hook for twice that amount, and it now appears that Paulson and senior Federal Reserve officials either plunged ahead without understanding AIG's financial situation and the risks it posed to taxpayers -- or were less than candid about one of the largest corporate bailouts in U.S. history.

AIG reported combined total losses of $110 billion in 2008 and 2009, erasing any doubt that the government stepped into a colossal mess.

AIG was at the epicenter of all the government bailouts of financial institutions in 2008, a company through which more than $90 billion in federal money flowed out the back door to some of the same Wall Street banks whose risky behavior fueled the crisis. Among leading beneficiaries of the AIG bailout was investment banking giant Goldman Sachs, which Paulson headed until June 2006.

Explanations of the bailout from current and former top government officials have never fully jibed, fueling allegations that most of the money was always intended for Wall Street rather than Main Street.

Elizabeth Warren, chairman of the Congressional Oversight Panel that's tracking the use of bailout money, said at a hearing in late May that the government "broke all the rules" with its rescue of AIG, which she labeled a "corporate Frankenstein" that defied regulatory oversight.

As the Fed wired billions of dollars to AIG in the fall of 2008, state and federal officials assured the public that the company's financial woes were limited largely to its parent, which had wagered $2 trillion on exotic financial instruments and incurred massive losses on housing-related investments. AIG's six dozen U.S.-based insurance companies, the regulators said, were all on solid footings.

Despite regulators' public assurances and AIG's assertion that pooling arrangements among its subsidiaries made the liabilities look worse than they were, AIG has since propped up its insurance subsidiaries with $31 billion of federal dollars, and its total debt to taxpayers could reach $182 billion.

Now the company, nearly 80 percent owned by taxpayers, is reporting profits again and appears to have stabilized. But even before AIG's planned $35.5 billion sale of a prized Asian insurance subsidiary collapsed on June 1, government auditors projected that bailing it out will still cost taxpayers as much as $47 billion.

Most experts agree that shoring up the insurer was important to prevent systemic financial breakdown, but critics question the government's handling of the bailout -- from misleading early portrayals of AIG's financial condition to failing to press Wall Street creditors such as Goldman to accept discounted payments from AIG.

Warren, whose panel is completing a critical report on the bailout, said, "The government invented a new process out of whole cloth."

In a normal restructuring, she said, AIG's shareholders "should have lost everything, and its creditors should have taken substantial losses."