Watchdog: Gov't May Have Overpaid To Bail Out AIG

DANIEL WAGNER

WASHINGTON (AP) — Officials handling the multibillion dollar bailout of insurance giant American International Group Inc. mismanaged an initial rescue attempt and may have overpaid other banks to wind down AIG's business relationships, a government watchdog says.

The Federal Reserve Bank of New York — headed at the time by now-Treasury Secretary Timothy Geithner — paid AIG's business partners full face value for securities so they would cancel insurance contracts AIG had written in order to ease the firm's liquidity crunch. But at least one of those partner banks offered to canceled the contracts for less, according to a report Monday from Neil Barofsky, the Special Inspector General for the $700 billion financial bailout Congress approved last October.

That means officials may have spent billions more than necessary to cancel debt insurance contracts with banks including Goldman Sachs Group Inc. and others, the report says.

AIG, a financial services conglomerate that was the world's largest insurer, was considered so interconnected with other companies that its failure could upend the global financial system. As it teetered last fall, officials decided to save the company with billions of taxpayer dollars and government guarantees to prevent deepening the spreading financial crisis.