Two banks with self-interest said private bailout not possible

The Congressional Oversight Panel has criticised the New York Federal Reserve under Timothy Geithner for failing to arrange a private-sector rescue of AIG before its taxpayer bailout in 2008, Reutrers reports

Bloomberg and the FT pick on its descriptions of the bailout as “poisonous” for the markets because it demonstrated the government would protect firms from their own risk-taking.

Geithner, now US Treasury Secretary, asked only two Wall Street banks, JPMorgan Chase and Goldman Sachs, and when those two said a private bailout was not possible, used public money.

Conflicts of interest

"The Panel is concerned that the government put the effort to organise a private AIG rescue in the hands of only two banks - banks with severe conflicts of interest as they would have been among the largest beneficiaries of a taxpayer bailout," the report said.

"By failing to bring in other players, the government neglected to use all of its negotiating leverage."

Professor’s view

"The government could have acted earlier and much more aggressively to secure either a fully private rescue of AIG or a rescue that combined public and private funds," the panel's chairman, Harvard Law School professor Elizabeth Warren, told reporters on a conference call.

"This would have been difficult, perhaps even impossible, but the government should have exhausted every option before spending a penny of taxpayer funds."

A Fed spokesperson said the bank disagreed with the report's conclusion.