NU Online News Service, Sept. 16, 3:26 p.m. EDT

WASHINGTON–American International Group (AIG) still relies largely on government funding for capital and liquidity, and "most observers" expect that the AIG Investment Program will generate "significant losses" to U.S. taxpayers, according to a new government report.

The Congressional Oversight Panel's September report on the Troubled Asset Relief Program (TARP)–called "Assessing the TARP on the Eve of Its Expiration"– also carries other distressing news.

It acknowledges that the program provided "critical support" to the financial markets at a time when market confidence was in freefall, but it states the program has been far less effective in meeting its other statutory goals, such as supporting home values, retirement savings, and economic growth.

And, because it failed to stem the decline in value of the assets of Americans, especially their securities and homes, the report says the TARP program is very unpopular amongst the public.

"Thus, the greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises," the report notes.

It adds that since TARP was authorized in October of 2008, 7.1 million homeowners have received foreclosure notices.

"Since their pre-crisis peaks, home values have dropped 28 percent, and stock indices–which indicate the health of many Americans' most significant investments for college and retirement–have fallen 30 percent," the report states.

"Given that Treasury was mandated by law to use the TARP to address these measures of the economy, their lingering weakness is cause for concern," according to the report.

The COP report was released on the "eve of the expiration of the program," which is scheduled to end Oct. 3.

"Popular anger remains high about taxpayer support of America's largest banks, and that anger has only intensified in light of the continuing economic turmoil," the report states.

The TARP's unpopularity may mean that, unless the program's effectiveness can be convincingly demonstrated, the government will not authorize similar policy responses in the future, according to the report.

Regarding AIG, it says the latest estimates by the Congressional Budget Office, the Office of Management and Budget and the Treasury project losses in the amount of $36 billion, $50 billion, and $45 billion, respectively, although the estimated losses have steadily decreased since the inception of the credit facility.

The report notes that Treasury's ability to recoup its investment depends on the value of AIG's common stock at the time Treasury sells its interests.

Therefore, the report states, the value of Treasury's substantial investment in AIG and the size of any gain or loss are dependent on many external variables, and "the protracted investment in AIG continues to create significant risks to taxpayers."

The report adds that Treasury has invested approximately $47.5 billion in TARP funds in AIG. This investment is comprised of non-cumulative preferred stock in the amount of $40 billion and an equity capital facility under which AIG has drawn down $7.5 billion.

Including the $1.6 billion in unpaid dividends, AIG's outstanding TARP assistance equals $49.1 billion, the report explains.

In addition, AIG must repay $79.1 billion in outstanding debt to the Federal Reserve Bank of New York.

"The timing of Treasury's exit is complicated by the fact that AIG is not permitted to repay Treasury until it has fully repaid FRBNY," the report states.

Treasury, the Federal Reserve, and AIG have stated that they are confident that AIG will fully repay FRBNY in the near future without "jeopardizing its financial viability," according to the report.

Special Reports /

New Report Casts Doubt On Government's AIG Investment, TARP

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