Issue of the week: What did AIG do with all that money?

What happened to all that money? That’s what a growing chorus of legislators and accounting experts is asking this week about the costly federal takeover of giant insurer AIG, said Gavin Magor in TheStreet.com. “It took AIG less than a month to burn through more than $70 billion of the $85 billion bridge loan” that the Federal Reserve granted the company in October. Since then, the federal government has provided an additional $59 billion in credit, for an eye-popping total of $144 billion. AIG says that much of the money was used to cover losses on credit default swaps, the exotic insurance contracts that dragged AIG to the brink of collapse.

But that answer just raises more questions, said Mary Williams Walsh in The New York Times. As recently as September, the company claimed its losses on the swaps were under control. Did the bottom suddenly drop out in October? “Some analysts say that at least part of the shortfall must have been there all along, hidden by irregular accounting.” And there’s “tantalizing support for this argument.” A former Securities and Exchange Commission accountant hired by the company to clean up its book­keeping resigned from the firm after being excluded from meetings at which the value of the swaps was debated.

That should raise all sorts of warning flags, said Carol Leonnig in The Washington Post. That unnamed accountant isn’t the only one to question whether AIG has low-balled its estimates of losses on the swaps. Earlier this year, AIG was embroiled in a heated dispute over the value of credit default swaps it had sold to Goldman Sachs, which bought them to protect against losses on mortgage-backed bonds. Goldman insisted that the bonds had fallen sharply in value and demanded that AIG put up cash to prove it could pay off on the insurance. If Goldman and other critics are correct, then AIG “may be forced to borrow additional federal funds” to cover its losses.

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All this has some legislators hopping mad, said Maya Jackson Randall in Marketwatch.com. Sen. Charles Grassley of Iowa, the ranking Republican on the Finance Committee, last week demanded that AIG “shed more light into how it has used its federal rescue money.” AIG refused, saying it would provide a full accounting when it releases its regular quarterly financial report next week. That’s not good enough for Grassley, who wants an immediate, “full, and detailed accounting of its expenditures to date.” That could prove embarrassing for AIG, which has already taken heat for spending $440,000 on an executive retreat at a posh resort less than a week after the emergency rescue. But U.S. taxpayers could be more than embarrassed if the government can’t recover the billions of dollars it has poured into the firm. “Right now,” says insurance analyst David Schiff, “no one knows if this bailout is going to work.”