The panel's job is to ensure there is no fraud or abuse in the Troubled Asset Relief Program the government created in 2008 to stabilize financial institutions by loaning them money.

In its report, the panel said the AIG rescue "distorted the marketplace by transforming highly risky derivatives bets into fully guaranteed payment obligations."

Moreover, the report states that "throughout its rescue of AIG, the government failed to address perceived conflicts of interest," and that "the government's rescue of AIG continues to have a poisonous effect on the marketplace."

The report contradicted Federal Reserve Board Chairman Ben Bernanke, who said Wednesday at a House Budget Committee hearing that the federal government will be repaid for its investment in AIG.

Asked how much the TARP program would cost taxpayers, Mr. Bernanke said "the direct cost for financial institutions…including AIG, I would say is, at this point, not very large."

He added, "Except for AIG, every other major institution has repaid with interest and dividends."

And AIG, he said, "I believe will repay. So, the financial institution part–the direct cost is, I think, really quite small and may, in the end, be in fact a profit."

The oversight panel acknowledged that the TARP program averted a larger financial crisis.

"Through a series of actions, including the rescue of AIG, the government succeeded in averting a financial collapse, and nothing in this report takes away from that accomplishment," the report states.

But regarding AIG, it adds, "Even at this late stage, it remains unclear whether taxpayers will ever be repaid in full."

The report also contends that AIG and Treasury have provided optimistic assessments of AIG's value.

The Congressional Budget Office, the report notes, "currently estimates that taxpayers will lose $36 billion."

According to the report, "The uncertainty lies in whether AIG's remaining business units are able to generate sufficient new business to create the necessary shareholder value to repay taxpayers in full."

The oversight panel rejected claims by Treasury and the Fed that they faced a "binary choice" to either allow AIG to fail or rescue the entire institution, including payment in full to all of its business partners.

The panel said the government had additional options, including orchestrating "a rescue funded entirely or in part by private parties."

The report states, "Earlier and more aggressive efforts to protect taxpayers and maintain market discipline would, if successful, have had an enormous calming effect on the market–and even if ultimately unsuccessful, they would have strengthened the government's credibility with taxpayers during a time of crisis."