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

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 to ease the firm's liquidity crunch. But at least one of those partner banks offered to cancel the contracts for less, according to a report Monday from Neil Barofsky, the Special Inspector General for the $700 billion financial bailout. That means officials might have spent billions more than necessary to cancel debt insurance contracts, the report says.

AIG, a financial services conglomerate that was the world's largest insurer, was considered so interconnected with other companies 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.

After several bailouts, AIG now holds government commitments worth up to $180 billion — more than any other company. The Treasury Department owns nearly 80 percent of the company.

Critics have long argued AIG's trading partners should have been forced to take less than 100 percent of the value of their contracts with AIG. They noted the protection AIG offered — in the form of complex products called credit-default swaps — was unregulated and AIG's trading partners knew the risks and should have to assume some losses.