Minutes from about 25 Federal Reserve Board meetings late last year, released Wednesday, reveal the extent of concern officials had over the potential repercussions that failures of AIG and Citigroup could have triggered in global financial markets.

In the Fed’s initial decision to extend an $85 billion lifeline to American International Group Inc., on Sept. 16, 2008, officials judged that “the company faced the imminent prospect of declaring bankruptcy,” according to the minutes.

“Board members agreed that the disorderly failure of AIG was likely to have a systemic effect on financial markets that were already experiencing a significant level of fragility and that the best alternative available was to lend to AIG to assist it in meeting its obligations in an orderly manner as they came due,” according to the minutes of that meeting.

AIG tapped $62 billion of that loan by Oct. 1, the Fed noted in the minutes of a subsequent meeting on Oct. 6 in which the Board voted to set up a securities lending facility for AIG. As part of their discussion, officials considered “the likelihood that no incremental losses would be assumed by the Federal Reserve due to the high-quality collateral taken under the proposed facility and the additional protections provided by the terms of the proposed facility.”

They also weighed “possible risk of loss to the Federal Reserve from the disorderly failure of AIG,” according to the minutes.

In the minutes of a Nov. 23 meeting in which Board members agreed to take part in a joint Treasury-Fed-FDIC rescue of Citigroup Inc., the Fed said “available evidence suggested that investors were becoming increasingly concerned about the company’s prospects, which would threaten Citigroup’s ability to continue to obtain funding.”

Meeting minutes released Wednesday cover the dramatic steps officials took to put out a slew of fires from the AIG and Citi rescues to creation of new credit facilities for commercial paper, money market funds and asset-backed securities as well as a decision to allow Fannie Mae and Freddie Mac to borrow from the Fed’s discount window.

The minutes also reveal the daunting workload the Washington, D.C.-based Board of Governors faced at a time when they were operating at less than full strength.

They also highlight the extent to which key decisions were being undertaken by the five-member Board – which is supposed to have seven members – and not the Federal Open Market Committee, which includes both the Board of Governors and regional bank presidents. – Brian Blackstone

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Doling out the first third of the $700 billion to help stabilize financial firms could cost U.S. taxpayers $64 billion, the Congressional Budget Office said.

The CBO said that the estimated cost of Treasury Department’s implementation of the Troubled Asset Relief Program through Dec. 31 will represent more than a quarter of the funds given out. (Read the report.)

The estimate covers $247 billion in transactions, including $178 billion in capital injections to banks, as well as the special rescues of American International Group Inc., Citigroup Inc. and GMAC.

CBO said the $64 billion figure generally represents the difference between what Treasury paid for the investments or lent to firms and the market value of the transactions. This difference, called the “subsidy rate”, was 26% for the first third of the TARP funds.

The subsidy rate for the government’s special loans in AIG and GMAC are significantly higher than for the majority of TARP transactions. CBO said the estimated cost of the government’s $40 billion loan in AIG would be $21 billion, while the $5 billion GMAC loan would cost $3 billion. –Michael R. Crittenden

Citigroup CEO Vikram Pandit said short sellers and plummeting confidence in the financial system are to blame for the plunge in Citigroup#39;s stock last week. In an interview with the Charlie Rose Show, Pandit said his company is not too big to manage…