Former AIG chief favors alternative rescue plan

NEW YORK (Reuters) - American International Group Inc (AIG.N) should seek modified terms to the U.S. government's $85 billion bailout financing, former Chief Executive Maurice "Hank" Greenberg told the insurer's board.

In a letter to AIG CEO Edward Liddy, made public on Tuesday through a Securities and Exchange Commission filing, Greenberg said the government rescue should be provided through a purchase of AIG preferred stock instead of a loan.

The loan plan will result "in the liquidation of AIG, the loss of thousands of jobs, and the irretrievable loss of billions of dollars in shareholder value," Greenberg wrote.

The loan, extended last month, has a two-year term carrying an effective interest rate of more than 14 percent and grants the government warrants for an 80 percent stake in AIG.

"This means that AIG cannot pay off this loan from the proceeds of selling assets in this market, nor can it pay the annual interest rate from earnings," Greenberg wrote. "It is a lose-lose plan."

Greenberg said AIG would benefit if the financing were extended through preferred stock paying a 5 to 6 dividend while offering a 10-year redemption right at a 10 percent premium.

"Such a plan would have an immediate impact on the market and would save AIG from being liquidated," he wrote.

The government last week increased its lending commitment to $123 billion as AIG struggles to shed assets so it can repay the loan.

Greenberg was ousted as AIG CEO in 2005 amid investigations into the company's accounting practices. AIG was nearly driven into bankruptcy this year because of its exposure to hard-hit credit default swap markets.

Three years after his ouster, the octogenarian executive continues to seek influence over AIG as a major shareholder.

Greenberg has personal and indirect holdings of 278.4 million AIG shares, representing a 10.36 percent stake in the company he built up.

He intends to present his alternative rescue proposal to U.S. Treasury Secretary Hank Paulson and key members of the Congress, the Financial Times reported Tuesday.

(Reporting by Joseph A. Giannone; editing by John Wallace)