Fed official: AIG deal revamp seen halting losses

WASHINGTON (Reuters) - The U.S. government retooled a rescue package for insurer American International Group to take advantage of its new ability to inject capital into the firm, a senior Federal Reserve official said on Monday.

Taking an equity stake in the firm is a much better way to stabilize it, the official said, speaking to reporters on condition of anonymity. The government did not have that authority at the time of its original rescue in mid-September, but gained that capacity after passage of the $700 billion financial stabilization package.

The U.S. government concluded, aided by outside analysis, that lowering interest rates on loans to AIG and taking residential mortgage-backed securities and credit default swap contracts off the insurer's balance sheet was the best way to prevent future losses at the firm, the official said.

The government is confident it will be repaid for loans to AIG and that there is some chance there it could make a profit, the official added.

The $150 billion the government is making available to AIG appears to be the largest amount of funding ever provided to a single company.

(Reporting by Mark Felsenthal; Editing by Theodore d'Afflisio)