AIG gets $150 billion government bailout; posts huge loss

By Mark Felsenthal and Lilla Zuill

WASHINGTON/NEW YORK (Reuters) - The government restructured its bailout of American International Group Inc, raising the package to a record $150 billion with easier terms, after a smaller rescue plan failed to stabilize the ailing insurance giant.

The Federal Reserve and the Treasury Department announced the new plan on Monday as AIG reported a record third-quarter loss of $24.47 billion, largely from write-downs of investments.

The new package, at least $27 billion more than was previously extended, will leave the government exposed to billions of dollars of potential losses.

AIG, once the world's largest insurer by market value, nearly collapsed after being forced to post large amounts of collateral related to exposure to complex derivatives known as credit default swaps.

Many of these securities were linked to the performance of residential mortgages, and lost value as the U.S. housing downturn mushroomed into a global credit crisis.

"We cannot continue to hemorrhage cash in the two areas of securities lending and credit default swaps," Chief Executive Edward Liddy said on a conference call. "We need to stop that, and we need to stop it now."

Under the new plan, the government will get a $40 billion equity stake in AIG, spend as much as $30 billion on securities underlying the insurer's credit default swaps, and spend up to $22.5 billion to buy residential mortgage securities.

It will also reduce a previously announced credit line to $60 billion from $85 billion, and lower interest rates on borrowings. AIG will also accept curbs on executive pay, including a freeze of bonuses for its top 70 executives.

"The restructured bailout should give AIG the flexibility to sell assets in an orderly manner for closer to their intrinsic values rather than fire-sale prices," CreditSights Inc analyst Rob Haines said. "Moreover, we believe that it will help to restore confidence in AIG's global franchise."

Shares of AIG were up 26 cents, or 12.3 percent, at $2.37 in afternoon trading on the New York Stock Exchange. The cost of protecting AIG debt against default declined, indicating that investors see less risk.

'ROBUST DISCUSSIONS'

AIG will issue preferred shares to the government that carry a 10 percent dividend. The government will maintain its roughly 80 percent stake in AIG, making it the biggest beneficiary of the revised bailout.

In an interview, Liddy said it's possible the ownership stake could fall as AIG gets its finances in order.

"Once all of this is repaid, and we don't need that (credit) facility anymore, I think we will have some rather robust discussions about that ownership percentage," he said.

He acknowledged the possibility, though, that even $150 billion might not be enough. "There is more breathing room, but the answer is, 'What do you think is going to happen to capital markets?'" he said. "Under any normal scenario, I think we are in pretty good shape. But you can never say never."