AIG's fancy refinancing play

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NEW YORK(CNNMoney.com) -- American International Group is paying down its pricey $85 billion loan from Uncle Sam with cheaper funding from Uncle Sam.

The struggling insurance giant now is allowed to issue up to $20.9 billion of short-term debt, known as commercial paper, under a new Federal Reserve Bank of New York program, according to a federal filing posted Thursday. The Commercial Paper Funding Facility, which began this week, is designed to provide short-term financing to companies suffering from the credit crunch.

But the interest rate AIG pays under the commercial paper program is less than 4%, while the $85 billion federal loan it received in September carries a rate of nearly 11.7%. The rates fluctuate daily.

"It appears we're giving away more money," said Bill Bergman, senior equity analyst at Morningstar. "The Fed terms are getting less, not more tight."

AIG also has access to a $37.8 billion lending facility from the Fed arranged in early October after its securities lending division ran into trouble.

Borrowings under the original two lending programs fell to $83.5 billion, down from $90.3 billion the week before, the Fed said Thursday. AIG reduced its obligations under the original bridge loan to $65.5 billion, down from $72 billion a week earlier, the company said.

The federal government granted AIG the bridge loan to prevent the company's collapse the day after Lehman Brothers declared bankruptcy on Sept. 15.

AIG plans to sell of most of its divisions to pay back the debt. Asset sales should be announced by year's end, Chief Executive Edward Liddy told CNNMoney.com last week.