AIG near new bailout deal: Report

Speculation grows that government may change terms of federal loan that saved insurance giant from collapse.

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NEW YORK (CNNMoney.com) -- Embattled insurance giant American International Group, set to reveal its latest financial results on Monday, is reportedly close to securing a new bailout deal from the federal government.

The Wall Street Journal, citing sources familiar with the matter, reported Sunday evening that AIG's board was close to approving significant changes to the terms of the $123 billion in loans extended so far, and might announce a revised $150 billion deal as early as Monday.

Details were still in flux, but under the plan being discussed Sunday night, the government would cut the interest rate AIG is paying and use its authority under last month's $700 billion bailout law to buy $40 billion in preferred shares, the Journal said.

The government would also stand behind billions of dollars in credit default swap agreements - essentially insurance contracts that AIG had sold to customers worldwide, according to the Journal. Finally, it would backstop AIG's business of securities lending.

The new deal would mark a stunning turn in what has become one of the most controversial Bush administration moves to stem the escalating financial crisis. The company has come under fire from lawmakers and state officials for seeking to make big payouts to former executives and planning pricey corporate events after receiving the federal loans.

In mid-September, the government reluctantly provided AIG (AIG, Fortune 500) with an $85 billion line of credit after an unsuccessful bid to get Wall Street firms to prop up the company.

The plan was to allow AIG to spin off many of its businesses over two years with "the least possible disruption to the overall economy."

But in recent days, speculation grew that a new rescue was in the works as concerns mounted that AIG would have trouble unwinding its business units. The global financial crunch may have reduced the value of AIG's units, as well as others' ability to buy them -- complicating the efforts to spin off assets, experts say.

"The real issue driving the problems is that they can't sell this stuff," said Stewart Johnson, portfolio manager at Philo Smith, an investment bank specializing in insurance.

An AIG spokesman said Sunday afternoon that the firm is carrying out its plan to "sell assets and repay the Fed loan with interest, and we continue to evaluate other potential options for improving our financial condition."

Analysts will be watching Monday's quarterly financial report, scheduled for release at 6 a.m. ET, for clues about AIG's underlying insurance business, which has come under increasing pressure from competitors.

Johnson said he has heard that AIG is aggressively cutting rates to hold on to clients. Reductions in premiums, in turn, jeopardize profitability.

"It's just a huge spiral," Johnson said. "The insurance business every day is worth less than the day before."

Standard & Poor's warned on Wednesday that it might downgrade AIG's property and casualty subsidiaries.

"Although at this point we have not seen clear evidence of long-term damage to AIG's franchise, there have been wide reports that competitors are actively pursuing AIG's accounts and key underwriting personnel, which could pressure operating performance over time given the current market conditions the industry is facing," said Standard & Poor's credit analyst Rodney A. Clark.

Eye of the storm

At the time of the $85 billion loan -- a day after Lehman Brothers declared bankruptcy at the start of the credit market panic -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke calculated that they couldn't allow the massive international firm to fail. In return, the government took a 79.9% stake in the company.

AIG's troubles originated in its London-based financial services unit, which prospered for years issuing credit default swaps, which insure against corporate debt defaults. The near-collapse came when it was forced to put up billions in collateral after the swaps declined in value and rating agencies downgraded the insurer.

The company -- once the world's largest insurer with more than $1 trillion in assets and 74 million customers in 130 countries -- wrote down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year. It also took $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

Since September, as AIG continued to spiral downward, the Federal Reserve gave it access to an additional $37.8 billion lending facility at much lower rates and allowed it to sell up to $20.9 billion of short-term debt, known as commercial paper, to the government at a rate of less than 4%.

AIG has so far borrowed about $61 billion under the original loan and about $20 billion from the Fed under the second loan.

That first loan, however, came with onerous terms. AIG would have to pay a steep interest rate of 3-month Libor plus 8.5% on the money it borrowed, which at the time was 11.31% but spiked to more than 14% as the global financial crisis escalated. On top of that, it would have to pay 8.5% on the unused portion of the loan.

Shareholders immediately protested that the company couldn't operate under such difficult terms. Led by major shareholder Maurice "Hank" Greenberg, AIG's former chief executive, they first lobbied for a vote on the government loan and then to modify the terms.

Shareholders apply more pressure

In recent weeks, shareholders have stepped up their efforts, appealing to both regulators and to government-installed chief executive, Edward Liddy, to revise the AIG's deal with the government.

Shareholders have asked that AIG receive funds from the $700 billion bailout of the financial sector, which is primarily for banks but open to other financial institutions. Also, Greenberg wants AIG to have access to the Fed's "discount window," which provides funding to banks at 1.25%.

AIG, meanwhile, has maneuvered to alleviate some of the burden. Over the past two weeks, it has been paying down the $85 billion loan with money obtained under the commercial paper facility.

At the same time, it is scrambling to find buyers for its far-flung businesses. The company announced last month it would keep its foreign and domestic property-casualty units, as well as a majority stake in its foreign life insurance operations.

Everything else is on the table, including its aircraft leasing unit, asset management division, retirement services and U.S. life insurance operations. But so far, no sales have been announced. Liddy told CNNMoney.com last month that deals would be made before year-end. To top of page

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