U.S. takes another crack at AIG rescue

Insurance giant American International Group reported a stunning $62 billion quarterly loss on Monday, while government officials unveiled their latest efforts aimed at preventing the collapse of the firm.

Overwhelmed by ongoing deterioration in the credit markets and charges related to its restructuring, AIG's losses overwhelmed the firm during the fourth quarter. Its $61.7 billion loss amounted to $22.95 per share.

AIG's loss for the full year was even more dramatic -- $99 billion. In 2007, the company reported a profit of $9.3 billion.

To keep the company from cratering and causing broader fallout across the financial system, the government said it would overhaul its bailout, which is aimed at helping the besieged firm unwind in an orderly way.

"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," Treasury said in its announcement.

One main goal of the revamped rescue plan -- now totaling $162.5 billion -- is to help boost AIG's financial position by, among other things, reducing the interest it pays the government on its loans.

Key components of the plan included the government's decision to commit another $30 billion to the firm in exchange for cumulative preferred stock. The payment, which will come from the second half of the $700 billion rescue package enacted last fall, will not be a one-time payment but AIG will able to draw down the funds as needed to help strengthen its capital base.

At the same time, the Treasury Department, which has spearheaded efforts to keep the insurer from collapsing, will exchange its existing $40 billion preferred shares stake for shares that more closely resembles common stock. The change is expected to spare AIG from paying a large dividend to the Treasury.

The government has extended more than $150 billion to AIG since September. Regulators have feared that the bankruptcy of AIG, which does business in more than 130 countries, would have disastrous consequences.

Since then, the government has pushed the New York-based insurer to sell pieces of its business to repay its loan commitments. But a tough economic environment combined with a weakened appetite among potential buyers has hampered those efforts.

"AIG is executing one of the most extensive corporate restructuring programs in history at a time when the global economy and capital markets are in turmoil," said Edward Liddy, AIG's chairman and CEO, who was appointed to lead the firm in September after the Federal Reserve arranged financing for the insurance giant.

So far, the company has managed to shed just a few of its different divisions including the German reinsurer Munich Re, Hartford Steam Boiler Inspection, which insures equipment as well as its stake in the Brazilian bank Unibanco to Uniao de Bancos Brasileiros.

Monday's agreement, which marks the third revision to the government's rescue efforts for AIG, also included key revisions to the terms of the $60 billion credit facility that was created by the Federal Reserve Bank of New York.

That line of credit will be reduced to no less than $25 billion in exchange for giving the New York Fed a stake in two life insurance subsidiaries owned by AIG. At the same time, regulators said they would relax some of the terms of AIG's repayment by lowering the initially agreed to interest rate.

At the same time, the New York Fed said it was ready to provide up to $8.5 billion in credit to certain life insurance divisions owned by AIG. Money generated from life insurance policies are expected to be used to repay those loans, the Treasury Department said.

The government's efforts prop up AIG yet again comes just days after regulators moved to shore up Citigroup (C, Fortune 500). On Friday, the Treasury converted part of its preferred shares in the beleaguered bank, giving it control over as much as 36% of the firm's common stock, a shift that is designed to improve the embattled bank's capital base, which in turn will hopefully allow it to increase its lending.