Washington — In a significant overhaul of their plan to rescue American Insurance Group, federal officials have agreed to inject billions of dollars into the insurance giant while easing terms of an existing credit line and creating two new lending programs for the firm.

To prop up "the systemically important" but ailing insurer, the Treasury Department Monday said it will funnel $40 billion of its $700 billion bailout funds into the insurance firm to purchase newly issued AIG preferred shares.

The move leaves the Treasury with immediate access to only $60 billion under the bailout program. While Congress authorized $700 billion for the financial market bailout, the Bush administration only has immediate access to $350 billion. Treasury has decided to put $250 billion of those funds toward its plan to take equity stakes in "healthy" financial institutions and now, another $40 billion will go to AIG. Congress can object to Treasury receiving the remaining $350 billion under the bailout plan.

Under its new agreement with AIG, Treasury also is requiring that the top five senior executives at the insurance firm comply with "the most stringent limitations" on executive compensation allowed under the financial market bailout package signed into law last month. The department is also placing "golden parachute" limitations on AIG as well as a freeze on the size of the annual bonus pool for the top 70 company executives.

Treasury officials said a representative from President-elect Barack Obama's team was briefed about the restructuring Sunday night.

Meanwhile, the Fed said the Treasury move enables it to scale back the credit line it set up with AIG on Sept. 16 from $85 billion to $60 billion.

Additionally, the Fed has agreed to ease credit terms for the insurer by slashing the interest rate on the AIG loan.

Specifically, the Fed will cut the interest rate on AIG's credit facility with the Federal Reserve Bank of New York to three-month Libor (London interbank offered rate) plus 300 basis points from the current rate of three-month Libor plus 850 basis points. Also, the fee on undrawn funds will drop to 75 basis points from 850 basis points.

In addition, the New York Fed has agreed to lend up to $22.5 billion to a new limited liability company to purchase mortgage-backed securities from AIG. Under a second program, the New York Fed will lend up to $30 billion to another LLC to purchase multi-sector collateralized debt obligations on which AIG Financial Products has written credit default swap contracts.

Overall, the goal is "to keep the company strong and facilitate its ability to complete its restructuring process successfully," the Fed said in its notice. "These new measures establish a more durable capital structure, resolve liquidity issues, facilitate AIG's execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. government and taxpayers."

Sources: American Banker, Dow Jones

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