Treasury to give AIG another $40 billion

— -- The Federal Reserve and Treasury Department Monday upped the stakes in the government's role in American International Group to more than $150 billion with a restructuring of its loan package that includes $40 billion in new funding from the financial rescue package and other measures to help the ailing firm.

The changes will "keep the company strong and facilitate its ability to complete its restructuring process successfully," the Fed said in a statement. "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."

Among the changes:

• The Treasury Department will purchase $40 billion of newly issued AIG preferred shares. The purchases will be funded under the $700 billion Troubled Asset Relief Program passed by Congress. The Fed is cutting a previously announced loan to AIG to $60 billion from $80 billion because of the Treasury's involvement.

• The Fed is reducing the interest rate on its loans to AIG by 5.5 percentage points. The loans now carry a rate of 3 percentage points plus the going rate for the three-month London Interbank Offered Rate, the rate large banks charge each other for short-term unsecured loans. The length of the loans will now be five years vs. the previous two.

• In a new program, the Fed will lend up to $22.5 billion to a newly formed limited liability company to fund the firm's purchase of residential mortgage-backed securities from AIG's U.S. securities portfolio. AIG will make a $1 billion loan to the LLC and bear the risk for the first $1 billion of any losses. The loans will be repaid from the cash produced by the assets as well as proceeds from any sales of these assets. A previously announced $37.8 billion program established by the New York Fed in October 8, will be repaid and ended because of the new program.