Treasury will give AIG another $40 billion, restructure loans

WASHINGTON -- The ailing insurance giant, which has essentially been under government control since mid-September, is now the largest recipient of government aid in the financial crisis, which has led economic slowdowns around the globe.

"This action was necessary to maintain the stability of our financial system," Neel Kashkari, the interim head of the Treasury Department's finanical relief program said in a speech. "We recognize that the financial system remains fragile and we continue to stand ready to prevent systemic failures."

California State University economics professor Sung Won Sohn says the government continues to prop up AIG because the consequences of the company's failure are too dire.

"AIG has extensive reach not only in the United States, but in 100 countries," he says. "If AIG were to go down, this would create turmoil around the world."

The changes to the 2-month-old rescue plan will "keep the company strong and facilitate its ability to complete its restructuring process successfully," the Fed said. "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."

Senior Fed staff in a conference call with reporters said they expect the loans will be repaid in full once the economy, and the value of the company's assets, improve.

Sohn agreed. "I expect (the government) to make money, not lose money," he said.

As the Fed and Treasury were announcing their plan Monday, AIG said it had a net loss of $24.47 billion or $9.05 per diluted share, in the third quarter.