AIG nears approval of revised Fed plan: Source

Under the revised rescue plan, US gov is expected to buy 40 billion of AIG preferred shares.

The board of troubled insurer American International Group was nearing approval late on Sunday of a revised US bailout to replace a previous 85 billion rescue, a person familiar with the matter said.

Under the revised rescue plan, the US government is expected to buy 40 billion of AIG preferred shares through Treasury8217;s Troubled Asset Relief Program TARP and greatly ease lending terms, sources said.

The government is also expected to set up two separate vehicles that will buy securities worth billions of dollars underlying the insurer8217;s credit default swaps and backstop a securities lending portfolio, the sources said.

AIG plans to announce the new plan early on Monday, when it reports third-quarter results, sources said.

8220;It8217;s not done until it8217;s done, but this is where this is headed,8221; said one person familiar with the details under discussion.

The government gave AIG, once the world8217;s largest insurer by market value, 85 billion in bailout financing in September after counterparties and rating downgrades forced it to post large amounts of collateral for credit derivatives positions.

It later offered additional financing to bring the support extended to AIG up to 123 billion.

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The new package is designed to help staunch the cash drain on the insurer and give the company more breathing room for its planned sale of assets to repay the government.

It will leave the US exposed to billions of dollars in investments. The government will still have a nearly 80 per cent equity stake in AIG after the revisions.

Under the plan, the emergency 85 billion two-year credit facility extended to the insurer on September 16 will be replaced by a 60 billion loan with a five-year term, according to these people.

The new facility is expected to have an interest rate of 3 per cent over LIBOR, slashed from the earlier rate of 8.5 per cent over the benchmark interest rate, the sources said.

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The government8217;s preferred shares are to carry a dividend of 10 per cent, one of the sources said.

A vehicle for holdings tied to AIG8217;s credit default swaps will be capitalized with 30 billion in federal funds and 5 billion from the insurer to buy underlying securities with a face value of 70 billion, said one person.

Both sides will share any proceeds if market values improve leading to gains on these holdings, but the US would reap more, a person said.

The second vehicle, for securities lending, will be capitalized by the government with about 20 billion and 1 billion from AIG to buy residential mortgage-backed securities for 50 cents on the dollar, and shut down a 37.8 billion federal credit facility put in place last month.

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AIG declined to comment on the news that was first reported by the Wall Street Journal, as did the Federal Reserve and Treasury.

Credit default swap agreements have led AIG to record 18 billion in losses over the past three quarters. Mounting collateral calls left it so severely short of cash that it was veering toward bankruptcy.

The company plans to retain its property-casualty operations, and a stake in its Asian life operations, but sell most other parts to repay the government. It is close to reaching deals for two of its smaller insurance operations.