The U.S. government may agree to finance the purchase of some American International Group Inc businesses, take stakes in assets and ease terms of its aid package to the insurer, a person familiar with the matter said on Thursday.

These are some of a wide range of options under discussion between the government, the insurer and credit rating agencies, as AIG, once the world's largest insurer by market value, looks to avoid a credit downgrade that would trigger a host of liquidity issues and hurt its business, the source said.

Other options that are being discussed include changing the terms of a $40 billion preferred stock investment that has a 10 percent coupon, the source said. New terms could include reducing or even eliminating the dividend on that.

The sides are also looking at the possibility of lowering the interest rate on the government's credit line to AIG, and swapping debt for equity for some businesses, the source added.

AIG may also get an additional equity commitment of several billion dollars from the government, which could come as an expanded credit line, the source said.

But the options are still under discussion, and it was unclear what the final plan would look like exactly, the source said.

We continue to work with the U.S. government to evaluate potential new alternatives for addressing AIG's financial challenges, AIG spokesman Joe Norton said.


One idea being discussed with the government is that AIG is too big and unwieldy, and some businesses may be more valuable outside of the company than inside, the source said.

Talks include possibly breaking out certain units, including American Life Insurance (Alico), American International Assurance Co (AIA) and the U.S. auto insurance business, the source said.

Under one scenario, there could be a debt-to-equity swap, where the government would take a stake in these businesses and reduce AIG's debt. But the valuation of the businesses was unclear, the source said.

The talks come as AIG expects to post a record $60 billion quarterly loss, according to another source -- that's about $460,000 a minute.

A ratings downgrade could have serious ramifications on the insurer's liquidity and hurt businesses. Customers could cancel their insurance policies if a minimum rating is no longer satisfied.

AIG was first rescued in September after bad mortgage bets left it on the verge of collapse. The government stepped in with $85 billion in bailout financing, as the credit crisis peaked with Lehman Brothers Holdings Inc filing for bankruptcy and Merrill Lynch agreeing to be bought by Bank of America Corp .

The government subsequently offered additional financing, bringing the support up to $123 billion.

And in November, the government had to revise its bailout package, raising its aid further, to about $150 billion.

Last year, AIG said it would sell all assets except its U.S. property and casualty business, foreign general insurance and an ownership interest in some foreign life operations, to pay back the government.

While the company has announced some sales, it has been difficult to find buyers and get a good price for assets amid the financial crisis.

Credit for deals remains difficult to arrange due to the crisis and as many would-be buyers struggle with their own problems.


AIG was in talks to sell its U.S. auto insurance unit to Swiss insurer Zurich Financial Services AG in a deal that was expected to be worth around $2 billion, a source has told Reuters, but the transaction has run into problems because of the credit crisis.

Some buyers, especially for the large businesses such as its aircraft leasing unit, International Lease Finance Corp, have been looking for government help with financing, another source has said.

Deadlines for bids for the Asian assets are due Friday, according to sources. The sales could raise tens of billions of dollars for AIG. [ID:nHKG137257]

But there is a sense that prices for the businesses in the current environment will not reflect their true value, a source said.

AIG's shares closed up 6 cents at 52 cents on the New York Stock Exchange.

(Additional reporting by Lilla Zuill; editing by Jeffrey Benkoe)