AIG in Talks to Rework Terms of Federal Bailout

First came the bailout. Now comes talk of a bailout from the bailout.

Two months after rescuing global insurance giant AIG with an $85 billion loan, the government is talking to AIG about potentially easing the terms of the loan, which the company and some of its shareholders consider much too costly.

Options under discussion include lowering the interest rate or lengthening the credit line's two-year term, sources familiar with the discussions said, speaking on condition of anonymity because the negotiations are private.

Another possibility is having the government assume billions of dollars of financial guarantees that put AIG in peril and prompted the government's September intervention, the sources said. Institutions around the world had used AIG to insure bets they had placed in the troubled mortgage market. Having a government backstop could greatly expand taxpayers' exposure to AIG, but it could reduce the risk that a further meltdown at the insurance conglomerate would prevent the government from recouping money already advanced.

How much more the government is willing to do to stabilize AIG remains unclear. Spokesmen for the Treasury Department and the Federal Reserve declined to comment.

But former AIG chairman Maurice R. "Hank" Greenberg, a major shareholder, made the case for federal forbearance in an interview yesterday, saying the costs associated with the $85 billion loan pose a potentially crushing burden for the company.

"It's clear that the original terms as the government negotiated with AIG . . . were so draconian that it would be impossible for the taxpayers to be repaid," Greenberg said.

To make payments on the $85 billion credit line, including charges he estimated at $22 billion over two years, AIG would be forced to sell pieces of itself at a fraction of their value, Greenberg said. AIG has been trying to sell assets but has not announced any transactions yet. Market conditions have compounded the challenge, making it harder for prospective buyers to finance deals.

One industry source familiar with the negotiations framed the matter as a question of fairness, too, noting that since the AIG rescue was announced, the government has made funds available to banks on more favorable terms.

AIG spokesman Nicholas J. Ashooh said the company continues "to evaluate other potential options for hastening our recovery."

The prospect of additional aid to AIG was reported yesterday in the Wall Street Journal.

The government's rescue of AIG was put together hastily. At the time, the sudden collapse of the Lehman Brothers investment bank left markets reeling, and AIG was on the brink of bankruptcy. Officials at the Treasury and the Federal Reserve feared that AIG could drag down the financial system.