After committing another $30 billion to its already massiverescue effort to keep American International Group in business,federal officials warned that even more government aid might beneeded down the road--part of a brutal week for AIG, which reporteda record fourth-quarter loss, was scolded by the Federal Reservefor exploiting a regulatory gap, and was sued by its iconic formerchief executive, Maurice Greenberg.

The bottom line, however, is that because of the continuing"systemic risk" AIG's failure would pose to the world financialsystem, "restructuring will take time and possibly furthergovernment support, if markets do not stabilize and improve," theTreasury Department and Federal Reserve Board warned in a jointstatement.

"Given the systemic risk AIG continues to pose and the fragilityof markets today, the potential cost to the economy and thetaxpayer of government inaction would be extremely high," theagencies concluded.

The additional federal support was part of a series of movesannounced to shore up AIG after the company reported a recordfourth-quarter loss of $61.7 billion, compared to a net loss of$5.3 billion in 2007's final quarter.

For full-year 2008, the net loss was $99.3 billion, compared tonet income of $6.2 billion in 2007, the company noted. Thefull-year 2008 adjusted net loss was $52.1 billion, compared toadjusted net income of $9.3 billion for the previous year.

AIG cited "continued severe credit market deterioration" andcharges related to ongoing restructuring activities for itsfourth-quarter loss. Most of the damage, however, was related towrite-downs--particularly from holdings of commercialmortgage-backed securities, not cash losses.

The company said commercial insurance net premiums writtenduring the fourth quarter of $4.4 billion were down 22.1 percentfrom the same period the year before, "reflecting changes in thestructure of [AIG's] catastrophe reinsurance programs and asignificant reduction in workers' compensation premiums."

"Aside from the effect of these two items," the company added,"net premiums written declined approximately 11.7 percent."

AIG said that for its commercial insurance units, "new-businesspremium decreased in the fourth quarter of 2008 from deterioratingeconomic conditions, with the effect of maintaining pricediscipline and the market reaction to AIG's financialchallenges."

AIG added that "overall, rates in commercial insurance are flatin early 2009 as compared to the comparable prior-year period,"reporting that "the stabilization of rates is an improvement fromthe fourth quarter of 2008, in which rates declined 6.5 percent.Additionally, retention levels have improved in the early part of2009 as compared to the fourth quarter of 2008."

AIG got mixed reviews from rating agencies for its latestrestructuring efforts and modified federal rescue plan, mostlysupporting the company's insurance financial strength rating basedon government backing for the carrier.

Standard & Poor's affirmed its financial strength rating andcounterparty credit rating on AIG's insurance subsidiaries at"A-plus" and removed all ratings from Credit Watch, but said theoutlook is negative. "The affirmation primarily reflects our viewthat the U.S. Treasury and the Federal Reserve will continue theirfinancial support of, and ongoing commitment to AIG...," S&Panalyst Kevin Ahern said.

However, analysts expressed concern over AIG's competitiveposition going forward due to the loss of customers, producers andkey senior executives. Cliff Gallant, an analyst with Keefe,Bruyette & Woods, said the earnings decline for AIG showedsignificant pressure on premiums.

"In our view, whether the decline is due to clients leaving orbecause AIG must significantly cut prices to keep clients, theimplication is clear that AIG's franchise has suffered," Mr.Gallant wrote. "We expect well-positioned competitors to gainmomentum in gaining market share."

Federal Reserve Board Chair Ben Bernanke blasted AIG at a SenateBudget Committee hearing, saying "nothing has made me more angry"than credit default swap activity by the firm, which helped crashthe global financial system.

"AIG exploited a huge gap in the regulatory system," he said,adding that "there was no oversight of the Financial Productsdivision"--which guaranteed payment on collateralized debtobligations that securitized subprime mortgages.

AIG was "a hedge fund, basically, that was attached to a largeand stable insurance company," according to Mr. Bernanke, whoargued that the firm "made huge numbers of irresponsible bets [and]took huge losses. There was no regulatory oversight because therewas a gap in the system."

To close that gap, Mr. Bernanke again suggested an expansion ofFederal Deposit Insurance Corp. authority to deal with large,troubled financial institutions beyond banks--such as insurers,securities firms, hedge funds and mutual funds.

"We have no legal and regulatory structure that allows us toresolve in a safe and sound way [troubles at] a large financialinternational conglomerate," he said. "We're much better off,frankly, trying to resolve it within the context of continuedoperation than to allow it to fail and allow all the chaos thatwould occur following a bankruptcy."

Mr. Bernanke said federal officials "really had no choice" butto provide over $100 billion to save AIG starting last Septemberbecause with millions of policyholders and thousands of derivativeand credit-insurance counterparties, AIG's downfall would have been"devastating to the stability of the world financial system."

Mr. Bernanke linked AIG's solvency to the welfare of "justaverage everyday families," arguing there was definitely a"potential for contagion."

"In this case, we're dealing with the largest insurance companyin the world," he said, concluding that AIG's failure "would havesent shockwaves through the entire insurance industry" and beyond,into the global economy.

Mr. Bernanke wasn't the only person furious at AIG last week, asits former chairman and chief executive officer, Maurice Greenberg,sued his old company, charging that excessive speculation in riskyderivatives and lack of disclosure about the resulting exposuresafter he left caused him to lose money in stock purchased on hisbehalf in deferred compensation plans.

In an interview with CNBC, Mr. Greenberg--who left AIG in 2005following an accounting scandal over bogus finite reinsurance dealsused to artificially bolster the firm's balance sheet--estimatedhis stock losses totaled some $2 billion. "I was hurt very badly,"he said.

Mr. Greenberg--now chairman and CEO of C.V. Starr, once closelyaffiliated with AIG--said in the lawsuit that he wants to recoverthe difference between the price at which he bought the shares andthe "price of the true and fair value of these shares haddefendants not engaged in material misrepresentations andomissions."

He charged in the suit that the rapid run-up in AIG'sinvolvement with risky credit default swaps after he left had"artificially inflated the price of AIG shares," and also causedhim to pay excessive income tax on the shares he acquired.

"AIG made repeated statements touting its sophisticated andconservative strategies in limiting any foreseeable losses arisingfrom its CDS portfolio," the suit said.

Mr. Greenberg also cited comments about the security of AIG'sswap portfolio by Joseph Cassano, former head of the London-basedAIG Financial Products division, in August 2007, during thecompany's second-quarter earnings conference call withanalysts.

"It is hard for us...without being flippant, to even see ascenario within any kind of realm of reason that would see uslosing $1 in any of these transactions," Mr. Cassano reportedlysaid.

"We believe the lawsuit is without merit and we will vigorouslydefend against it," said Peter Tulupman, an AIG representative.

In coordination with Treasury and the Fed, AIG announced arestructuring of its businesses as it struggles to maintain itscredit ratings and remain a viable company.

The government also announced AIG will have access to anadditional $30 billion in fresh capital through the Treasury'sCapital Purchase Program. An AIG official said the money will be ina standby facility--"a commitment, not actual cash."

The government will also lower the interest rate on a $60billion loan and ease the terms of a $40 billion preferred shareinvestment, the company reported.

AIG will securitize $5-to-$10 billion in debt, backed with lifeinsurance assets, to further reduce its debt burden. In addition,the $60 billion Federal Reserve credit facility AIG received inNovember will be reduced to $25 billion, the company said.

As for the latest restructuring moves, AIG will transfer equitystakes in two overseas units--Asia-based American InternationalAssurance Company and American Life Insurance Company--to thefederal government in return for forgiveness of a $40 billion debtit owes to the federal government. AIG will continue to operate thetwo companies, and eventually could sell or take them public,sources told NU.

AIG also said it would form a general insurance holding companythat will include its Commercial Insurance Group, Foreign Generalunit and other property-casualty operations. The new unit will becalled AIU Holdings Inc., with a management and brand "distinctfrom AIG," the company said.

This was designed to prepare for the potential sale of aminority stake in the business--believed to be 19.9 percent--to thepublic, hopefully within a year as market conditions improve.

AIG Chairman and CEO Edward Liddy, in a conference call withanalysts, acknowledged it will be difficult for AIG to sell offassets and free itself of dependence on government support, giventhe problems plaguing the economy, as well as the company's sheersize.

"The measure of the health of the investment-sensitive portionof our industry is down 52 percent year-to-date as of [Feb.27]--that's [in] two months," he said, adding that "it is down over70 percent since I became CEO of AIG in late September."

He also said the company is aware that despite the challenges,AIG must move quickly if it wants to prevent further erosion in thecompany's market share. "The marketplace is a pretty crummy placeto be right now," he observed.

Mr. Liddy said he is working to reorganize core businesses into"clearly separate, independent" companies "worthy of investorconfidence."

He justified giving an ownership interest to the government inexchange for the stock of American Life Insurance Company andAmerican International Assurance Company to pay off the $38 billionAIG owes the Fed under a credit facility.

"This will allow AIG to cap the intrinsic value of its insurancecompanies [and] to repay a portion of the government creditfacility," he said, adding that "it will accelerate AIG'srestructuring plan and position these businesses as independentcompanies."

Mr. Liddy said government support was justified because "if AIGwould have failed, the impact on our customers and counterpartieswould have undermined an already unsettled global financialsystem."

Looking ahead, while AIG has "made meaningful progress" indigging itself out of its financial hole, according to Mr. Liddy,he cautioned that "the economy and capital markets remain inturmoil, and we are taking additional steps to preserve the valueof our businesses and maximize the ultimate proceeds for thebenefit of all stakeholders, including taxpayers."

(Additional reporting by Mark E. Ruquet.)