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

The bottom line, however, is that because of the continuing "systemic risk" AIG's failure would pose to the world financial system, "restructuring will take time and possibly further government support, if markets do not stabilize and improve," the Treasury Department and Federal Reserve Board warned in a joint statement.

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

The additional federal support was part of a series of moves announced to shore up AIG after the company reported a record fourth-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 to net income of $6.2 billion in 2007, the company noted. The full-year 2008 adjusted net loss was $52.1 billion, compared to adjusted net income of $9.3 billion for the previous year.

AIG cited "continued severe credit market deterioration" and charges related to ongoing restructuring activities for its fourth-quarter loss. Most of the damage, however, was related to write-downs--particularly from holdings of commercial mortgage-backed securities, not cash losses.

The company said commercial insurance net premiums written during the fourth quarter of $4.4 billion were down 22.1 percent from the same period the year before, "reflecting changes in the structure of [AIG's] catastrophe reinsurance programs and a significant 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-business premium decreased in the fourth quarter of 2008 from deteriorating economic conditions, with the effect of maintaining price discipline and the market reaction to AIG's financial challenges."

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

AIG got mixed reviews from rating agencies for its latest restructuring efforts and modified federal rescue plan, mostly supporting the company's insurance financial strength rating based on government backing for the carrier.

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

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

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

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

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

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

To close that gap, Mr. Bernanke again suggested an expansion of Federal 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 to resolve in a safe and sound way [troubles at] a large financial international conglomerate," he said. "We're much better off, frankly, trying to resolve it within the context of continued operation than to allow it to fail and allow all the chaos that would occur following a bankruptcy."

Mr. Bernanke said federal officials "really had no choice" but to provide over $100 billion to save AIG starting last September because with millions of policyholders and thousands of derivative and 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 "just average everyday families," arguing there was definitely a "potential for contagion."

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

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

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

Mr. Greenberg--now chairman and CEO of C.V. Starr, once closely affiliated with AIG--said in the lawsuit that he wants to recover the difference between the price at which he bought the shares and the "price of the true and fair value of these shares had defendants not engaged in material misrepresentations and omissions."

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

"AIG made repeated statements touting its sophisticated and conservative strategies in limiting any foreseeable losses arising from its CDS portfolio," the suit said.

Mr. Greenberg also cited comments about the security of AIG's swap portfolio by Joseph Cassano, former head of the London-based AIG Financial Products division, in August 2007, during the company's second-quarter earnings conference call with analysts.

"It is hard for us...without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of these transactions," Mr. Cassano reportedly said.

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

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

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

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

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

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

AIG also said it would form a general insurance holding company that will include its Commercial Insurance Group, Foreign General unit and other property-casualty operations. The new unit will be called AIU Holdings Inc., with a management and brand "distinct from AIG," the company said.

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

AIG Chairman and CEO Edward Liddy, in a conference call with analysts, acknowledged it will be difficult for AIG to sell off assets and free itself of dependence on government support, given the problems plaguing the economy, as well as the company's sheer size.

"The measure of the health of the investment-sensitive portion of 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 over 70 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 the company's market share. "The marketplace is a pretty crummy place to be right now," he observed.

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

He justified giving an ownership interest to the government in exchange for the stock of American Life Insurance Company and American International Assurance Company to pay off the $38 billion AIG owes the Fed under a credit facility.

"This will allow AIG to cap the intrinsic value of its insurance companies [and] to repay a portion of the government credit facility," he said, adding that "it will accelerate AIG's restructuring plan and position these businesses as independent companies."

Mr. Liddy said government support was justified because "if AIG would have failed, the impact on our customers and counterparties would have undermined an already unsettled global financial system."

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

(Additional reporting by Mark E. Ruquet.)

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