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WASHINGTON, DC-Jaws dropped open wide upon hearing the terms of the latest bailout the government has given to American Insurance Group. The Federal Reserve Bank and the Treasury Department are injecting another $40 billion in bailout funds into the one-time industry stalwart, bringing the total amount of state-support funds in AIG to $150 billion.

The capital AIG is receiving–again–from the government has kicked off a new round of speculation as to the eventual direction and possible expansion of the Troubled Asset Relief Program unveiled this Fall will take, especially under an Obama Administration. “Hands from every sector will be reaching out,” one analyst tells GlobeSt.com. “The argument that AIG cannot be allowed to fail will be–and is–increasingly being made for other industries as well, especially the auto industry.”

The concern among financial institutions is that the focus of the bailout may expand far beyond the original mandate of helping banks that were disabled by toxic real estate debt, this analyst says, thus diluting its impact. AIG, of course, falls under the category of financial institution, but the terms are so generous it may be hard for other sectors to ignore the government’s largess.

To recap, AIG has remained troubled–even after the federal government first rode to its rescue with an $85-billion secured revolving credit loan on Sept 16, in exchange for a nearly 80% ownership stake. By Oct. 8, the government had to follow up with another loan for $37.8 billion. At the end of last month AIG accessed $20.9 billion via the government’s new commercial paper program that had been set up to inject short-term liquidity in the market.

All of that was before AIG’s largest quarterly loss ever reported -$24.47 billion–compared to the $3.09-billion profit realized a year ago. Revenue had declined 97% to $898 million from $29.84 billion in Q3 2007. In response the Treasury Department has stepped in with a $40-billion package that includes a reduction in the interest rate AIG will pay and an extension of loan terms to five years from two.

The new arrangement also replaces the $37.8-billion loan with a $52.5-billion aid package under which the Fed will purchase troubled RMBS and CDOs in AIG’s portfolio. One result of the new package is that AIG will be less likely to sell-off its business lines at below premium–an opportunity at which many capital sources had been eyeing.

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