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Stocks hit new lows on fear of a bigger U.S. bailout of AIG

February 23, 2009 | 12:33 pm

Crippled insurance titan American International Group is coming back to the government for more help, as the company prepares to report a massive fourth-quarter loss, CNBC is reporting.

The report triggered a fresh dive in share prices shortly after 11:30 a.m. PST, ending the market’s attempt to rally from the day’s lows. The Dow industrials were down 222 points, or 3%, to an 11-year low of 7,141 at about 12:30 p.m. PST.

From CNBC’s David Faber:

AIG, the insurance giant that is 80%-owned by the U.S. government, is in discussions with the government to secure additional funds so it can keep operating after next Monday, when it will report the largest loss in U.S. corporate history, CNBC has learned.

Aighq Sources close to the company said the loss would be near $60 billion due to write-downs on a variety of assets including commercial real estate.

That massive loss is likely to spur downgrades in its insurance and credit ratings that will force AIG to raise collateral that it doesn't have.

In addition, if AIG's book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.

All of this adds up to a huge headache for the Federal Reserve and Treasury, which have already provided over $150 billion of assistance to AIG.

Faber said AIG's board is expected to meet Sunday to reach an agreement with the government. The company is preparing for the possibility of bankruptcy, although a filing was unlikely, he said.

If he’s right about AIG’s need for more cash, it will reinforce the perception that troubled financial companies have become a bottomless pit for taxpayers’ funds.

Surprised?

-- Tom Petruno

Photo: AIG's headquarters in New York. Credit: Timothy A. Clary /AFP/Getty Images

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