American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate.

AIG will get lower interest rates and $40 billion of new capital from the government to help ease the impact of four straight quarterly deficits, including a $24.5 billion third- quarter loss posted today by the New York-based company.

Taxpayers will take on the extra risk to give Chief Executive Officer Edward Liddy more time to salvage AIG. The insurer needed U.S. help to escape bankruptcy in September after at least $40 billion in quarterly losses tied to home mortgages. Liddy’s plan to repay the original loan by selling units stalled as plunging financial markets cut into their value and forced potential buyers to shore up their own balance sheets.

“This gives AIG much more breathing room,” said Robert Haines, an analyst at CreditSights Inc. “Now they have the time and flexibility to sell assets for closer to their intrinsic value rather than fire-sale prices.” The news is a “big positive” for bondholders, he said.

AIG advanced 63 cents, or 30 percent, to $2.74 at 9:31 a.m. in New York Stock Exchange composite trading.

The first rescue plan wasn’t sustainable, Liddy said during a conference call today. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004.

Affordable Terms

To make the bailout affordable, the U.S. will reduce the $85 billion loan that saved AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, the Federal Reserve said today in a separate statement.

The move extends the government’s reach into the financial system amid the worst economic crisis in 75 years. The U.S. seized control of Fannie Mae and Freddie Mac, lenders that guarantee or own about 40 percent of the $12 trillion in U.S. mortgages, in September. The next month, Treasury Secretary Henry Paulson unveiled a $250 billion program to recapitalize U.S. banks — at least $163.5 billion of which has already been committed to lenders.

The new AIG package includes a freeze on the bonus pool for 70 top executives and imposed limits on severance benefits, the Treasury said in its statement. Lawmakers had said failing companies getting taxpayer bailouts shouldn’t be using the money for multimillion-dollar pay packages.

Securities Lending

The original rescue was disclosed on Sept. 16, a day after investment bank Lehman Brothers Holdings Inc. was allowed to collapse. The U.S. reversed its opposition to a bailout when the Federal Reserve concluded that ripple effects from the insurer’s failure could bring down more financial companies. The U.S. then provided two more credit lines, worth a combined $58.7 billion, before restructuring the package.

The revised rescue may fix two AIG operations that are draining cash because of the collapse of subprime mortgage markets. In the first, the U.S. will provide as much as $30 billion to help buy the underlying assets of credit-default swaps that AIG sold to investors, including banks. AIG will contribute $5 billion and bear the risk of the first $5 billion in losses, the Fed said.

The insurer guaranteed about $372 billion of fixed-income investments as of Sept. 30, compared with $441 billion three months earlier. AIG booked more than $7 billion in writedowns during the quarter on the value of the swaps.

New York Fed

The New York Fed also will lend as much as $22.5 billion to a new limited-liability company to fund the purchase of residential mortgage-backed securities from AIG’s U.S. securities-lending collateral portfolio. AIG will make a $1 billion subordinated loan to the new entity and bear the risk for the first $1 billion of any losses, the Fed said. The securities lending operation and the previous $37.8 billion credit line from the Fed will be shut down, AIG said.

Securities lending accounted for $11.7 billion, or about two-thirds, of the $18.3 billion in impaired investments in the third quarter, AIG said.

The interest rate on the $60 billion credit line will be reduced to the three-month London interbank offered rate plus 3 percentage points, from a previous spread of 8.5 percentage points in the original rescue plan, the Federal Reserve said. AIG’s assets continue to secure the loan.

Preferred Shares

The Treasury will buy the newly issued preferred shares from the insurer using the agency’s $700 billion Troubled Asset Relief Program, a financial rescue package that Congress passed in early October. The company agreed to turn over a 79.9 percent stake to the U.S. in exchange for the initial loan in September.

“This plan contributes to stabilizing the financial system and provides the opportunity for the public to realize gains on its AIG investment in the future,” Liddy said in a statement. “These measures will also put AIG on track to emerge as a nimble competitor with good long-term growth prospects.”

The biggest insurers in North America posted more than $120 billion in writedowns and unrealized losses linked to the collapse of the mortgage market from the start of 2007, with AIG representing about half that total. The company has units that insure, originate and invest in home loans.

“AIG keeps getting hit square between the eyes by the housing-finance meltdown,” said Bill Bergman, an analyst at Morningstar Inc. in Chicago, before the results were announced. “Risk controls at the company were clearly inadequate.”

AIG’s property-casualty operations reported an operating loss of $899 million, compared with a profit of $2.51 billion in the same period a year earlier, on $1.39 billion in catastrophe claims and a loss at its mortgage insurance unit.

Mortgage Insurance

The mortgage insurer, United Guaranty Corp., had an underwriting loss of $1.16 billion, a fourfold increase from a year earlier.

AIG lost $993 million on private-equity and hedge-fund holdings in the quarter, compared with a profit of $575 million a year earlier. AIG had $28.4 billion in the so-called “alternative” holdings as of Sept. 30. Hedge funds lost $921 million, while private equity resulted in a $72 million loss.

Operating income at the insurer’s aircraft leasing unit, International Lease Finance Corp., rose 14 percent to $306 million as the company charged more to rent planes.

Book value per share, a measure of assets minus liabilities, fell 35 percent from a year earlier to $26.46.

AIG Prospects

Liddy, 62, plans to sell life insurance operations in the U.S., Europe and Japan, along with the firm’s reinsurer, airplane lessor, consumer finance unit and asset manager. The former CEO of Allstate Corp., was appointed by the U.S. as a condition of AIG’s bailout.

AIG renewed doubt about its prospects today by saying in a federal filing that it might not survive. Liddy said in a statement that “our goal is to repay taxpayers in full with interest, and emerge as a focused global insurer that will create meaningful value for taxpayers and other stakeholders.”