Oct. 17 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., may seek a third source of government cash by tapping a Federal Reserve program that buys commercial paper, according to a person familiar with the matter.

AIG probably will borrow less than $10 billion through the new commercial paper program, said the person, who declined to be identified because no agreement had been reached. AIG has already used two-thirds of its $122.8 billion credit line in the past month to cover bad bets made on the U.S. housing market.

A third loan would add to evidence that an emergency $85 billion lifeline from the Fed on Sept. 16 and a $37.8 billion facility last week weren't enough to satisfy the New York-based insurer's need for cash. Chief Executive Officer Edward Liddy is trying to sell units including U.S. life insurance, plane leasing and consumer finance to repay the debt.

``We've got a plan that will allow us to repay the Fed loan and emerge as a strong international property-casualty insurer with a presence in international life insurance,'' said AIG spokesman Nicholas Ashooh.

The Fed said last week it will create a special fund to buy commercial paper, seeking to unblock the financing that drives everyday commerce for American businesses. The program will start on Oct. 27, the Fed said this week. A spokesman for the New York Fed declined to comment.

AIG fell 33 cents, or 14 percent, to $2.10 at 4:15 p.m. in New York Stock Exchange composite trading. The insurer has dropped by more than 95 percent this year and has posted three quarterly losses totaling more than $18 billion.

Joseph Cassano

Representative Henry Waxman, chairman of the House Committee on Oversight and Government Reform, demanded in a letter today to AIG that the insurer turn over e-mails and other dispatches sent and received by Joseph Cassano, who ran the firm's financial products unit responsible for more than $25 billion in writedowns. Waxman also asked for e-mails from employees William Kolbert, Pierre Micottis and Doug Poling.

The committee is also seeking more information on Cassano's compensation. Cassano, who stepped down in March, earned $280 million since 2000, according to Waxman. Congress also asked for documents related to conference calls held by Cassano's unit.

Waxman also requested ``a detailed description'' of how AIG used the U.S. money it borrowed, including the names of counterparties for which the insurer had to post collateral. The firm's collapse was triggered last month by credit downgrades, which the insurer previously said could force more than $13 billion in collateral calls from fixed-income investors who bought credit-default swaps from AIG to protect against losses.

Credit-Default Swaps

AIG received Waxman's letter and will respond, said Ashooh. ``We're working closely with the New York attorney general, the New York Department of Insurance and the Federal Reserve on reviewing all expenses and activities,'' he said.

Liddy said Oct. 3 the insurer has been using federal money to cover shortfalls caused by credit-default swaps, losses in its securities-lending program and its inability to get cash through the private commercial paper market. Swaps, contracts bought by banks and other investors to protect against default, plunged in value as the assets they guaranteed declined.

Liddy told employees at a Sept. 18 meeting that the original $85 billion credit line was ``enough'' and that he didn't think the government would loan AIG ``one more penny.''

Of the $82.9 billion AIG has borrowed so far, $13 billion was from the second credit line, which was arranged to shore up its securities-lending program, Ashooh said today. The insurer lost money on investments made using collateral from securities it loaned to third parties.

New Finance Chief

AIG agreed yesterday with New York Attorney General Andrew Cuomo to halt a $10 million severance payment to outgoing Chief Financial Officer Steven Bensinger. The insurer promoted David Herzog to CFO to oversee the plan to pay off its debt.

The firm had been searching for a CFO since May when then- CEO Martin Sullivan said Bensinger would move from that post to vice chairman after a record first-quarter loss. Herzog, 48, will work to reduce expenses at the insurer, which was criticized by lawmakers for spending $440,000 on a conference at a California resort after the takeover.

Yesterday Liddy agreed to cancel unnecessary junkets and perks and to help Cuomo potentially retrieve pay awarded to Cassano and Sullivan.

Herzog, who was AIG's comptroller for three years, will ``assume a central role in overseeing AIG's plan to address its capital structure and pay down the credit facility'' from the U.S., AIG said yesterday in a statement.

Executive Pay

Lawmakers investigating how AIG nearly went bankrupt lambasted Sullivan and former CEO Robert Willumstad at an Oct. 7 hearing over executive compensation and money spent to send salespeople to resorts.

AIG pays 8.5 percent annual interest plus the 3-month London interbank offered rate on money it draws from the two-year, $85 billion loan. Three-month Libor dropped to 4.42 percent today. AIG's drawdown on that loan is $69.9 billion, Ashooh said today.

Last week AIG said it would also be allowed to swap as much as $37.8 billion of its ``investment-grade, fixed income securities'' with the government for cash to address a liquidity squeeze caused by the insurer's securities-lending program.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: October 17, 2008 17:55 EDT