The deal calls for the U.S. Federal Reserve to lend up to $85 billion to AIG for two years in exchange for that 79.9 percent equity stake. AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, making the current rate equal to about 11.4

percent.

This gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly. The deal also severely dilutes existing shares of the company.

Index futures pointed to a higher market open on Wednesday after the news.

Former Allstate Corp CEO Edward Liddy will be named the new chief executive of AIG, replacing Robert B. Willumstad.

AIG had been racing against the clock to avoid a bankruptcy filing on Wednesday, making efforts to work out a deal with the Federal Reserve to shore up its finances.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with Senate and House leadership Tuesday night to discuss how to assist AIG, sources said.

The Fed's financial aid for the troubled insurer marks a reversal of its decision on Monday to refuse a bridge loan to AIG.