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NEW YORK (Reuters) – American International Group Inc (AIG.N) Chief Executive Robert Benmosche, typically in the position of playing defense for one of America’s most vilified companies, recently got a taste of what it must have been like when the insurer was a world-beating empire.

Deals

Benmosche, thanks to a spectacular reversal of fortunes that has been engineered by the U.S. government, was able to browbeat British insurer Prudential Plc (PRU.L) into raising its offer for AIG’s Asian unit by several billion dollars, according to two sources familiar with the situation.

Only a little over a year ago, Prudential had made a low-ball, oral bid for American International Assurance (AIA), offering a desperate AIG about $11 billion for the unit, the sources said.

But the Federal Reserve Bank of New York, with Morgan Stanley (MS.N) at its side, made an aggressive call at the height of the financial crisis — that AIA and American Life Insurance Co (Alico), another large foreign life unit, were worth more than what they could fetch in the market then.

It was a bet that’s paying off in spades now.

AIG, nearly 80 percent owned by the government, agreed this week to sell AIA to the British insurer for $35.5 billion in the largest insurance deal ever.

Now the insurer is hoping to wrap up talks with MetLife Inc (MET.N) to sell Alico for about $15 billion, the sources said, declining to be identified because these talks are not public.

Those numbers are billions of dollars more than the offers AIA and Alico were attracting as AIG tried to sell them off to pay back the government in the months after its September 2008 rescue, the source said.

The situation was so dire in early 2009 that “it looked like the world was ending,” one of the sources said.

The New York Fed, AIG and MetLife declined to comment. Prudential was not immediately available after-hours on Wednesday.

DIRE STRAITS

In early 2009, in addition to Prudential’s offer, AIG had two other bids in the $11 billion to $15 billion range for AIA, the sources said.

The bidders, however, had done no due diligence, and so even these offers were expected to be adjusted downward, one of these sources said.

For Alico, the bids were similarly low. MetLife’s bid at that time was around $11 billion, but it wanted the government to guarantee all investment assets, the sources said.

Axa SA (AXAF.PA) had offered in the $6 billion range, but the seriousness of its bid was suspect, they said.

New York Fed staff, AIG executives and their advisers knew they needed to find a way to buy time for markets to heal and to prepare the companies for separation, a third source said.

Over a series of meetings in lower Manhattan in January 2009, they came up with the idea of the special purpose vehicle, the source said.

“There was a recognition that they were good companies, but with the markets being as they were, they needed time,” the source said.

The New York Fed said on March 2, 2009, it would take a $16 billion preferred stake in a vehicle that would hold AIA and a $9 billion preferred interest in a vehicle that would hold Alico, reducing AIG’s outstanding debt under a credit facility by that amount and giving the insurer more time to sell.

The Fed believed those units were worth more, and in coming up with the size of the preferred interest it left a cushion to give itself room to maneuver, one of the sources said.

FED MOVE HELPS

The Fed’s move helped AIG, which had been bailed out with a $182.3 billion taxpayer-funded aid package, on several fronts, the two sources said.

The debt-to-equity swap gave AIG a much-needed capital boost after a $61.7 billion loss in the fourth quarter of 2008, the largest ever quarterly loss in U.S. corporate history.

The Fed’s interest also set price floors for those businesses and gave AIG time to pursue other options, including initial public offerings, which in deals of this magnitude is as good as having a competitive auction, the sources said.

AIG got negotiating leverage, they said.

That allowed Benmosche, with Citigroup Inc (C.N) and Goldman Sachs (GS.N) also advising him, over a few weeks to get Prudential to raise its offer, which was already far above what AIG could have hoped to get during the dark days of the crisis, the sources said.

Blackstone Group (BX.N) advised AIG throughout the process.

It was a welcome turnaround for Benmosche who just months ago was threatening to leave the company over a bitter spat about compensation for AIG’s top executives.

In the end, AIG, used to having its own finances dissected, found itself scrutinizing Prudential’s ability to pull off such a massive deal, the sources said.

Last Friday, Prudential Chief Executive Tidjane Thiam, accompanied by JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon and Credit Suisse (CSGN.VX) CEO Brady Dougon, gave a presentation to convince AIG of its ability to do the deal, one source said.

By Monday, Benmosche was able to strike a deal that would help the government recover billions of its rescue funds.