Chief Executive John Strangfeld is trying to strengthen the Newark, New Jersey-based company's finances and capital position in the wake of heavy investment losses, which have also hurt other insurers. Prudential said no decision has been made on its application for U.S. funds.

American International Group Inc raised $40 billion from the Treasury program, and Hartford Financial Services Group Inc and Principal Financial Group Inc are trying to participate. MetLife Inc, the largest U.S. life insurer, has declined to say whether it will seek funds.

Prudential and Wachovia Corp combined their retail brokerages in July 2003, with Wachovia taking a 62 percent stake in the joint venture and Prudential the rest. In selling its stake, Prudential is exercising an option it received when Wachovia bought the A.G. Edwards Inc brokerage last year.

A sale is expected around Jan. 1, 2010, and assumes Wells Fargo completes its purchase of Wachovia by year-end. The sale could result in $3.7 billion of after-tax proceeds, and a $1.7 billion after-tax gain, Prudential said.

Wachovia Securities is one of the three largest U.S. retail brokerages, along with Merrill Lynch & Co and Citigroup Inc's Smith Barney unit. It ended September with 14,635 brokers and $1 trillion of client assets, down from $1.17 trillion at the end of 2007, Wachovia has said.

A spokeswoman for Wells Fargo had no immediate comment on the San Francisco-based bank's plans for the brokerage or for taking over Prudential's stake. Wells Fargo's purchase of Wachovia would create the fourth-largest U.S. bank.

In afternoon trading, Prudential shares were up $1.77, or 8.6 percent, at $22.31 on the New York Stock Exchange. They began the year at $93.04.

EARNINGS OUTLOOK

The fourth-quarter loss at Prudential assumes a $1.4 billion pre-tax charge, or $1.80 per share, in its individual annuities unit.

Credit losses and writedowns for equity investments might each total as much as $400 million in the quarter, Prudential said. The insurer lost $108 million, or 23 cents per share, in the third quarter.

Prudential projected profit per share of $5.40 to $5.60, excluding unusual items, in 2008, and $5.25 to $5.65 in 2009.

Analysts on average expected profit per share of $1.42 in the fourth quarter, $5.81 in 2008 and $7.16 in 2009, according to Reuters Estimates.

Prudential said it will treat the brokerage as a divested business in all three periods, and that its projections assume the Standard & Poor's 500 index finishes this year at 800 and next year at 900. It closed Wednesday at 871.

The $5 billion value for Prudential's stake in the brokerage was as of Jan 1, 2008. It excludes the impact of A.G. Edwards, which Wachovia acquired last year for $6.4 billion.

That purchase allowed Prudential to decide by Jan 1, 2010, whether to quit the joint venture by exercising a "put option," or to contribute capital to preserve its ownership stake.

Chief Financial Officer Rich Carbone said Prudential could receive less than $5 billion if it sold its stake early. He also said Prudential expects to have enough capital to maintain "double-A" credit ratings even if the S&P 500 falls to 700.

A Prudential unit plans to bid for two Japanese life insurance affiliates of American International Group Inc , people familiar with the matter said this week.

Strangfeld declined to discuss specific merger and acquisition plans, but said that "we view M&A as something we would like to do, not have to do."

(Editing by John Wallace)

((jon.stempel@thomsonreuters.com +1 646 223 6317; Reuters Messaging: jon.stempel.reuters.com@reuters.net)) Keywords: PRUDENTIAL/BROKERAGE - Keywords: PRUDENTIAL/BROKERAGE (Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com * BridgeStation: view story .134

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The U.S. Treasury Department bought $25 billion of preferred shares and warrants from Citigroup in October when it injected capital into banks under the $700 billion Troubled Assets Relief Program.

It could buy more, boosting Citigroup's capital and a renewed government willingness to support the bank, which could soothe investors. Citigroup bonds, which have been sinking because of concern that a bailout would harm bondholders, would rally. That could lift prices for other bank bonds, reducing borrowing costs for lenders that rely on bond markets to fund themselves.

Preferred shares do not have voting rights, so a preferred stock investment would not provide new U.S. oversight over Citigroup's management or board, which some taxpayers and government officials may want. But the government could require the bank to add new management or directors as part of a deal.

A LOAN, OWNERSHIP STAKE

Another possibility is a bailout similar to the original $85 billion package for American International Group Inc . The government made a loan that would be first to be repaid if the insurer went bankrupt, and took an 80 percent ownership stake.

The loan's terms were so onerous that AIG trading partners demanded even more collateral, making the insurer's position more precarious. But a more lenient loan for Citigroup plus shares would ensure ample say for the government in how the bank is run, and would leave taxpayers with minimal risk compared to other investors.

But such an arrangement would erase much of Treasury's earlier $25 billion investment in Citigroup preferred shares. Plus, it would hurt investors in Citigroup's bonds, and bank bonds in general, making it harder for some banks to fund themselves.

LIQUIDATION

The Federal Deposit Insurance Corp has considerable leeway in how it sells a bank it seizes. It can, as with Washington Mutual Inc, protect deposits and leave bondholders and stockholders in the cold.

This could shelter the financial system from some of Citigroup's toxic assets, but at tremendous cost. No longer would any bank, or perhaps any company, be deemed "too big to fail." Investors could dump stocks of and corporate credits of all stripes, turning what could already be a deep recession into a punishing one.

"The too big to fail doctrine is being tested. Maybe the solution is to break these companies up like Ma Bell," said James Ellman, president of hedge fund Seacliff Capital in San Francisco. "Ma Bell" was a nickname for AT&T, which was broken up into smaller regional telephone companies in the 1980s.

GUARANTEES

The government could guarantee all of Citigroup's debt and derivative obligations. This could be a low-cost solution if investor confidence in Citigroup returns. But even a government guarantee does not necessarily ensure restoration of investor confidence, as Fannie Mae and Freddie Mac learned earlier this year.

A government guarantee of Citigroup derivatives could create significant questions about how to manage them. Would they wind the derivatives books down, reducing the capacity of trillions of dollars of over-the-counter derivatives markets globally? Making markets in derivatives typically involves taking some risk. Would the government be willing to expose taxpayers to such risk?

BUYING THE WORST ASSETS

The government could buy Citigroup's worst assets, perhaps at a discount, and allow an asset manager such as BlackRock Inc to manage them for taxpayers. The government's $700 billion rescue package was supposed to do that, but deciding on fair prices for the government to buy assets proved difficult. If the price is too high, taxpayers risk big losses. If the price is too low, the bank could be hobbled, and the asset values implied by the transactions could hurt other banks.

REGULATORY CHANGES

Instituting a new short-selling ban, loosening mark-to-market accounting rules for bank assets, or halting trading in credit default swaps could provide a temporary boost to banks in general, and Citigroup in particular.

"If you banned all short selling, not just new short selling, but all short selling on every company, stocks would really rally. It would force the mother of all short-covering rallies," said Seacliff's Ellman, referring to rallies where investors buy shares to cover short positions.

But such moves could fail. A recent short-selling ban did not halt declines in bank shares, and created market distortions that may have forced hedge funds to liquidate more assets. Loosening mark-to-market rules could reduce transparency in the banking system, making investors even more reluctant to sink capital into it. And halting credit default swap trading would eliminate an important source of revenue for banks, and make it harder for investors to hedge.

(Reporting by Dan Wilchins) Keywords: CITIGROUP/RESCUE (Reuters Messaging: dan.wilchins.reuters.com@reuters.net; +1 646 223 6320)

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"AIG has decided to terminate and pay out the deferred pay plans to remove the incentive for employees to leave in order to obtain their deferred pay," said Andrew Kaslow, Senior Vice President, Human Resources.

"Many AIG employees have seen their life savings wiped out in the financial crisis," Kaslow said. "Employees are now concerned about obtaining the pay they have earned but deferred so they can pay for retirement, college tuition or other expenses."

Under the majority of AIG's deferred pay plans, participants can only access deferred pay when they retire or leave the company. AIG is concerned that employees will leave AIG so they can obtain their deferred pay. This is a concern at a time when AIG is working to maintain the value of its businesses, whether those businesses are to be sold to repay AIG's Federal Reserve loan or to be continued as part of a restructured AIG.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

SOURCE: American International Group, Inc.

American International Group, Inc. 
Nicholas J. Ashooh, 212-770-3523 
Sr. Vice President 
or 
Joe Norton, 212-770-3144 
Director of Public Relations