Ah, nevermind about those asset sales. AIG is no longer planning on selling businesses to pay back the government’s $85 billion loan, Bloomberg reports. Instead the company may give stakes in some businesses directly to the government. The firm had been looking for a buyer for its Retirement Services business, which includes the firm’s three independent b/ds: FSC Securities Corp., Royal Alliance and the SagePoint Financial, formerly AIG Financial Advisors. Advisors, this may be your cue. Say hello to your new bosses in Washington.

Meanwhile, leaving aside questions of what Bank of America did, or didn’t know, about Merrill Lynch’s balance sheet, the latter just can’t seem to deliver any good news. In its annual report released Tuesday, Merrill announced that it had underestimated its 2008 losses by more than $500 million. Merrill reported 2008 full year losses of $27.1 billion last month, but revised that figure up to $27.6 billion in its annual report, the FT reports. The firm attributed its error to its “flawed model for measuring the value of derivatives that were used in its hedging strategy.” Auditor Deloitte & Touche attributed it to ineffective “internal control over financial reporting.”

Speculation that a number of banks will have to be nationalized has been swirling this week. The U.S. Treasury is already nearing an agreement to take a 40 percent stake in Citigroup, with an announcement expected as early as Wednesday or Thursday according to the Financial Times. The FT reports that the deal would entail conversion of the Fed’s $45 billion preferred stock into Citi common stock, with voting rights. Other preferred shareholders, including sovereign wealth funds, would also convert some of their shares into common stock in the company. According to the WSJ, Citi is seen as posing such a huge risk to the financial system that former federal officials have dubbed it the “Death Star,” likening the bank to the cataclysmic battleship in the movie Star Wars, which was capable of destroying entire planets. Seriously, what’s next, a financial bailout of the planet Endor after struggling Ewoks default on the sub-prime loans they got to for their tree huts?

Federal Reserve Chairman Ben Bernanke thinks all that nationalization talk is hooey, or at least that is what he told the House Financial Services Committee Wednesday morning, when he appeared for a second day of testimony. Yesterday, Bernanke sounded a happy note on the economy, saying he hopes for an end to the recession madness by year end—if the government can restore stability.

The future of the big banks may hang on President Obama’s big bank stress tests, which are slated to begin Wednesday. The government will assess all of the banks that have received TARP handouts, Citigroup and Bank of America included, to determine whether they have sufficient capital to battle any further economic stress in the next two years, and whether they will need more cash infusions in order to start lending again.

Meanwhile, President Obama’s speech before a joint session of Congress Tuesday night offered few specifics about how exactly his administration would restart the troubled economy, aside from prior promises to cut the $1.3 billion deficit in half, as well as hints that the White House will need a little extra dosh for the ailing banks, in excess of the $700 billion already allocated to the Troubled Asset Relief Program (TARP).