AIG offers to buy toxic assets from Fed

In a filing Thursday to US market regulators, AIG offered the Federal Reserve Bank of New York to purchase all of the residential mortgage-backed securities in Maiden Lane II, a special entity created to house toxic assets in the government's 2008 rescue of the foundering insurance giant.

"AIG believes this offer is in the best interest of the US taxpayers, the US government and AIG itself," Robert Benmosche, AIG president and chief executive, said in the letter to the New York Fed filed with the Securities and Exchange Commission.

"If accepted, this offer will substantially reduce the amount of outstanding government assistance to AIG (and) help AIG ensure that the US government recoups all of the money it has invested in AIG," AIG said.

It will also "guarantee that the Federal Reserve Bank of New York earns a profit on its interest in Maiden Lane II while reducing the amount of AIG-related assets on the FRBNY's balance sheet."

The Fed would gain a $1.5 billion profit on the deal, and it would reduce AIG's debt to the government by $13 billion to $26 billion, AIG said.

The outstanding debt includes Maiden Lane III, another special entity created to house AIG's toxic credit-default swap assets.

Confirming the offer, the New York Fed on Friday said any decision "will be made in a way that maximizes the proceeds to the taxpayer and that is consistent with the goal of fostering financial stability."

Once the world's largest insurer, AIG diversified into complex financial instruments linked to mortgages that soured when the US housing market bubble collapsed.

The US government marshalled some $180 billion from taxpayer funds to rescue and stabilize AIG as its investments collapsed amid the 2008-2009 financial crisis.

The Treasury made a total cash investment in AIG of approximately $68 billion through the Troubled Asset Relief Program, while the Federal Reserve provided loans to keep the key financial firm afloat.

In January the Treasury raised its equity stake in AIG to 92 per cent as part of a restructuring of the company's debt and capital, but plans to exit the firm eventually.

If the New York Fed accepts the offer, it "will accelerate the time period within which the US government will be able to terminate all of its assistance to AIG," the firm wrote.

For AIG, the Maiden Lane II securities present an "attractive" profile.

The company "has extensively evaluated the risk in the portfolio and has determined it is within AIG's overall risk tolerance for residential mortgage risk."

The company said it did not expect the transaction to have a significant effect on its credit ratings from rating agencies.

On Tuesday AIG repaid $6.9 billion to the US Treasury, using proceeds from the sale of its stake in industry rival MetLife.