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AIG gives stake to repay federal loans

AMERICAN International Group Inc said yesterday it will reduce outstanding federal loans by US$25 billion by giving the government a preferred stake in two units that will be spun off from the insurance giant.

Embattled insurer AIG is placing two life insurance subsidiaries - American International Assurance Co and American Life Insurance Co - into special purpose vehicles ahead of planned share sales.

As part of the plan, the Federal Reserve Bank of New York will receive preferred interests in the SPVs, which will eventually be independent companies once a public offering is completed.

The Fed will receive preferred interests worth US$16 billion in American International Assurance and US$9 billion in American Life Insurance.

The stakes will cut AIG's outstanding debt owed to the Federal Reserve Bank of New York to US$15 billion from US$40 billion.

The government rescued New York-based AIG from the brink of collapse last fall as the credit crisis worsened. The government first extended AIG a loan package worth US$85 billion in September. As market conditions worsened and losses piled up at the insurer, the government revised and expanded its loan package several times. AIG now has up to US$182.5 billion in funding available to it from the government.

AIG was hurt not by its traditional insurance operations, but by its financial products business, which underwrote risky credit derivatives contracts known as credit default swaps. The swaps are essentially insurance contracts protecting an investor against default on an underlying investment, such as mortgage-backed securities.

The insurer is selling, including some of its profitable insurance units to repay the government debt.


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