AIG works out deal to cut debt to Fed by $25 billion

American International Group Inc., the insurance giant bailed out by the federal government, announced Tuesday that it had completed a deal to reduce its debt to the Federal Reserve by $25 billion.

AIG gave the Federal Reserve Bank of New York preferred stakes in two of the company’s crown jewels -- Asia-based American International Assurance, or AIA, and American Life Insurance Co., or Alico, which operates in more than 50 countries. The deal had been announced this year.

The transaction involves AIG shifting ownership of the two units into separate entities, which themselves remain owned by AIG. The New York Fed is being given preferred stakes in AIA worth $16 billion and in Alico worth $9 billion. AIG said that after the deal, it would still owe the New York Fed about $17 billion.

The company first signaled its intent to offer the government stakes in AIA and Alico on March 2, the same day that it posted a staggering $62-billion loss for the final quarter of 2008 and nearly $100 billion for that year. The move was part of an overall effort by the firm to restructure its federal bailout, which had grown since the initial round of help in September 2008 into a commitment of about $180 billion, including cash infusions and government asset purchases.

The company’s new chief executive, Robert Benmosche, said in a statement that the ongoing effort to reduce the federal debt “sends a clear message to taxpayers: AIG continues to make good on its commitment to pay the American people back.”

The company has said it plans to eventually take AIA and Alico public, and AIG repeated Tuesday its intention to proceed with initial public offerings or third-party sales.

Last month, AIG announced its second consecutive quarterly profit as some of its units continued to stabilize and improved financial markets boosted the company’s bottom line. That disclosure showed that so far this year, AIG has sold or agreed to sell operations and assets expected to generate about $5.6 billion that could be used to repay its massive debt to taxpayers.

Still, company executives continue to warn about potential instability.

“We continue to focus on stabilizing and strengthening our businesses,” Benmosche said Tuesday, “but expect continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities.”

Dennis writes for the Washington Post.