AIG, U.S. in deal to terminate some debt obligations

NEW YORK (Reuters) - American International Group Inc AIG.N and the U.S. government have reached an agreement to clear the insurer of its obligations on about $53.5 billion in toxic mortgage debt, the giant insurer said in a regulatory filing on Tuesday.

The logo of American International Group Inc. (AIG) on the outside of their corporate headquarters in New York, November 10, 2008. REUTERS/Mike Segar

The development is part of the U.S. Federal Reserve’s agreement last month to buy up to $70 billion of toxic mortgage assets -- collateralized debt obligations -- underlying AIG credit default swaps (CDS), a type of debt guarantee.

AIG’s responsibility to post collateral on the $53.5 billion in assets has been suspended, but will resume for any underlying assets that cannot be obtained, it said in the filing with the U.S. Securities and Exchange Commission.

The need to post increasing amounts of collateral to counterparties for these guarantees left AIG with deep losses over the last four quarters. It has lost $42.5 billion in that period.

Short of cash, the U.S. government saved AIG from bankruptcy in September with a rescue plan that has ballooned to about $152 billion.

Under the agreements disclosed by AIG, assets of about $46 billion have been obtained by the government. Another $7.4 billion is contingent on related counterparties obtaining underlying assets, AIG said.

The Federal Reserve has established two funds -- Maiden Lane II LLC and Maiden Lane III LLC -- to hold mortgage assets linked to AIG.

One will hold the assets underlying the AIG CDS, and the other entity will be for mortgage liabilities from a securities lending portfolio that caused additional losses for AIG.

The insurer puts up $5 billion and $1 billion for each fund, while the government provides $30 billion and $22.5 billion, respectively.

To date, the Federal Reserve has funded Maiden III, the facility which will be used to buy assets underlying CDS, with about $15 billion, according to a statement late Friday.

It had also paid out $40 billion to AIG in exchange for preferred shares. AIG has used those funds to put up the $5 billion for Maiden III, and most of the rest to pay down part of a $85 billion credit facility first extended by the government in September.

Reporting by Lilla Zuill; editing by Jeffrey Benkoe