NEW YORK (Bloomberg)—American International Group Inc. is considering repaying part of its U.S. bailout by handing over stakes in the mortgage-linked bonds that pushed the firm to the brink of collapse, said three people with knowledge of the plan.

The assets are contained in Maiden Lane II and Maiden Lane III, entities created in 2008 as part of the U.S. effort to remove toxic securities from the firm. AIG's proposal reflects the insurer's confidence in the rebound of these holdings, said the people, who declined to be identified because the plan hasn't been approved. AIG valued the stakes at $6.2 billion as of March 31, $900 million more than at the end of 2009.

“The only reason they look good now is because the Fed has ramped up the market with its policies,” said Christopher Whalen, managing director of Torrance, Calif.-based Institutional Risk Analytics. As long as Federal Reserve Chairman Ben S. Bernanke “is willing to print money, as he has been, the Maiden Lanes will do just fine.”

AIG CEO Robert Benmosche, 66, has said AIG would pay down a Federal Reserve credit line with the planned divestitures of two non-U.S. life divisions and then turn to its Treasury Department obligations. The New York-based insurer hired Citigroup Inc. and Bank of America Corp. to explore options to repay loans within AIG's $182.3 billion bailout.

AIG has been in talks with Treasury about the potential plan, one of the people said. Treasury considers the proposal in its early stages, according to the person. The U.S. received an almost 80% stake in AIG after its initial 2008 rescue.

$751 million gain

Under terms of the deal removing mortgage-backed securities from its balance sheet, AIG contributed $6 billion to fund the Maiden Lane entities and is entitled to a share of proceeds after the Fed is repaid the more than $40 billion it loaned. In a May regulatory filing, AIG said that it expects to receive payments in excess of its initial investment in Maiden Lane.

The insurer booked a $751 million gain on its stake in Maiden Lane III and a $160 million gain on Maiden Lane II in the first quarter as the securities rebounded, compared with combined losses of $2.2 billion in the year-earlier period.

AIG spokesman Mark Herr, Andrew Williams of the Treasury and Jack Gutt of the Federal Reserve Bank of New York declined to comment.

AIG was forced in September 2008 to take a bailout after it was unable to meet collateral calls to banks including Goldman Sachs Group Inc. and Societe Generale S.A. The banks had purchased protection from AIG against default on collateralized debt obligations, which are pools of assets including home loans.

Collateral damage

The Fed and AIG later agreed to create Maiden Lane III to purchase $62.1 billion in CDOs and Maiden Lane II to buy about $39 billion in residential mortgage-backed securities owned by AIG. The actions prevented a credit-rating downgrade of AIG that would have sparked more collateral calls.

The securities were purchased at about half their face value, reflecting markdowns AIG had already taken. Banks got payments from Maiden Lane III to retire the guarantees and were allowed to keep collateral, making them whole on the assets.

Joseph Cassano, the former head of the AIG unit that sold the CDO guarantees, testified last month to the Financial Crisis Inquiry Commission that Maiden Lane III was “performing” as borrowers repaid their loans, and he expected few defaults.

Mortgage-backed securities

Maiden Lane III is valued at $22.9 billion and has $15.5 billion in principal remaining to be repaid to the Fed, according to the bank’s data. Maiden Lane II is valued at $15.5 billion and has about $14 billion to repay. Mortgage-backed assets have gained since the depths of the financial crisis as Mr. Bernanke held short-term interest rates near zero and bought more than $1.7 trillion of Treasuries and government-backed housing debt.

Treasury believes there is value in the portfolios, particularly Maiden Lane III, according to one of the people, who declined to say how much debt the government would be willing to forgive in exchange for AIG’s minority stake.

BlackRock Inc. is managing the portfolios for the New York Fed, which opted to hold most of the assets and collect payments on the securities, rather than sell them below face value.

Mr. Benmosche is seeking to focus the insurer, once the world’s largest, on global property/casualty coverage and life and retirement products in the U.S. He told the Congressional Oversight Panel in May that the U.S. will recover AIG bailout funds “plus a profit.” AIG’s rescue may result in a $45.2 billion loss, based on March 31 data, Treasury said in May.

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