NEW YORK (Bloomberg)—American International Group Inc. offered to pay $15.7 billion to repurchase mortgage-backed securities the insurer was forced to turn over to a Federal Reserve rescue fund amid a liquidity squeeze in 2008. The company advanced in extended trading.

“AIG believes this offer is in the best interest of the U.S. taxpayers, the U.S. government and AIG itself,” the insurer said in a letter Thursday to the Federal Reserve Bank of New York.

The facility was created in 2008 to hold mortgage-linked assets that AIG had purchased with collateral turned over by Wall Street banks through securities-lending deals. When the housing market collapsed, AIG was unable to reimburse banks that wanted their collateral back, prompting the Fed to make about $22.5 billion available to a fund called Maiden Lane II to take the assets off the New York-based company's balance sheet.

“It certainly does strike me as an unexpected use of AIG's cash,” said Clark Troy, a senior analyst based in Chapel Hill, N.C., for Aite Group. “AIG wouldn't be doing this if the valuation wasn't conservative.”

The value of some of the securities subsequently rebounded and the bonds have paid coupons, reducing the Fed's investment in the facility. At the same time, AIG has lowered its obligations under a $182.3 billion bailout by selling units including non-U.S. life insurers and a consumer lender.

“The conditions that necessitated Maiden Lane II in the first place have been resolved,” AIG said in the letter, which was included in a regulatory filing. The company is more stable and is able to match the assets with “appropriate longer-term insurance liabilities, not shorter-term liabilities.”

‘Unexpected use’

AIG jumped 2.7% to $37.49 at 5:58 p.m. in New York. The company has dropped 24% this year on the New York Stock Exchange.

The Fed made $30 billion available for a second facility, Maiden Lane III, to buy mortgage-linked assets backed by AIG’s Financial Products division. AIG made smaller contributions than the Fed in 2008 to set up the Maiden Lane funds. Jeffrey Smith, a spokesman for the New York Fed, declined to comment.

AIG didn’t say where it would get the funds. Its obligations to the U.S. would shrink by about $13 billion to $26 billion, the insurer said in the letter. Mark Herr, a spokesman for the company, declined to comment on which subsidiaries would provide the money.

The U.S. Treasury Department, which committed up to $69.8 billion in assistance, holds a 92% of the company’s common stock after exchanging its preferred stake this year. The Treasury plans to sell its holding to private investors.

AIG’s rescue also included a $60 billion Federal Reserve credit line that the insurer has repaid.

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