The Federal Reserve Board says it has rejected AmericanInternational Group's offer to buy back a package of securities ithad sold the Fed when it needed cash in November 2008.

The Fed says in a statement that because of improving marketconditions for the types of securities held in the so-called MaidenLane-II portfolio, "it has declined AIG's offer to purchase all ofthe assets in Maiden Lane II."

AIG had offered to purchase the securities, valued at $21.7billion at par, for $15.7 billion.

AIG responds in a statement: "We are highly disappointed in theFed's decision, which may prevent AIG from delivering on its goalthat U.S. taxpayers earn a profit on their investment in AIG. Thatthe Fed, which has been such a constructive partner over the lasttwo years, would hurt the very company in which U.S. taxpayers owna 92 percent stake is very difficult to understand."

The Fed says that after "careful review," the N.Y. Fed and theBoard of Governors of the Federal Reserve System "judged that thepublic interest in maximizing returns from any sale and promotingfinancial stability would be better served by an alternativeapproach to realizing value that is also more consistent withnormal market practice."

It says it is doing so in "light of improved conditions in thesecondary market for non-agency residential mortgage-backedsecurities (RMBS) and a high level of interest by investors."

AIG had been seeking to buy back the securities since lastSeptember, AIG president and CEO Robert Benmosche said March 23 onCNBC.

The N.Y. Fed adds that it believes "conditions are right for MLII to begin more extensive asset sales while taking appropriatecare at all times to avoid market disruption."

"In light of this decision, the New York Fed has changed theinvestment-management objective for ML II consistent with suchsales."

The sale of the securities will be conducted through BlackRockSolutions, the N.Y. Fed's investment manager.