American International Group and the Federal Reserve Bank of NewYork (FRBNY) are at odds concerning whether the insurer hasauthority to sue banks over virtually worthless mortgages they soldthat drove AIG to seek a federal bailout.

The new development is spelled out in a lawsuit AIG filed Fridayin the New York State Supreme Court, in Manhattan.

The Fed had earlier allowed AIG to pursue the lawsuits againstthe banks even though the defective mortgages in question werecontained in a facility known as Maiden Lane II (MLII), which ispartially funded by the FRBNY, AIG alleges.

But the lawsuit says the Fed is now supporting the banks bycontending that AIG lost its ability to recoup its losses throughlawsuits when it turned the securities over to the Fed viaMLII.

James Ankner, a spokesman for AIG corporate, says AIG is seekinga declaration from the court that the 2008 contract between AIG andML II did not transfer to ML II AIG's right to sue Bank of Americaand other financial institutions for billions of dollars in damagesthey allegedly caused AIG and its shareholders in connection withthe fraudulent sale of residential mortgage-backed securities(RMBS) to AIG.

Ankner notes that the latest AIG action is part of ongoinglitigation. “For the past 18 months, AIG has been pursuing thesefraud claims against Bank of America and its affiliated entities,”he says.

AIG's underlying lawsuit alleges that financial institutionsthat created and/or sold the RMBS provided offering materials thatassured AIG that each mortgage loan met certain qualitystandards.

“In reality, the financial institutions, driven by asingle-minded desire to increase their share of the lucrative RMBSmarket and the considerable fees generated by it, abandoned thestated underwriting guidelines, ignored the represented creditquality metrics, and packed the RMBS with thousands of defectivemortgages,” the suit says.

The suit notes that AIG is seeking $10 billion from BankAmerica,formerly Countrywide, labeling it one of the “most blatantoffenders.”

AIG's disagreement with the Fed comes as the Financial StabilityOversight Council debates whether to designate the insurer as asystemically-significant non-bank, a move that would keep it underthe supervision of the Fed, with even more heightened capitalrequirements and restrictions.