American International Group contends it never forfeited itsright to sue mortgage bankers that sold it virtually worthlessmortgage-backed securities, and the insurer says a Federal Reserveofficial has made inconsistent statements to the court on thematter.

AIG is claiming that it is owed perhaps $10 billion from thebanks.

AIG's statement is contained in a March 28 filing related to itscase against BankAmerica, the successor to Countrywide Financial,and Merrill Lynch in federal court in California.

The suit was filed in January in New York State Supreme Court, in Manhattan,but the case was transferred to Los Angeles in February in order toconsolidate all MBS claims against Countrywide.

AIG is at odds with the Federal Reserve Bank of New Yorkregarding whether the insurer gave up its ability to sue themortgage bankers when it transferred the mortgage-backed securitiesin question to Maiden Lane II—a facility set up by the Fed torelieve AIG of the toxic assets as part of the governmentassistance the insurer received beginning in 2008.

In the current court battle, AIG is arguing that the Fed hadearlier allowed it to pursue the lawsuits against the banks, butlater supported the banks by stating that AIG lost its ability torecoup its losses through lawsuits when it turned the securitiesover to the Fed via MLII.

Indeed, the latest March 28 AIG brief asserts that March 18testimony by a Federal Reserve Bank of New York official, JamesMahoney, "retreated" from assertions made in a December brief onbehalf of BankAmerica. In that declaration, Mahoney asserted that"[t]he FRBNY and ML II intended for ML II to receive alltransferable and assignable benefits associated with the securitiesand related instruments, including litigation claims associatedwith those securities or their acquisition by AIG."

But, AIG says in the filing, "In his March 18 deposition, hebackpedaled, admitting that when the [MLII deal] was negotiated, heand the FRBNY were utterly 'unaware of any actual [fraud or tort]claims that may have existed,' and he was not 'even thinking aboutthe concept that AIG may have had tort claims.'"

The AIG brief further says that Mahoney "never discussed withanyone at the FRBNY, ML II, or AIG the idea that AIG was somehowgiving up its [tort] claims by reference to 'RelatedInstruments.'"

AIG lawyers also cite testimony by the insurer's negotiatorsinvolved in the creation of Maiden Lane II that "unequivocallyestablishes that the assignment of AIG's tort claims was not evendiscussed" by the Fed and AIG. "We did not negotiate it; we did notintend to transfer it," AIG's lead negotiator, Christopher Swift,says in the filing.

The AIG filing also cites the testimony of Steven Manzari, asenior vice president of the FedBankNY, that "he did not recall anydiscussion leading up to the execution of the ML II documents aboutAIG somehow giving up its rights to try to seek any recovery fromanyone for the loss of the $17 billion" AIG sustained on thetransfer of the residential mortgage-backed securities to ML II aspart of the deal.

Maiden Lane II was mostly liquidated late year at a total valueof 30 to 50 cents on the dollar.