American International Group Inc. has agreed to end litigationagainst the Federal Reserve Bank of New York over whether theinsurer retained the right after its 2008 taxpayer-funded bailoutto sue over losses on residential mortgage-backed securities.

In a May 28 order made public on Thursday in U.S. District Courtin Manhattan, AIG and Maiden Lane II, an entity created by the NewYork Fed in December 2008 to buy troubled mortgage debt from theinsurer, agreed to dismiss their case without prejudice.

At issue was whether AIG, as part of its since-repaid $182.3billion federal bailout, had transferred $18 billion of litigationclaims to Maiden Lane, preventing the New York-based insurer fromrecouping losses from banks.

The dismissal follows a May 7 decision by U.S. District JudgeMariana Pfaelzer in Los Angeles that AIG did not assign $7.3billion of those claims, which are part of a fraud lawsuit by theinsurer against Bank of America Corp and its Countrywide unit.

"In light of the recent ruling that AIG did not assign its fraudclaims to ML II, we have agreed to dismiss our declaratory judgmentaction, without prejudice to our right to reinstitute it ifnecessary," AIG spokesman James Ankner said, referring to the NewYork case.

Jack Gutt, a spokesman for the New York Fed, declined tocomment.

The case before Pfaelzer is part of a $10 billion lawsuit inwhich AIG accused Bank of America, Countrywide and the bank'sMerrill Lynch unit of misrepresenting the quality of more than $28billion of residential mortgage-backed securities it bought.

Lawrence Grayson, a spokesman for Bank of America, on Thursdaysaid the Charlotte, North Carolina-based bank retains the rightunder Pfaelzer's ruling to obtain more evidence to suggest that AIGassigned its litigation claims to Maiden Lane.

AIG last month won a federal appeals court ruling to move theentire case against Bank of America to the New York state courtwhere it began. The bank has since taken steps to keep the case infederal court.

U.S. District Judge Lewis Kaplan, who signed the May 28 order,had put the case before him on hold in February, saying it was bestto let the California case take its course.

He also admonished the New York Fed, saying that "on the face ofit" some of its actions "perhaps are unattractive and, indeed,wrongful."

AIG separately opposes an $8.5 billion settlement between Bankof America and Countrywide investors over other mortgage debt. Ahearing on that accord before Justice Barbara Kapnick of the NewYork State Supreme Court begins on Monday.

The case is American International Group Inc et al v. MaidenLane II LLC, U.S. District Court, Southern District of New York,No. 13-00951.