American International Group said a federally financed operation has been launched to help it deal with its debt problems and it is selling an interest in a natural gas firm.

Maiden Lane III (MLIII), a financing entity created by the Federal Reserve Bank of New York, it was explained was designed to purchase Multi-Sector credit debt obligation (CDO) exposure on which American International Group has written credit default swap (CDS) contracts.

The creation of ML III was announced last month, along with a separate entity, Maiden Lane II, which will hold residential mortgage-backed securities (RMBS) from AIG's securities lending collateral portfolio.

An AIG spokesman said ML II has not yet been set up by the Fed.

In announcing ML III last month, AIG said the financing entity "will purchase up to approximately $70 billion of Multi-Sector CDO exposure on which AIG has written CDS contracts. Approximately 95 percent of the write-downs AIG Financial Products (AIGFP) has taken to date in its CDS portfolio were related to Multi-Sector CDOs."

AIG has also announced that ML III reached agreements with AIGFP's CDS counterparties to purchase approximately $53.5 billion principal amount of CDOs.

To date, AIG said $46.1 billion of such CDOs have been purchased and, in connection with the CDO purchase, the CDS transactions have been terminated.

According to a regulatory filing yesterday, "Settlement on the remaining $7.4 billion notional amount of CDS is contingent upon the ability of the related counterparty to obtain the related Multi-Sector CDOs and thereby settle with ML III and terminate such CDS with AIGFP."

ML III has $5 billion in equity funding from AIG, and up to approximately $30 billion from the FRBNY, of which approximately $15.1 billion has been funded to effect purchases of CDOs, the company explained.

An AIG spokesman also confirmed AIG Chief Executive Officer Edward Liddy intends to go to Washington, once the company makes progress on selling assets and paying off its debt to the Fed, to lower the 10 percent dividend on preferred shares the government is receiving.

Mr. Liddy also believes the 79.9 percent stake the government has in the company is too high because it chokes out investment from the private market, the spokesman explained.

The spokesman stressed that any action taken by Mr. Liddy on this matter would be after progress is made on selling assets and paying off the debt to the Fed.

"We are starting to announce some small assets sales," the spokesman said, but he added these were not ones that would make good progress toward paying down the debt.

The company also announced that for an undisclosed amount it is selling its interest in Canada-based Tenaska Marketing Ventures, Tenaska Gas Storage and Tenaska Marketing Canada (collectively TMV). Affiliates of AIGFP have owned 50 percent of TMV's holding companies since April 2007. That interest will now be sold back to Tenaska, which owns the other 50 percent of TMV's holding companies and serves as manager TMV.

AIG said Tenaska "proposed to AIG that Tenaska reacquire AIG's interest in TMV after AIG announced that it was winding down the AIGFP division as part of AIG's restructuring of certain of its assets."

Paula Reynolds, AIG vice chairman and chief restructuring officer, said "AIG has benefited from its investment in TMV. That investment, however, does not fit with our strategic insurance focus and the businesses in which we intend to remain as we restructure."

Following the completion of this repurchase, Tenaska's employee owners will again own 100 percent of TMV, which was formed in 199, AIG said. The companies anticipate closing on or about Jan. 2, 2009, subject to certain regulatory approvals.

Blackstone Advisory Services provided financial advice to AIG in connection with AIG's global restructuring program.

Special Reports /

Entity To Buy AIG CDO Exposure Launched; AIG Sells TMV

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