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

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

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

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

The Fed says that after "careful review," the N.Y. Fed and the Board of Governors of the Federal Reserve System "judged that the public interest in maximizing returns from any sale and promoting financial stability would be better served by an alternative approach to realizing value that is also more consistent with normal market practice."

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

AIG had been seeking to buy back the securities since last September, AIG president and CEO Robert Benmosche said March 23 on CNBC.

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

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

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