American International Group Inc. announced Thursday that it has a deal to simplify U.S. government ownership of the insurance firm, and eventually return to private control.

AIG, which was essentially taken over by the U.S. government at the height of the financial crisis in October 2008 to prevent its failure, said that it has now entered into an agreement-in-principle with the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the AIG Credit Facility Trust, that would see it restructure those obligations with an eye to relieving them over time.

The plan involves:

> repaying the US$20 billion in senior secured debt it owes the New York Fed under a credit facility, with resources from the parent company as well as with proceeds from a variety of asset sales, including the initial public offering of its Asian life insurance business and the pending sale of its foreign life insurance company;

> paying off two special purpose vehicles set up by the New York Fed worth approximately US$26 billion, first with money from the government’s Troubled Asset Relief Program, but ultimately with the proceeds from future asset sales; and

> exchanging the US$49.1 billion of TARP preferred shares outstanding for common stock, which will give the U.S. Treasury 92.1% of the common stock of AIG, which it will sell on the open market over time.

AIG expects to repay and terminate the Fed credit facility and complete the issuance of common stock to the U.S. Treasury before the end of the first quarter of 2011, subject to regulatory approvals and other closing conditions.

“We are very pleased that this agreement vastly simplifies current government support of AIG, sets forth a clear path for AIG to repay the FRBNY in full, and sets in motion the steps for the U.S. Treasury to exit its ownership of AIG over time,” said Robert Benmosche, AIG’s president and CEO.

IE