This past Thursday, AIG announced that it had reached an agreement with the Federal Reserve Bank of New York (FRBNY) under which the FRBNY will receive a preferred interest in AIG’s two largest overseas life insurance units, American International Assurance (AIA) and the American Life Insurance Company (ALICO). In exchange for the preferred interests, FRBNY will reduce by $25 billion the outstanding balance and maximum amount available to be borrowed under AIG’s September 22, 2008 credit agreement with FRBNY.

Under the AIA and ALICO agreements, AIG will retain control of the life insurance units, while granting FRBNY veto rights over certain significant actions by AIA and its subsidiaries. FRBNY will also have the right, subject to certain restrictions, to compel AIA and ALICO to take certain actions, including an initial public offering or sale of the companies. The preferred interests received by the FRBNY will have an aggregate liquidation preference of $25 billion ($16 billion for AIA and $9 billion for ALICO) and will accrue a return of 5 percent per annum until September 22, 2013 and 9 percent per annum thereafter.

This announcement is the latest in a series of steps, including recent asset sales and spin-offs, that are part of a broader restructuring plan announced in March.