The ailing American International Group Inc. announced Thursday that it has agreed with the Federal Reserve Bank of New York to use the proceeds from initial public offerings by two of its international life insurance units to repay $25 billion it owes the bank.

Under the deal with the New York Fed, first developed in March, AIG would put equity from American Life Insurance Co. and American International Assurance Co. into separate special-purpose vehicles in exchange for preferred and common interests in the vehicles.

The New York Fed would get $25 billion in preferred interests in the two special-purpose vehicles, reducing AIG's debt to the bank by the same amount.

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