AIG to keep up to $500B in controversial assets

NEW YORK (CNNMoney.com) -- AIG has decided to keep up to $500 billion of assets that have been widely blamed for bringing the company to its near collapse.

The troubled insurer changed its plans for unwinding its entire derivatives portfolio, and instead plans to retain up to 25%, AIG spokesman Mark Herr said. That means AIG could hold onto $500 billion worth of the assets, but Herr said the amount will likely be less than 15% or $300 billion.

The controversial derivatives tumbled in value when the bottom of the housing market fell out, bringing the company to its knees. Taxpayers stepped in with a $181 billion bailout to rescue the company.

AIG (AIG, Fortune 500) had previously planned to sell off 100% of its $1.9 trillion portfolio of 44,000 derivatives, and it sought to close down the Financial Products unit that bought and sold them. The company wound down 28% of its derivatives portfolio in the first nine months of 2009. As of September, AIG had $1.1 trillion, or 16,000 of the controversial assets.

But the credit markets are making a comeback, and the company reportedly believes it can take advantage of the upswing by maintaining a portion of its of its portfolio. By holding onto some of the assets, it hopes it may be able to get a good return on its investments and pay back the billions it owes the federal government.

"Rather than hold a fire sale on positions, we are pursuing a strategy to maximize value on the unwind for the taxpayer," said Herr. This has already helped with our counterparties because they know we can negotiate better deals."

AIG also believes it has been able to eliminate risk from the assets it will continue to hold, and said it has already reduced the amount of risk by 75% since the company's bailout in September 2008. After consulting the Treasury Department and the New York Federal Reserve, AIG has received the blessing of its government overseers.

The news follows reports that surfaced earlier this month saying that AIG hired Barclays to manage its portfolio. Even if AIG manages the assets on its own, the company says it still plans to close down the troubled Financial Products division by the end of 2010. The insurer said it now has 220 employees in that division, down from 400 at the time of its bailout.

The Financial Products unit has been the object of much furor from lawmakers and the public. In addition to maintaining the derivatives portfolio, it was also responsible for writing insurance-like contracts on subprime mortgage-backed assets. Despite the unit's struggles nearly destroying AIG, the company still paid Financial Products employees retention bonuses of nearly $400 million.