Whether the New York Fed makes or loses money on its holdings in American International Group Inc.'s (AIG) businesses-some of which are being spun off or sold as IPOs-could hinge on a strong market recovery.

AIG announced in March that it would create special purpose vehicles, or SPVs, to transfer ownership interests in its international life insurance businesses to the New York Federal Reserve in return for forgiveness of much of its debt.

The deal was struck as an alternative to accepting lowball offers from would-be buyers, in a market that made it "much more difficult for companies to raise debt to finance acquisitions," Edward Liddy, AIG's chairman, said in March. Auctions to sell minority stakes in its foreign life insurance operations reportedly failed to generate acceptable bids.

One SPV holds American Life Insurance Co. (ALICO.KA), AIG's international life insurance business. A second SPV consists of American International Assurance Company, Ltd., its life insurer that covers China and other parts of Asia except for Japan. AIG said Monday that it plans an initial public offering of AIA in an Asian stock market in 2010.

The New York Fed will get a minority ownership in the form of preferred equity shares of both SPVs in return for erasing up to $26 billion of AIG debt.

"If we see a normalization and if AIG is able to stabilize, both big ifs, the Fed will recoup their money" in a sale or IPO, said Rob Haines, an analyst with CreditSights Inc., in an interview. "The further you get away from the U.S., the better these business units are doing, but all of them are under pressure."

AIG's biggest asset sale so far, of its U.S. auto insurance business in April, brought in about $1.9 billion, equivalent to the unit's book value, and far less than it had paid for a portion of the business a few years before.

Haines estimated that ALICO and AIA together might be worth around $40 billion today, a 70% discount from their estimated combined market value of $130 billion at the peak of the market. At the estimated value, a 49% stake, for instance, would be worth around $19.6 billion.

Representatives of AIG and the Fed said negotiations over the SPVs were in progress. Neither would say how big a stake the Fed will get and exactly how much debt will be wiped away. The value of the Fed's interest in AIA and ALICO will be "based on valuations acceptable to the" Federal Reserve Bank of New York, AIG's announcement said.

AIG owed the New York Fed about $42.6 billion at the end of April. A concurrent agreement gives the New York Fed securitization notes worth up to $8.5 billion backed by AIG's U.S. life insurance businesses.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141; lavonne.kuykendall@dowjones.com