UPDATE 2-AIG working on investing cash, may bid on bonds

* Cash pile biggest headwind – CEO

* Share sale timing up to U.S. Treasury – CEO

* Share sale target is still $3 bln – CEO

* Shares up 3 pct
(Adds comments on share sale, stock price)

By Adam Tanner

DUBROVNIK, Croatia, April 5 (Reuters) – Bailed-out insurer
American International Group (AIG.N: Quote, Profile, Research) is working hard to invest
cash it set aside for a failed deal to buy back assets from the
Federal Reserve, Chief Executive Bob Benmosche said on
Tuesday.

But the company is still looking at taking part in the
auction the Fed set up for the nearly $16 billion pool of
mortgage-backed securities, Benmosche told Reuters in an
interview. He was in Croatia to address a U.S.-organized
conference on investing in that country.

The Fed bought the securities from AIG during the depths of
the financial crisis in 2008 as part of a package to save what
was then the world’s largest insurer from collapsing into
bankruptcy.

AIG had offered to buy the whole of the Fed vehicle Maiden
Lane II, which holds the securities, for $15.7 billion. The
company had been accumulating cash for months at its insurance
units in anticipation of the deal.

But the Fed rebuffed it and said it would instead hold a
public auction for pieces of the portfolio, which Benmosche has
called a “huge problem” for the company, given all the
low-returning cash it was stuck holding.

“Because the money has been sitting in cash, we are now
busy getting that invested, and that has created a headwind to
say, ‘What can AIG actually earn off the cash they have and
what they actually invest in during this period of time?'”
Benmosche said.

“And it’s put us behind the 8-ball a bit, but we are
confident we’ll start working our way out of it.”

SHARE SALE ON TRACK

The first Fed auction is now underway, and Benmosche said
AIG was trying to decide whether to bid based on the securities
on offer.

The other major issue AIG has looming is a stock offering.
The U.S. Treasury holds 92 percent of AIG after the company’s
$182 billion bailout, and it is expected to begin selling down
that stake as soon as next month.

AIG has plans to sell shares in the same offering, though
Benmosche said the timing of any sale was entirely up to the
government.

He did say, though, that AIG remains comfortable with the
goal of selling about $3 billion in stock in the offering.

“That is an estimate that we have talked about and we have
not changed that estimate. I think for now we think it is
reasonable,” he added.

Benmosche is expected to participate in the roadshows for
the share sale despite undergoing treatment for cancer. AIG
said earlier this year his prognosis was such that he should be
able to stay on the job through mid-2012 as originally
planned.

He said Tuesday that AIG’s board has not yet selected a
successor for him. The company’s contingency plan would have
Chairman Steve Miller step in as interim CEO if Benmosche were
unable to keep working.

“Well, I still feel pretty good, so I am not ready to step
down today. I don’t think that they have selected a CEO, but I
believe that they have gone through a very thoughtful
succession process,” he said. “They have a sense of the
internal candidates and things they expect those people to work
on, to improve this year and into next year.”

AIG shares rose 3 percent to $34.97 in mid-morning trading.
The stock has lost about a quarter of its value since a
recapitalization deal with the Fed and the Treasury closed in
late January.
(Reporting by Adam Tanner in Dubrovnik, writing by Ben
Berkowitz in New York; Editing by Maureen Bavdek and John
Wallace)

UPDATE 2-AIG working on investing cash, may bid on bonds