Embattled insurance giant American International Group, Inc. (AIG) is expected to repay the $170 billion in loans it was granted by the Federal Reserve, New York Federal Reserve Bank President William Dudley said Tuesday.

Testifying with fellow financial heavy-hitters Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner before the House Financial Services Committee, Dudley defended the intervention in the face of severe systemic risk.

The total package of assistance that the Federal Reserve and Treasury Department have committed to AIG has established a more durable capital structure for the company that gives AIG greater time and flexibility to execute its asset disposition plan to repay government funds, Dudley told lawmakers.

He added, Notably, we have recently agreed in principle to accept preferred interests in two of AIG's large foreign life insurance subsidiaries, AIA and ALICO, in order to make repayment of our loan less dependent on forced divestitures into a depressed acquisition market.

Although it will take time, we still expect that the proceeds from asset sales should enable AIG to repay the New York Fed in full, Dudley noted.

Prior to taking over the role of New York Federal Reserve Bank President, Dudley served as the head of the Markets Group at the New York Fed.

The New York Fed President recognized the unpleasant aspects of the AIG bailout, stating that as unattractive as parts of the bailout, including compensation, may be, they are better than the alternative of letting AIG fail.

These negative aspects have followed unavoidably from the decision to avert a systemically destructive bankruptcy, he said.

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