Bailed-out insurer American International Group 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)

Aig