Fund manager Berkowitz gets sneak peek from AIG

The logo of American International Group Inc. (AIG) on the outside of their corporate headquarters in New York, November 10, 2008.

BOSTON (Reuters) - Money manager Bruce Berkowitz may be preparing to deepen his involvement in American International Group Inc as the insurer plans a capital restructuring to pay back taxpayers and restore its financial stability.

Largely unnoticed Thursday as AIG (AIG.N) unveiled its plan to accelerate the payback of U.S. government bailout money, Berkowitz disclosed that he had signed a confidentiality and standstill agreement with the insurer.

In return for agreeing not to buy, sell or hedge any AIG securities, Berkowitz will get a peek at "certain confidential material" relating to the planned capital reorganization. The standstill agreement is to run until October 6 or 24 hours after AIG makes public the same materials, whichever comes first.

That could be a sign that Berkowitz is willing to put up additional capital as AIG seeks to boost its credibility with other big investors, analysts said.

Such a move by Berkowitz would be bold but not uncharacteristic for the contrarian manager, said Russel Kinnel, director of mutual fund research at Morningstar. Berkowitz will have less control over the situation than in some of his prior activist bets, given the government's controlling stake, Kinnel added.

"With the government as your partner, you don't have quite the power you would if you owned a big chunk of a company entirely in private hands," he said.

Berkowitz, named the top stock manager of the past decade by Morningstar, has already put his $16 billion (10.14 billion pounds) Fairholme Fund and his star reputation on the line by betting that AIG can recover. In the process, he has spent almost $2 billion this year buying up AIG common shares, preferred shares and bonds.

Along with its reorganization plan, AIG expects to sell $2.5 billion of equity and a small amount of debt by March, a source familiar with the situation told Reuters on Thursday.

The bulk of AIG's plan is aimed at reducing the U.S. government's controlling stake. Under the plan, the U.S. Treasury will swap $49.1 billion of AIG preferred shares and accrued interest for 1.66 billion AIG common shares worth about $65 billion at current prices.

That will raise the government's ownership stake to over 92 percent from nearly 80 percent. AIG's plan is also aimed at eliminating the involvement of the Federal Reserve.

Shares of AIG were down 1.7 percent at $38.44 in midday trading on the New York Stock Exchange on Friday after gaining 4.4 percent on Thursday after the plan was announced.

Berkowitz, based in Miami, declined to be interviewed. In a statement released on Thursday, he said his funds "strongly support the proposed solution to revitalize AIG in a fair and equitable manner for all constituents."

Berkowitz's firm, Fairholme Capital Management, has invested more than $1.8 billion in AIG securities, or more than 10 percent of the firm's total assets under management, the statement said.

The manager has been known to get actively involved in tricky situations before. Along with William Ackman's Pershing Square Capital, Berkowitz had a huge say in the reorganization of bankrupt mall owner General Growth Properties (GGP.N) after agreeing to kick in billions of dollars of fresh capital.

Berkowitz's return on his AIG bet so far is unclear. The price of AIG's common shares has risen 31 percent this year but the bulk of the gain occurred by mid-April. Berkowitz bought about 15 million shares in the first quarter, a stake that has dramatically risen in value. He subsequently added another 17 million shares that likely show smaller gains.

And the price of AIG's 8.5 percent preferred shares AIG_pa.N has declined about 25 percent this year, including an 11 percent drop since the end of the second quarter. Berkowitz owned 20.3 million preferred shares at the end of the first quarter and 29.9 million at the end of the second quarter.

(Reporting by Aaron Pressman; Editing by Steve Orlofsky)