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) -- In a somewhat absurd twist,

American International Group

(AIG) - Get Free Report

said Friday it has paid back some taxpayer funds, using other taxpayer funds.

AIG also reported its

quarterly results

on Friday morning, and the shares were trading 5.1% lower in premarket action at $26.11.

AIG borrowed $3.1 billion from its Federal Reserve credit facility, primarily to repay $3.5 billion in borrowings from the Fed's commercial paper funding facility. AIG still had $4.7 billion in outstanding borrowings from the CPFF as of Dec. 31, as well as $23.4 billion in available credit from the Fed facility.

It's unclear which type of debt is more expensive for AIG, and therefore more beneficial to taxpayers on an immediate yield basis, but it appears to be the direct Fed loan.

The CPFF prices its purchases at a discounted rate pegged to the three-month overnight index swap on the day of the transaction. The Fed's credit facility is pegged to the benchmark LIBOR rate, but also carries an 8.5% rate above that, along with a commitment fee of 2% on loan principal and an 8.5% fee on the undrawn portion.

While commercial paper must be paid back within weeks or months, the direct Fed loan to AIG, made in September 2008, was initially given a two-year time frame. Revisions to AIG's bailout may have extended that further.

The Fed rolled out the CPFF and other programs to stimulate lending in the frozen credit markets last year. Private commercial paper buyers had taken a step back from the market, or required much higher interest rates, resulting in a short-term funding bind that could have crippled corporate America.


Written by Lauren Tara LaCapra in New York