The U.S. Treasury will swap debt it currently holds in AIG for common stock and then sell those shares over time. It would be able to pocket a profit if AIG's share price rises.
New York-based American International Group Inc. was one of the hardest hit financial companies by the credit crisis. It received a bailout package worth as much as $180 billion from the government.
The exit plan had been widely anticipated since full-scale negotiations began several days ago.
The move is similar to the deal the government struck with Citigroup Inc., which was another of the largest bailout recipients. Citigroup paid off a large chunk of the bailout money it received in cash, but also converted $25 billion it owed the government into common stock. The government has been selling those shares throughout this year at a profit.
AIG has been selling assets over the past two years since it received its first bailout, in an effort to streamline operations and repay the government debt. The company has been selling noncore assets like many of its foreign life insurance subsidiaries.
AIG made its largest one-time repayment of debt last month. It repaid $4 billion after its aircraft leasing unit successfully raised $4.4 billion in debt.
AIG remains on schedule to close the sale of its American Life Insurance Co. unit by the end of the year. It plans to use $16.5 billion from that sale to repay government debt as well.
AIG has focused on trying to return to consistently profitability in its primary businesses it plans to hold, such as its global property and casualty and U.S. life insurance operations.