Sept. 24 (Bloomberg) -- The Starr Foundation had a vision of spending millions of dollars trying to spruce up New York City public school gym classes and improve math and science education.

With the past year's 93 percent plunge in American International Group Inc. shares -- what Starr calls its ``currency'' -- those proposals are on hold.

The 16th-largest U.S. foundation has been forced to reduce outlays and defer or cancel new initiatives.

Yet if not for well-timed trades by the New York foundation, which is run by AIG insiders including former Chairman and Chief Executive Officer Maurice ``Hank'' Greenberg, cutbacks would be worse.

The foundation sold about 30 million shares of AIG between January 2006 and May 2008, or about two-thirds of its holdings. The stock sales, disclosed in regulatory filings and on the foundation's tax forms, locked in gains when AIG traded between about $40 and $73 a share, months before some investors realized how badly the insurer would be hit by the credit crunch.

AIG shares yesterday rose 28 cents to $5, after the federal government took control as a condition of providing an $85 billion bridge loan to keep the company operating.

``It was a board decision to diversify,'' said Florence Davis, who was vice president and general counsel of AIG for four years before becoming foundation president in 1999. ``It became clear that it wasn't the company it once was.''

Nonetheless, ``You will see smaller grants from us,'' said Davis, 53. ``We have to rethink some of our initiatives. This will postpone them if it doesn't derail them entirely.''

$209 Million in Grants

Last week, nonprofit leaders fretted about the future of the Lehman Brothers Foundation, which distributed $12.2 million in 2006. The New York-based Starr Foundation gave away 17 times as much that year, $209 million.

Created in 1955 by Cornelius Vander Starr, founder of a forerunner company of AIG, Starr is the 16th-largest foundation in the U.S., based on its assets of $3.3 billion at the end of 2006.

The foundation focuses on education, health care and social services, and about half of its money is donated locally. Recipients range from elite universities such as Juilliard School and Johns Hopkins University to Literacy Inc., to fund a teen tutor reading program, and Partnership for After School Education, which coordinates agencies that run after-school programs. Both are based in New York.

Each year, Starr also hands out millions of dollars in scholarships to U.S. and foreign high-school and college students.

Hold Forever

C.V. Starr required in his will that the charity hold onto its AIG shares, which totaled 39.1 million worth about $2.8 billion at year-end 2006, as long as possible. The balance was in stakes in other public companies and private equity and hedge funds, according to its tax return.

``Mr. Starr asked us not to sell the stock if we didn't have to,'' Davis said. Yet by the time the federal government took control of the company last week, as a condition for providing the bridge loan, ``we had substantially reduced our exposure. We've got broad exposure nationally and internationally.''

As of May 7, it held 15.5 million shares, according to a lawsuit that the foundation filed against AIG and its then-chief executive, Martin Sullivan. (The suit alleged that Sullivan misrepresented billions of dollars of losses in its portfolio of credit-default swaps, which are contracts to cover losses when banks and bondholders default on debts.)

Davis, who earned $537,718 in salary and benefits in 2006, declined to disclose the foundation's value today. AIG shares closed on May 7 at $45.09, down $58 from their peak of $103.68 on Dec. 8, 2000. That means the value of the 15.5 million shares fell by at least $900 million from their peak.

`Bearish' on Contributions

Davis said the foundation will fulfill every commitment, and ``we're hardly going out of business.'' Still, new proposals are on hold.

``This has been very painful and very sad,'' she said. ``I'm very bearish on contributions right now. The markets have been globally down. I don't think anyone has escaped.''

Davis said she generally didn't talk to the press until recently.

``It wasn't Mr. Starr's style,'' she said. ``Everyone on the board has the philosophy that the philanthropy should be quiet.''

Why the change?

``I was getting too many panicky phone calls,'' she said.

To contact the reporters on this story: Philip Boroff in New York at pboroff@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

Last Updated: September 24, 2008 00:01 EDT