AIG (AIG) In Free-Fall On Liquidity Concerns

American International Group (NYSE: AIG), facing potential catosrophic credit downgrades, is looking to raise $40 billion to save the company. Shares of the larger insurer are plummeting today, falling over 50%, as a credit downgrade could force the company to post more collateral on certain credit products threatening the company's survival.

The State of New York announced today that it is going to allow AIG to use $20 billion of assets held by its subsidiaries. AIG is also in talks with the Federal Reserve for $20 billion. As was the case with Lehman, the Fed is taking a hard line with AIG and is looking for a private sector solution to the problem. But the Fed has hired Morgan Stanley and Wachtell Lipto to evaluate a possible bridge loan.

Earlier today there were reports Warren Buffett was in talks to save the company, but later reports suggested he no longer has interest in a deal with AIG.

Following Friday's 31% drop in AIG stock, Standard & Poor's Ratings Services placed its ratings on AIG and subsidiaries on CreditWatch with negative implications. Standard & Poor cited the significant decline in AIG's share price and an increase in credit spreads on the company's debt. The firm said, "We believe that AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements, which are significantly greater than the expected cash losses on the mortgage-related assets. However, additional market value losses will place some strain on the company's resources." They also said they believe AIG's potential access to the capital market may be more restricted in the short term.

Investors in AIG are concerned that marks on the assets they hold are significantly understated and also fear credit defaults swaps the company is involved with will lead to more write-downs and will further clamp liquidity.

Bank of America's (NYSE: BAC) Ken Lewis said a AIG failure could be "much bigger" than the Lehman Brothers (NYSE: LEH) demise.

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