AIG, the world’s largest insurer, is this morning struggling to raise tens of billions of dollars to save itself from a catastrophic ratings downgrade.

Like several other New York-based global financial institutions, AIG is reeling from massive exposures to mortgage-related debt. Last month it reported a second-quarter loss of $US5.36 billion ($6.7 billion) after a first-quarter loss of $US7.81 billion ($9.7 billion).

Shareholders have deserted the stock as the extent of its exposure to complex financial instruments linked to the US subprime mess became obvious. Today its share price is worth 91% less than at the start of the year.

On Friday Standard & Poor’s dealt a deadly blow by warning that it may downgrade the company’s ratings because the collapse in its share price has affected its ability to raise further fresh capital.  

A few hours ago New York Governor David Paterson announced that AIG has been given permission to transfer $US20 billion ($25 billion) in assets from subsidiary companies – an amount that would stave off a ratings downgrade but not solve AIG’s long-term problems.  

“It is simply giving AIG in effect the ability to provide a bridge loan to itself,” Mr Paterson said.

Media reports say AIG directors rejected a private equity consortium’s offer to invest $US8 billion ($10 billion) in the group, because the deal involved eventually handing over control. They turned instead to the US Government, asking for a $US40 billion ($50 billion) loan from the Federal Reserve.

The Federal Reserve has reportedly asked banks Goldman Sachs and JP Morgan Chase to lend AIG a further $US70-75 billion ($87.5-93.8 billion). The company has already raised $US20 billion ($25 billion) in fresh capital this year.

AIG will be have to be restructured, although there has been no announcement yet on what this would involve. A plan had been expected to be made public today. New York media commentators say AIG is keen to hold on to its giant aircraft leasing company International Lease Finance Corporation, which owns 950 aircraft valued at nearly $US50 billion ($62.5 billion). But its auto insurance arm – one of the largest in the US – is likely to be sold off, along with reinsurer Transatlantic Holdings and some service companies.

Government authorities and ratings agency Standard & Poor’s have been at pains this morning to emphasise that AIG’s problems are different from those of failed banking icon Lehman Brothers, which has now filed for bankruptcy. They say AIG is financially sound.

Standard & Poor’s says AIG has sufficient capital and liquidity to meet its policy obligations, and that its assets are “significantly greater than the expected cash losses on the mortgage-related assets”.

The implications for AIG’s Australasian operations is not yet known. AIG has carved out a significant niche in large local corporate and manufacturing businesses, and has been making moves into the middle market.

The company is expected to communicate with Australian brokers when local executives have been fully briefed by their US counterparts.

Reports in some newspapers this morning have made the obvious point that QBE is watching the situation and could make a move on US assets if they become part of any fire sale.