Worries are growing that US insurance giant AIG could follow investment bank Lehman Brothers into bankruptcy.
The markets' focus is on whether AIG, one of the world's biggest insurers with 74 million customers worldwide, will be able to secure enough funding to prevent its collapse.
New York Governor David Paterson said this afternoon that AIG had one day to raise up to $80 billion.
Its shares were down more than 20% on Wall Street this afternoon after 60% of its market value was wiped out on Monday. Its collapse could potentially be even more damaging than that of Lehman Brothers.
Last night the three main rating agencies - Standard & Poor's, Moody's and Fitch - lowered AIG's credit rating. They judge the solvency of AIG at risk. AIG has a workforce of almost 400 in Ireland.
The Wall Street Journal said today on its website that people close to the situation say AIG may be forced into filing for bankruptcy if it can not secure sufficient fresh funding by tomorrow.
The three ratings agencies gave essentially the same reasons for the downgrade: the US housing crisis, to which AIG is highly exposed, and its shares freefall.
Far more than other insurers, AIG has been a big player in a complex parallel market called credit default swaps (CDS), financial instruments in which Wall Street companies take out a form of market insurance against the risks of bond default.
These complex products, often linked to the US property market, are at the heart of the current banking crisis and have led to massive write-downs of assets around the world.
AIG alone has written down $25 billion amid spiking defaults on US mortgage payments in the US. In a filing with US market regulator the Securities and Exchange Commission, AIG said it would need $13.3 billion to meet its CDS obligations, if S&P and Moody's lowered its rating a notch.
After Wall Street investment bank Lehman Brothers filed for bankruptcy protection and peer Merrill Lynch was swallowed by Bank of America yesterday, it looked like AIG may be the next domino to drop in the swiftly deteriorating US financial crisis.
The US Treasury, as it had done for Lehman, ruled out using taxpayer money to prop up the insurer.
The Wall Street Journal, citing people familiar with the situation, reported that the US Federal Reserve yesterday asked Goldman Sachs Group and JP Morgan Chase to help make $70-75 billion in loans available to AIG.
The stakes are high for a company that until only recently had been long considered the world's largest insurer. In the past year it has been battered by the global credit crunch and the worst US housing slump in decades.
