Fed holds fresh AIG crisis talks as AIG downgrade could prove costly
Nation's largest insurer hit with first downgrade as it tries to raise cash. Fed asks Goldman and JPMorgan Chase to raise $70B for firm. Shares end down 61%

Another cut could prove very costly to the firm, which is scrambling to raise much-needed capital.

Fitch Rating downgraded AIG to A, from AA-, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.

The company could be required to post $10.5 billion of additional collateral if it is downgraded one notch by one of the other major rating agencies and $13.3 billion of collateral if downgraded by both, Fitch said in a statement, citing AIG's July 31 estimates.

US authorities were on Monday fighting a fresh fire in the crisis on Wall Street, throwing a $20bn lifeline to AIG while convening a fresh set of crisis talks to deal with the troubled insurer that sits at the heart of the financial system.

The deal between AIG and New York state insurance regulators allows the company to access $20bn of assets from its own subsidiaries to use as collateral for a loan in an attempt to stave off a liquidity crisis and credit downgrades.

itch Ratings last night downgraded AIG to A from double A minus, but it was not clear whether this move alone would trigger calls for billions of dollars of extra collateral, potentially sparking a liquidity crisis. A similar move by Moody’s and S&P would force such payments, AIG has said.

The New York Federal Reserve also hosted a fresh set of emergency talks to deal with the problems at AIG.

The Fed, which convened the parties, was facilitating the discussions but was not discussing whether to lend indirectly to AIG via back-to-back transactions intermediated by the banks.

Fears over AIG’s financial health sent its shares into a tail-spin. The stock fell as much as 70 per cent in morning trading in New York to an intra-day low of $3.50. It ended the day down $7.38, or more than 60 per cent.

AIG and its advisers spent the weekend hammering out plans to raise up to $40bn in capital, which the insurer needs to shore up its balance sheet and prevent crippling ratings downgrades that could lead to a liquidity crisis.