updated 9/16/2008 5:45:40 PM ET 2008-09-16T21:45:40

Its future in the balance, American International Group Inc. huddled Tuesday with Federal Reserve officials to find the cash the huge insurer needs to stay in business and avoid igniting more global financial turmoil.

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Meetings at the New York Fed, which is the Fed’s point bank on financial crises, were carrying on into the late afternoon.

Timothy Geithner, president of the New York Fed, is involved in the AIG sessions, said a New York Fed official who asked not to be named due to the sensitivity of the discussions. Geithner did not attend the Federal Reserve’s interest-rate meeting Tuesday in the central bank’s headquarters in Washington.

As talks went on, AIG shares rallied off intraday lows, though investors still remained worried there would be no assistance for the company.

Fed spokeswoman Michelle Smith said she could not make any comment on reports that the Fed was prepared to offer AIG a loan.

Treasury spokeswoman Brookly McLaughlin said that Treasury officials remained focused on market developments but she refused to comment on the AIG reports.

Just days ago, though, U.S. Treasury Secretary Henry Paulson said the agency would not help Lehman Brothers Holdings Inc. with the kind of taxpayer-backed funding that JPMorgan Chase & Co. received six months ago to buy ailing Bear Stearns.

Lehman, the nation’s fourth largest investment banker, filed for bankruptcy on Monday.

AIG shares closed down $1.01, or 21.2 percent, at $3.75, rebounding from an earlier low of $1.25. Its shares have traded as high as $70.13 during the past year.

The stock got a lift late in the day after CV Starr, an investment firm led by former AIG chief executive Hank Greenberg, disclosed in a regulatory filing it was reviewing its holdings in AIG, leaving open the possibility it could purchase some of the insurer’s assets or acquire a bigger stake in AIG.

New York-based AIG operates a range of insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those operations are considered healthy and policyholders would likely be covered even if AIG were to file for bankruptcy protection, said Donald Light, a senior analyst with Celent.

The problems at AIG stem from the more exotic financial products it offers, including some that insure risky debt and bonds against default. The value of those products have deteriorated amid the downturn in the credit markets over the past year.

A failure by AIG would send shock waves through an already battered financial system because of how many banks and other financial firms that have exposure to AIG through complex insurance contracts.

“It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions,” said Timothy Canova, a professor of international economic law at Chapman University School of Law. “If Lehman Brother’s failure could help trigger AIG’s going down, who knows who AIG’s failure could trigger next.”

If AIG files for bankruptcy, billions of dollars of insurance contracts known as credit default swaps would likely be wiped out. Much of those losses would be absorbed by the companies holding the contracts, which were sold by AIG.

For the three quarters ended in June, AIG itself has lost about $25 billion in the value of its credit default swaps portfolio.

Late Monday night, all three major agencies — Standard & Poor’s, Moody’s Investors Services and Fitch Ratings — cut AIG’s ratings at least two notches. While the new ratings are all still considered investment grade, the downgrades add to the pressure on AIG as it seeks tens of billions of dollars to strengthen its balance sheet.

“Getting some kind of liquidity facility in the next couple of days will help confidence,” Rodney Clark, a credit analyst at S&P, said in an interview.

AIG spokesmen did not return calls seeking comment on the impact of the downgrades. But last month, the company estimated in a regulatory filing that a one-notch downgrade of its long-term senior debt ratings by both S&P and Moody’s would force it to post $13.3 billion in extra collateral.

The need for that extra capital would put a constraint on AIG’s day-to-day liquidity position, which is why the company has been seeking new financing or capital investments.

“While there is a chance the company can work its way through its liquidity problems if it can secure substantial bridge financing, we think this will be challenging to execute it in the current onerous credit environment,” Credit Suisse analyst Thomas Gallagher wrote in a research note to clients.

In its efforts to improve its liquidity, AIG has already received support from the New York governor and state’s insurance regulator. On Monday, Gov. David Paterson said he would support a measure that allows AIG to use $20 billion of assets held by its subsidiaries to provide cash needed to stay in business.

Paterson said Tuesday that New York state officials were taking part in the AIG meeting with the Fed.

“While we do not generally support government intervention in these situations, in this case we do support the Federal Reserve being part of a private-sector effort to stabilize AIG,” New York Attorney General Andrew Cuomo said. “Given AIG’s interconnections, its failure would pose serious hardships to many companies and individuals. The Fed’s leadership and collaboration is therefore essential, and I hope they act soon.”

The Fed on Monday asked Goldman Sachs Group Inc. to work with JPMorgan Chase & Co. about a possible short-term loan to keep AIG in business, said a person familiar with the request who could not speak publicly because talks were still ongoing. The loan could be for about $70 billion, the person said.

Tuesday morning, while announcing fiscal third-quarter earnings, Goldman Sachs Chief Financial Officer David Viniar said during a conference call that he was “not going to comment on rumors about where we are in helping AIG.” He said they are “good important clients” but refused to discuss the matter further.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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