Fed Chooses Morgan Stanley to Drum Up Aig Rescue Plan

The insurance giant AIG went cap in hand to the Federal Reserve to plead for temporary funds of up to $40bn (£22bn) yesterday as it made urgent efforts to avoid following Lehman Brothers into financial oblivion.

The Federal Reserve appointed Morgan Stanley to look at all options for the troubled insurer and unconfirmed reports last night suggested that the central bank was pressuring JP Morgan and Goldman Sachs to step forward with loans to keep the insurer afloat.

AIG, which employs 106,000 people, has lost billions on bad investments and is at risk of suffering a downgrade in its credit rating which would endanger its ability to provide credible insurance. Its shares had collapsed 60% by the end of the day, diving by $7.38 to $4.76.

Making desperate attempts to shore up the 89-year-old company, AIG's executives are looking for buyers for large chunks of the group including its aircraft leasing arm and its US car finance business.

The company approached the world's richest man, Warren Buffett, but talks with the Nebraska-based tycoon appeared to be short lived.

The governor of New York state, David Paterson, attempted to ease AIG's ability to raise money by granting an opt out from certain insurance laws so that the group could dip into its regulated subsidiaries' reserves to raise some $20bn.

"We think we can allow them to go into their own subsidiaries to grant a bridging loan to themselves to access $20bn," said Paterson, who suggested this could make it more viable for white knights to swoop in with further capital.

The New York-based firm, which is shirt sponsor to Manchester United, was built over a 30-year period by veteran insurance boss Hank Greenberg who retired in an accounting scandal in 2005. More than four million people in Britain have policies with AIG, but few will realize it. The company is the leader in "white-labeled" insurance cover sold under several household brands including Argos, the AA, Boots, Comet and Sainsbury's.

The New York Times reported that sources close to AIG fear the company could go out of business within 48 to 72 hours if Standard & Poor's makes good on a threat to downgrade its ratings.

AIG is far from the only major US company engaged in a last-ditch fight for survival. Shares in the Seattle-based savings and loans bank Washington Mutual slumped by 15% on fears that it faces catastrophic defaults on mortgages. Another bank, Wachovia, faces similar issues arising from its acquisition of a large mortgage lender, Golden West Financial, in 2006.