AIG shrs plunge as crisis mounts, takeover mulled

By Lilla Zuill and Jonathan Stempel

NEW YORK (Reuters) - American International Group Inc (AIG.N) shares sank 48 percent on a report that regulators might take control of the giant insurer, though a U.S. government source said federal agencies do not have legal authority to put AIG into a conservatorship.

Bloomberg News reported the government was mulling a conservatorship, citing two people briefed on the negotiations. AIG has been battered by losses on mortgages in its securities portfolio.

The U.S. official told Reuters on Tuesday no federal agency has the authority to institute a conservatorship. Insurance companies are typically regulated by states, not by U.S. agencies, so the legal authority for a conservatorship doesn't rest with federal authorities, the source said.

AIG, in a statement, did not address the report, but said it is trying to boost short-term liquidity, and that its plans will not reduce capital at any unit or tap into Asian operations for liquidity. It said its operating units are operating normally and are "fully capable" of paying claims.

The Federal Reserve and the U.S. Treasury Department were not immediately available for comment.

"This is not good," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. "It puts more strain on our taxpayers, more strain on our government, puts us more in debt, and what's next? But they can't let it fail, there's no way. It would be mayhem."

AIG shares slid to $1.95 in after-hours trading. The stock down 21 percent at $3.75 on the New York Stock Exchange on volume topping 1.1 billion shares.

The insurer's credit rating was cut Monday by Standard & Poor's, Moody's Investors Service and Fitch Ratings, heightening concern it might file for bankruptcy, and cause more turmoil in global markets.

"They're too big to fail," Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York, said of AIG. "It would be much more of a disorderly event if it went bankrupt than it was with Lehman."

AIG has hired the law firm Weil, Gotshal & Manges LLP, which is also handling Lehman's bankruptcy, the New York Times reported on its website on Tuesday.

AIG is the latest company to be convulsed by a mortgage and credit crisis. Lehman Brothers Holdings Inc LEH.P filed for bankruptcy protection and Merrill Lynch & Co MER.N agreed to sell itself to Bank of America Corp (BAC.N) this week.

GREENBERG WARNS OF SYSTEMIC RISKS

Last week, the government put troubled mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) into a conservatorship, where their regulator assumed control until their businesses were restored to health.

That arrangement allowed their stock to keep trading, but put common shareholders last in line to recover on claims.

In a Tuesday regulatory filing, former AIG Chairman Maurice "Hank" Greenberg's investment firm C.V. Starr & Co said it was considering a bid for control of the company through a buyout.