AIG shrs plunge as crisis mounts, takeover mulled

By Lilla Zuill and Jonathan Stempel

NEW YORK (Reuters) - American International Group Inc (AIG.N: Quote) 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.