American International Group Inc., the largest U.S. insurer by assets, has been given special permission to access $20 billion of capital in its subsidiaries to free up liquidity, Gov. David Paterson of New York said.

The permission buys AIG time to negotiate for help from the Federal Reserve Board, Gov. Paterson said Monday at a press conference. AIG's shares closed down 61%.

Meanwhile, late Monday the Wall Street Journal reported that the Federal Reserve on Monday asked Goldman Sachs Group Inc. and JPMorgan Chase & Co. to help make $70 billion to $75 billion in loans available to the company, according to people familiar with the situation.

Robert Willumstad, AIG's chief executive officer, is racing to raise cash to forestall credit rating downgrades on further writedowns tied to derivative contracts backing $57.8 billion of subprime mortgage securities.

The New York insurer may need to raise $20 billion of capital and sell $20 billion of assets, people familiar with its plans said.

AIG's prospects dimmed Monday when Lehman Brothers sought bankruptcy protection after failing to find new funds or a buyer. Joshua Shanker, a Citigroup Inc. analyst, wrote in a note issued Monday that the insurer may report writedowns of $30 billion for this quarter, resulting in its "worst quarter yet," if Lehman's bankruptcy leads to distressed sales of mortgage assets, providing lower market values for AIG's holdings.

He downgraded AIG's stock to "hold," from "buy."

Gov. Paterson said the insurer "needs immediate access to capital" and will be able to swap illiquid assets to free up holdings at its subsidiaries. Each time AIG uses assets as collateral for cash loans, the New York Insurance Department will examine the transaction to protect policyholders, he said. "We have seen some of the companies that serve as the bedrock of our financial system unraveling before our eyes," Gov. Paterson said.

AIG and a group of banking companies had asked for a meeting Monday with the Federal Reserve Bank of New York to discuss the company's position, a spokesman for the New York Fed said. New York Fed President Timothy Geithner and New York Insurance Superintendent Eric Dinallo led the meeting. Treasury Department officials were also at the gathering.

Treasury Secretary Henry Paulson said the negotiations do not involve a loan from the government.

"What's going on in New York is a private sector effort, again, focused on dealing with an important issue that's, I think, important for the financial system to work on right now."

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