The shares of insurer American International Group Inc (AIG) were in free fall, dropping 70 per cent at the open amid intensified fears of bankruptcy.

The shares of AIG, once the world's largest insurance company, dropped 70 per cent to $1.31, one day after a drop of over 60 percent.

AIG's share price has fallen over 94 per cent to less than $23 this month, with the reporting over $13.2 billion in losses in the first six months.

With Lehman Brothers suffering a major decline in value and share price, potential investors started comparing the kinds of securities held by AIG to those held by Lehman. They found that AIG had valued their Alt-A and sub-prime mortgage-backed securities at 1.7 to 2.0 times that of Lehman's, for what Lehman officials called similar securities.

Last weekend, AIG announced it was mulling a sale of its aircraft leasing division, International Lease Finance Corporation, in a bid to raise necessary capital to keep the company afloat.

Media reports indicate that AIG is currently scrambling to come up with around $40 billion in capital to stave off a downgrade to its financial strength ratings, which in turn could cause a greater downturn in AIG's fortunes.

Standard and Poor's rating agency put out an advisory saying that it believed ILFC, AIG's airline leasing unit, is probably the most likely asset to be sold, though they aren't very optimistic about AIG being able to fully resolve its mortgage issues.

SP& has therefore lowered its 12-month target price to $8 from $20, assuming AIG shares trade at a deeper discount to book value. It has recommended selling above its target price.

Along the same lines, Moody's Investors Service axed AIG's ratings two notches to "A2" from "Aa3," while Fitch cut its rating two notches to "A" from "AA-minus." Those ratings are barely a notch above that of Standard and Poors.

Analysts say this is only the latest bad news on Wall Street, which is trying to recover from the nightmares of Lehman Brothers and Merrill Lynch which happened only days ago. However, they caution that a number of people fear that if AIG were to fall, it would be even more catastrophic than anything that market has had to go through till now. Just the massive size of AIG's balance sheet, relationships with bank and dealings with other financial counterparties suggests systemic risk beyond Lehman's.

Market sources point out that the downgrades only add to the woes of AIG Chief Executive Robert Willumstad and his endeavours to raise cash. AIG took hits to the tune of $18 billion in the last three quarters, linked to guarantees it wrote on mortgage-linked derivatives.

Reuters carried a report qupting Credit Suisse analyst Thomas Gallagher as saying that though there is a change that AIG could work its way out of the liquidity problems if it manages to secure substantial bridge financing, ''we think this will be challenging to execute it in the current onerous credit environment."

Regulators at the state Insurance Department are facilitating a deal with AIG to allow the company to generate $20 billion to stave off its liquidity problem.  Under the deal, AIG would be allowed to take $20 billion in assets from its insurance subsidiaries, and use them as collateral to raise liquid cash to stave off impacts of a potential ratings downgrade from ratings firm Standard & Poor's, which has downgraded its ratings of AIG. New York Governor David Patterson said that no taxpayer dollars were involved, and this was not a ''government bailout''.

''We are simply giving AIG, in effect, the ability to provide for a bridge loan to itself'', he said.

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