AIG could get up to $37.8 billion more from Fed

— -- Moving to stave off AIG's collapse, the Fed said Wednesday that the Federal Reserve Bank of New York will borrow up to $37.8 billion in investment-grade, fixed-income securities from AIG in return for cash collateral.

The Fed said that the new loan program "will allow AIG to replenish liquidity" used to settle earlier transactions with trading partners, while "providing enhanced credit protection" to taxpayers by holding AIG securities. The Fed also will charge interest on the transactions.

"This gives us the liquidity and flexibility we need to work on long-term solutions," says AIG spokesman Nick Ashooh.

The new loan comes after AIG said last week that it had already spent $61 billion of the first loan. CEO Edward Liddy told analysts that the money went to help AIG's securities lending business and finance other operations.

As the financial crisis worsened last month, the Fed made its first loan to AIG so it could ward off collapse and settle billions of dollars in payments to banks and other trading partners on high-risk insurance contracts.

AIG will sell assets to repay the two-year loan.

A failure of AIG could lead to $180 billion in losses and write-downs in financial markets worldwide on corporate loans, residential mortgages and debt-related investments, according to Hank Calenti of RBC Capital Markets.

Gary Ransom, an insurance industry analyst at Fox-Pitt Kelton, says the new loan program differs from the initial loan because the Federal Reserve Bank of New York will receive securities from AIG.

"Companies that borrowed stock from AIG, presumably to sell short, are putting the stock back to them for the return of (cash) collateral," Ransom says.

Ransom says the cash that AIG received from the borrowed stock was invested in "various securities that presumably have gone down in value," leaving the battered insurer without enough liquidity to pay back companies without selling the securities at a loss.