AIG Downgraded, Faces Cash Crunch.

UPDATE: AIG Ratings Cut by S&P and Moody's. Firms moves to raise capital otherwise they may be forced to file for bankruptcy later this week.

AIG is suffering a severe cash crunch as rating agencies cut the firm's credit ratings, forcing the firm to raise $14.5 billion to cover its obligations.

From the Wall Street Journal: With AIG now tottering, a crisis that began with falling home prices and went on to engulf Wall Street has reached one of the world's largest insurance companies, threatening to intensify the financial storm and greatly complicate the government's efforts to contain it. The company, whose stock fell 61% yesterday, is such a big player in insuring risk for institutions around the world that its failure could shake the global financial system.

AIG has been scrambling to raise as much as $75 billion to weather the crisis, and people close to the situation said that if the insurer doesn't secure fresh funding by Wednesday, it may have no choice but to opt for a bankruptcy-court filing.

The Fed is currently trying to have Goldman Sachs and JP Morgan Chase extend a $70 billion credit facility to help prop up AIG according to people familiar with the situation. This comes on the heels of AIG's stock sliding more than 60% on Monday.

WSJ: AIG Faces Cash Crisis As Stock Dives 61%

Tomorrow will be a big day for the market. Not only is AIG under the gun but traders fear that a domino effect could take place.

AIG was seeking help from the Fed but one problem that arises is that the Fed is really only to supposed to assist banks and not insurers therefore there are limitations as to what kind of help can be offered. At this point, Goldman and JP Morgan may have to come to the rescue.

From Bloomberg, with respect to the actual downgrades...

AIG Ratings Cut

S&P lowered AIG's long-term counterparty rating three grades to A- from AA-, citing a ``combination of reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses.''

The ratings assessor also lowered AIG's short-term counterparty credit rating by two levels to A-2 from the top A-1+ rating, and cut its counterparty credit and financial strength ratings on most of AIG's insurance operating subsidiaries by three notches to A+ from AA+. The ratings remain on watch for a possible further downgrade, S&P said.

AIG's senior unsecured debt rating was downgraded by Moody's to A2 from Aa3. Moody's said in a statement that its decision was made ``in light of the continuing deterioration in the U.S. housing market and the consequent impact on the group's liquidity and capital position due to its related investment and derivative exposures.'' Moody's placed AIG's long-term and Prime-1 short- term ratings on review for possible downgrades.