Shares of big insurer AIG continue free fall

Shares of American International Group Inc. tumbled Monday amid concern the world's largest insurer could need up to $40 billion to shore up its balance sheet.

Shares of AIG fell $7.38, or 60.8 percent, to $4.76, after closing Friday at $12.14. The shares plunged 45 percent last week amid concerns in the financial sector.

The insurer will be allowed to lend itself $20 billion of assets held by its subsidiaries, said New York Gov. David Paterson Monday. Shares had been down as much as 71 percent to $3.50 before Paterson's statement.

AIG is also discussing options with outside parties to shore up its business.

Citi Investment Research analyst Joshua Shanker on Monday downgraded the stock to "Hold" from "Buy," and lowered his price target on the insurer to $14 from $25.50.

"We believe AIG will survive, but we have little indication of how many business lines will ultimately need to be sold and how dilutive to shareholders' future capital raising efforts will be," Shanker wrote in a note to clients.

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AIG needed capital to help avoid a credit rating downgrade, which would make it more expensive for AIG to raise money. AIG has already raised $20 billion in new capital this year.

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The insurer was reportedly in "rescue" talks with Warren Buffett's Berkshire Hathaway Inc.

The company has said it is exploring all options to help bolster a balance sheet battered by a downturn in the credit and mortgage markets, that have led to losses totaling $25 billion in the value of credit default swaps — or default protection for bondholders — and about $15 billion on other investments, such as mortgage-backed securities, which are bonds backed by a pool of mortgages.

News of AIG's struggles come as investment bank Lehman Brothers Holdings Inc. said it was filing for bankruptcy protection and Bank of America Corp. said it will buy Merrill Lynch & Co. in an all-stock deal originally valued at $50 billion.