Oct. 9 (Bloomberg) -- American International Group Inc., the insurer taken over by the government, may access $37.8 billion from the Federal Reserve Bank of New York, in addition to the $85 billion loan that helped it stave off bankruptcy.

AIG can swap as much as $37.8 billion of its ``investment- grade, fixed-income securities'' for cash to ``replenish liquidity'' at the New York-based insurer, the Fed said late yesterday in a statement. AIG spokesman Nicholas Ashooh said the assets were held mainly in U.S. life insurance subsidiaries and declined to say how much of the new program has been used.

``You're in for a dime, you're in for a dollar on this one,'' said David Havens, a credit analyst at UBS AG. ``The core problem is liquidity as opposed to solvency, though as the businesses deteriorate and adverse economic conditions take hold, solvency will also become more of an issue.''

Chief Executive Officer Edward Liddy, appointed by the U.S. to run the firm, has said the $85 billion credit line extended by the U.S. would be enough. AIG ran short on cash after three straight quarterly losses tied to the housing slump totaling more than $18 billion. The company agreed Sept. 16 to hand over a 79.9 percent stake to the U.S. in exchange for the loan.

The Fed's use of emergency powers to expand AIG's lifeline addresses a liquidity squeeze caused by the insurer's securities- lending program, Ashooh said. The firm lost money on investments made using collateral from securities it loaned to third parties, requiring the difference to be made up, he said.

``In cases where people are not rolling over their securities and they want their collateral back, we can now satisfy them,'' Ashooh said. ``This gives us added liquidity until we get to a long-term solution.''

Seeking Buyer

He said ``it's not the hope'' that the Fed is stuck with assets that are worth less than the cash paid for them.

AIG, once the world's largest insurer, is trying to find a buyer for its U.S. life insurance businesses. The company has already tapped $61 billion of its $85 billion credit line, forcing it to accelerate plans for asset sales. Most of that has gone to the other source of AIG's liquidity problems, its credit default swaps business, Ashooh said.

Swaps, the contracts AIG sold to banks and other investors as protection against default, plummeted in value as the mortgage securities they guaranteed declined, causing more than $25 billion in writedowns.

The collapse of the insurer was the subject of Oct. 7 congressional hearings, which triggered criticism of the company for spending $440,000 on a conference at a California beachside resort less than a week after AIG was rescued.

Liddy, 62, said the gathering was planned ``many months'' before the Federal Reserve's loan to AIG.

Standard & Poor's said Oct. 3 it may cut AIG's credit grades because the amount the insurer has drawn down on its credit line is ``much larger'' than anticipated and there's a risk that Liddy won't be able to execute his plan.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: October 9, 2008 01:06 EDT