AIG's Uphill Battle

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The New York Federal Reserve Bank has also set up two limited partnerships called Maiden Lane II and Maiden Lane III that have taken on more than $100 billion in asset-backed securities once on the company's books.

Even so, as of its most recent quarterly filing with the Securities & Exchange Commission last fall, AIG and its financial products business had $107.8 billion of commercial and residential mortgage-backed securities and collateralized debt obligations on the books. It also had a sizable securities lending business. Problems with this type of lending have contributed to AIG's financial pressures.

Big Writedown Could Hit Credit Rating

A big writedown of some of those assets could very well force the rating agencies to reconsider AIG's credit ratings, triggering more collateral calls and financial problems for the company. "That's too large to ignore if you're Standard & Poor's (MHP) or Moody's (MCO)," says Ernst Csiszar, insurance industry director for Bridge Strategy Group. "It's a real mess."

From the beginning, AIG has argued that its core insurance businesses are healthy and just need to be broken off from their bad investments in order to thrive. But with employees and customers heading for the exits, that's now looking a lot less certain. And the money that was supposed to repay the government from other asset sales? That's not materializing, either.

Though AIG has been actively trying to divest businesses to raise money to repay the government, with the help of restructuring advisers at Blackstone Capital (BX) and investment bankers, the company has completed only a handful of smaller deals to date. Selling off its Thai credit-card business, life insurance operations in Canada, a stake in a Brazilian financial firm, and Hartford Steam Boiler have raised a total of just $2.8 billion at this point. Ashooh blames AIG's slow asset sales on severe weakness in the broader economy.

The bigger businesses on the block—particularly the company's life insurance business and its Asian operations—have yet to attract an acceptable offer. Bids for the Asian business, AIA, are still expected, says David Monfried, an AIG spokesman. However, "if we don't get full and fair market value for the properties, we simply won't sell them at this time," Monfried says. "This is the worst possible environment in which to be selling these fine businesses." AIG received at least one offer for its life insurance business that was less than half the asking price, according to a person familiar with the bid.

AIG, says Monfried, is in daily contact with the Federal Reserve, and the bank "understands the environment in which we're operating." But some in Washington have criticized the bailout as prolonging the time it takes AIG to sell off assets. "Private capital will wait on the sideline until the government comes up with some cohesive plan with an exit," says one critic.

Unfortunately, that exit seems to be getting further away.

Byrnes is a senior writer for BusinessWeek in New York.