Will AIG get Fed bailout — or file bankruptcy?

The fate of American International Group Inc. wobbled today as the giant New York insurer failed to obtain a much-needed $75 billion, and the option of bankruptcy hung in the air.

Speculation whipsawed between two extremes: that the federal government wouldn't help AIG with a bailout and, late in the day, that the federal government would help.

The Federal Reserve was considering a loan that would help AIG get the $75 billion it needs, according to a New York Times report last night.

A collapse of the huge insurer would vastly widen the nation's economic crisis that began with subprime mortgages and spread to the credit markets and banks.

The nation's financial tumult has battered investment banks and brokerages, leading to thousands of job losses on Wall Street, fired chief executive officers, and asset write-downs worth tens of billions of dollars.

An AIG bankruptcy would ripple through the nation's already fragile financial sector and rattle everyday Americans. AIG says in its corporate document that it backs $2.3 trillion in insurance coverage.

Pension funds, mutual funds and other stock investors in AIG would be wiped out with a bankruptcy filing, which an online report by the New York Times said could come as early as tomorrow, if AIG failed to get a huge infusion of cash.

One of the nation's largest holders of AIG shares is the Vanguard Group Inc., the Chester County mutual fund giant, according to Bloomberg News.

"It's bad," said Kent Smetters, associate professor for insurance and risk management at the Wharton School. "But it is not going to be doomsday for the economy, and we are not going to see a Great Depression."

Smetters said AIG "bet the farm" on a product it did not understand. "No company should have been exposed like this," he said.

AIG's biggest problem was an exotic and unregulated form of insurance called credit-default swaps. With them, the firm insured mortgage-backed securities, a type of investment that already has claimed the Bear Stearns Cos. Inc. and Lehman Bros. Holdings Inc. As mortgage defaults rose, so did financial claims on the swaps.

The total value of AIG's credit-default-swap business is $400 billion to $500 billion, according to various published reports.

In an odd twist to the AIG drama, former CEO Hank Greenberg disclosed that he might try a proxy fight or tender offer for AIG through a company he controls, according to a regulatory filing.

AIG shares today fell 21.22 percent, or $1.01, to $3.75 in regular trading on the New York Stock Exchange. They plummeted 61 percent yesterday.

AIG insurance policyholders will face uncertainty with a bankruptcy, although experts said the regulated insurance subsidiaries would be partially insulated from an AIG economic collapse. In severe cases, state guarantee funds could pay off life insurance policyholders. In Pennsylvania, the fund guarantees a maximum of $300,000, state officials said. Tapping guarantee funds could lead to surcharges on other insurance policies, driving up costs for everyone.

"It could be resolved, or it could end up in a bankruptcy," Pennsylvania Insurance Commissioner Joel Ario said in a phone interview of AIG's fate. "Either of those scenarios could happen."

AIG has potentially secured $20 billion in funds by accessing cash in its insurance subsidiaries, including ones in Pennsylvania. But AIG also was seeking a cash infusion from the federal government to reach $75 billion. Credit-rating agencies downgraded AIG's debt yesterday, triggering the cash call.

U.S. Treasury Secretary Henry M. Paulson Jr. has said the financial crisis wouldn't end until the housing slump eased and home prices stabilized.

AIG's Pennsylvania subsidiaries are financially healthy and could aid AIG, Ario said. He was willing to swap cash, or liquid assets, for illiquid assets such as real estate, but he added: "We won't make any deals that won't leave policyholders in the same, or possibly better, position than they are currently."

Ario would not agree to a deal unless AIG secured the entire $75 billion it said it needed. "We wouldn't want to make a deal," he said, "and then not solve the liquidity problem."