Greenspan warning as insurance giant tumbles

American International Group, best known here for its sponsorship of Manchester United and the AIG Direct insurance brand, has lost $18.5 billion in the last nine months and seen its shares crash 80 per cent.

In the early hours of this morning it appealed to the Fed for an emergency $40 billion loan, highlighting the extent of its crisis. The company made its pleas as Mr Greenspan warned: "We will see other major financial firms fail."

He described the current chaos in the markets as "a once-in-a-century type of financial crisis" adding that it would inevitably have a significant impact on the global economy.

As the City and Wall Street played the guessing game of who might be next, news broke that AIG was locked in talks with the American government about shoring up its finances. As Wall Street trading opened, AIG's shares crashed by a third.

AIG is the biggest insurance company in the world and employs hundreds of staff in London. In Britain, it is one of the biggest providers of insurance for cars, homes and businesses.

The company grew rapidly during the years of the bull market on Wall Street and in London by insuring the value of bonds based on sub-prime mortgages. As those bonds crashed in value, AIG faced the prospect of massive claims from customers.

Many of the insurance contracts, known as credit default swaps, are yet to expire so AIG can only estimate what the potential losses are. But analysts said the collapse of Lehman Brothers could mean billions of dollars of contracts automatically expiring, triggering heavy claims on AIG.

The insurer wants to persuade the American government to lend it the $40 billion as a "bridging loan" while it sells a mass of its assets to try and shore up its finances. It hopes to repay much of the loan with the proceeds of the sales.

Its case is seen as another big test of the resolve of the Fed, which decided to let Lehman Brothers die after already risking hundreds of billions of taxpayersdollars with guarantees for mortgage giants Freddie Mac, Fannie Mae and Bear Stearns.

Mr Greenspan said the government was unlikely to offer more Bear Stearns-type rescues, saying: "We shouldn't try to protect every single institution. The ordinary cost of financial change has winners and losers."

Much of AIG is highly regarded and would easily find willing buyers.It has raised $20.3 billion in May by selling new shares.

But the company's immediate crisis stems from fears that the credit rating agencies could mark down their view of its creditworthiness. Such a move would mean that companies would be wary of doing business with AIG, leading to its funding drying up.

The crisis was ringing alarm bells in an already nervous market this afternoon. Rohan Walsh, investment manager at Karara Capital said: "The market is very worried about AIG."