Silence was the name of the game at American International Group (AIG) Monday, although expectations abounded that the largest insurance company would soon announce some sort of restructuring that would include asset sales as it looks to shore up capital.

Shares of AIG closed down Monday at $4.76, marking a nearly 61% decline or $7.38, after the company said Sunday it was reviewing its operations and reports surfaced that the New York insurer could seek as much as $40 billion in emergency funds, perhaps by the Federal Reserve.

AIG’s woes come in the wake of a historic weekend for the financial markets in which Lehman Brothers was forced to file for bankruptcy protection and Bank of America (BAC) made a surprise bid for Merrill Lynch (MER). The government has been active in the financial sector this year, having played a hand in JPMorgan’s purchase of Bear Stearns in March and orchestrated the recent bailout of Fannie Mae (FNM) and Freddie Mac (FRE).

During a press conference Monday,  New York Governor David Paterson said AIG remains financially sound and that he  instructed the New York  Superintendent of Insurance Eric Dinallo to provide the authorization for AIG to access $20 billion of assets through subsidiaries for the purpose of hosting these assets as collateral to provide liquid cash in order to run the day-to-day operations of the parent company. 

Paterson said it would mark a change in the normal regulations but he said its “sound judgment.” He also noted that it’s not a bailout and tax payers would not be involved.

Both The Wall Street Journal and the New York Times reported Monday that AIG was looking to raise the funds to help prevent a downgrade of its credit rating, which would make it harder for the firm to raise capital. AIG has already raised $20 billion this year.  The Wall Street Journal also reported that AIG turned down a capital infusion from a group of private-equity firms because it would give the PE firms control of AIG. Monday afternoon the Wall Street Journal, citing people familiar with the matter, said the Federal Reserve asked Goldman Sachs (GS) and JP Morgan Chase (JPM) to help make $70 billion to $75 billion in loans available to AIG. 

“From an investor perspective, for them to come out and give specifics of the restructuring…I think that will be very calming,” said Michael Paisan, an analyst at Stifel Nicolaus & Co. “This is a very irrational market. Fear and inactivity is what rules the day and by saying nothing everyone assumes the worst. Clearly the stock is priced for insolvency.”  Shares of AIG traded down as much as 61% Monday and reached a new 52-week low. Last week AIG fell $10.20, or 45.7%. As of last week, it hit the lowest level since 1993, according to Dow Jones Newswires

Officials at AIG weren’t immediately available to comment. Analysts don’t think AIG will make an announcement until it has all of its restructuring plans in place.

“This isn’t like Lehman where you can get a bunch of people in the room to see if it will give them capital,” said Paisan. “They have to deal with the insurance regulator and rating agencies. There’s clearly a lot of constituencies that need to be addressed.”

At the heart of AIG’s woes is the potential cut in its credit rating due to the complex structured investments it has on its balance sheet. That would create turmoil for the New York insurer, which would have a much harder time raising capital. The most likely scenario, said analysts, is for AIG to sell assets including its aircraft leasing unit, personal auto insurance business, reinsurance unit and asset-management business. Sales of those assets could get the company around $20 billion, giving it much needed breathing room but not enough capital.

“Asset sales gives them what they want most, which is time,” said Clifford Gallant, an analyst at Keefe, Bruyette & Woods. “They need time to figure out the markets.”

According to analysts, AIG’s businesses that aren’t tied to its balance sheet would do well on their own and could draw a lot of interest from suitors. One potential suitor being bandied about is Warren Buffett, who has insurance holdings in Berkshire Hathaway (BRK.A).

“Warren Buffett has a very large personal auto business, and if he looks to add scale to that business, this is a good way to add scale,” said Paisan of Stifel, noting that Buffett could also look at AIG’s reinsurance business and could move to provide some sort of bridge loan or capital infusion.

But with AIG’s stock trading at about two-fifths of Friday's closing level, concerns reverberate that the company could share a similar fate as Bear Stearns, Lehman Brothers, Fannie Mae (FNM) and Freddie Mac (FRE). While six months ago, one could make the argument that AIG is "too big to fail," analysts said that is no longer the case.

Paisan noted, however, that insolvency is “highly unlikely.”