New York Gov. David Paterson, D, said today during a press conference that New York regulators will let American International Group Inc. use $20 billion in assets held by subsidiaries as collateral so that it can borrow cash to fund operations.

New York Insurance Superintendent Eric Dinallo is asking the Federal Reserve Bank of New York to help AIG, New York, face its current liquidity challenges, Paterson said.

“AIG still remains financially sound,” Paterson said.

But Paterson said he acted after AIG approached the state for help.

Some sources are saying the Federal Reserve Board reacted to the Dinallo visit by asking units of Goldman Sachs Group Inc., New York, and J.P. Morgan Chase & Company, New York, to arrange up to $75 billion in loans for AIG.

A representative for AIG declined to comment on the Paterson press conference or the speculation about efforts to look for capital.

Under a headline, “the strength to be there,” AIG’s commercial insurance unit has sent agents and brokers a document saying that the challenges facing AIG Commercial Insurance’s parent company do not affect AIG Commercial’s capital position.”

“Liquidity of AIG Commercial Insurance remains very strong,” the unit says.

The price of AIG shares fell 46% last week, to $12.14 per share.

Today, the price of AIG shares fell below $4 before noon, briefly rose above $7 after Paterson spoke, and now stands at about $5.52.

Standard & Poor’s Ratings Services, New York, warned Friday that it could possibly cut the ratings of AIG and some operating companies as much as 3 notches due to concerns about the company’s ability to handle losses on mortgage-related assets.

“We believe that AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements, which are significantly greater than the expected cash losses on the mortgage-related assets,” S&P credit analyst Rodney Clark says in a statement accompanying the Friday announcement. “However, additional market value losses will place some strain on the company’s resources. Given the movement in the share price and credit spreads, we now believe AIG’s potential access to the capital market may be more restricted in the short term.”

This evening, S&P went ahead with cutting its long-term counterparty rating on AIG to A minus, from AA minus.

Fitch Ratings, New York, cut its long-term issuer default rating on AIG to A, from AA minus, and A.M Best Company, Oldwick N.J., changed its issuer credit rating on AIG to “bbb,” from “a plus.”

In addition to seeking temporary financing, AIG could raise cash by selling assets, analysts say.

CNBC is reporting that AIG also has been talking to Warren Buffett.

During today’s press conference, Paterson criticized federal regulators, talked about the effects of the housing loan crisis on his state, and noted that 3 of New York’s top 5 investment banks – Bear Stearns & Company Inc., New York; Lehman Brothers Inc., New York; and Merrill Lynch & Company Inc., New York — have failed or lost their independence in the past few month.

“This is a very serious situation,” Paterson said. “The people who are paying the price are the workers.”

Paterson said the financial crisis has resulted from a lack of transparency in the balance sheets of investment banks.

The investment banks “were acting outside the perusal of any supervisory body,” Paterson said.

New York’s decision to let AIG use insurance company assets as collateral “will help,” said an insurance industry analyst who requested anonymity. “This is all about liquidity.”

AIG already has $21 billion in cash at the corporate level and $1 trillion in total assets, the analyst said.

The move to get access to more cash “is all about being able to show S&P it can post collateral to counterparties” of credit default swaps, the analyst said.

AIG customers used the credit default swaps to insure against the risk that issuers of mortgage-backed securities would default on their obligations.

In an investment note sent early Monday, Andrew Kligerman and Julie Oh, securities analysts at UBS Investment Research, New York, are still calling AIG a buy, although they have lowered the 12-month price target and earnings-per-share projections.

“Even post any rating agency downgrades, we think AIG has sufficient cash and collateral to meet near-term liquidity/capital needs without raising equity,” the analysts write in the note.

They also predicted that AIG’s Hurricane Ike losses would be “manageable,” at between $175 million to $475 million.

At one point this evening, the first story listed on Drudge Report was “Firefight Switches to AIG.”

Jim Cramer, a former hedge fund manager and host of CNBC’s “Mad Money,” told viewers of his show, “This would be a tragedy if they just let this company fail…. AIG is too big to fail.”

On a Yahoo AIG stock message board, a fixed annuity holder started a discussion about what might happen to the holder of a fixed annuity if the issuing insurer failed.