LONDON -(Dow Jones)- Insurance giant American International Group Inc. (AIG) said Wednesday it is bailing out a $2.5 billion structured investment vehicle, or SIV.

The rescue follows similar moves by other SIV managers, including Citigroup Inc. (C) and HSBC Holdings PLC (HBC), as the ongoing credit crisis makes it virtually impossible for the vehicles to fund themselves.

The AIG SIV, Nightingale Finance, is managed by London-based AIG-FP Capital Management Ltd., part of AIG's derivatives arm, AIG Financial Products Corp.

Under the rescue plan, AIG Financial Products will repay Nightingale's senior debt as it matures and keep financing its portfolio of bank debt and asset-backed securities with repurchase agreements, a type of short-term funding.

The plan led Moody's Investors Service to affirm top triple-A and Prime-1 ratings on Nightingale's medium-term notes and commercial paper Wednesday, saying the support would avoid "any realization of current or future mark-to-market losses."

The ratings agency didn't comment on the recovery prospects for Nightingale's $301 million in capital notes - a type of junior debt that cushions senior debtholders against losses. Moody's cut the notes to a junk rating of B3 on Nov. 30, from Baa2.

An AIG spokesman said the company doesn't expect to report net realized losses on the financing facility provided to the SIV.

Vehicles such as Nightingale have struggled to raise financing since investors started shunning their IOUs in August, as concerns grew about potential defaults on the mortgage-backed securities that typically make up about a third of SIVs' portfolio.

At the same time, the market value of SIVs' assets was declining for the same reason, leading to forced liquidations and a scramble by the SIVs' managers to restructure.

SIV managers haven't been obligated to take responsibility for the troubled vehicles, but they face damaging their reputations and angering clients who stand to lose money from liquidations. That reputational risk has prompted most of the banks with SIVs to move them onto their balance sheets, while SIVs managed by hedge fund managers and boutique investment group have for the most part been left to fail.

Shares in AIG have declined about 22% since early October on worries about its four-fold exposure to the troubled U.S. housing market. AIG shares rose $2.40, or 4.6%, to $54.81 on Wednesday.

AIG operates a mortgage lender, a mortgage insurance company, a derivatives unit, and holds residential mortgage-backed securities in its investment portfolio. All of the units have been hit by the faltering U.S. housing market, but the company said it began to back away from housing investments late in 2005, avoiding the worst of the loans.

In November, the financial products division reported $352 million in unrealized market valuation losses on its credit default swap portfolio, and said market valuation continued a steep decline into the fourth quarter.

In December, AIG executives said they didn't expect to actually have to make payments on those credit default swap agreements, but other financial guarantors have since said they expect to realize impairments on the securities.

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By Margot Patrick Of DOW JONES NEWSWIRES

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