The Federal Reserve Board said yesterday it has authorized a transaction that will provide American International Group with an additional $37.8 billion in credit on top of the $85 billion already extended.

Explaining the arrangement, the Fed said the Federal Reserve Bank of New York has been authorized to borrow up to $37.8 billion in investment-grade, fixed-income securities from AIG in return for cash collateral.

Securities involved were previously lent by AIG’s U.S. insurance company subsidiaries to third parties, such as banks and investors.

A spokesperson for AIG, Nick Ashooh, said the transaction was different from the $85 billion loan, which at last report AIG had tapped for $61 billion.

He explained that the new credit arrangement provides overnight short-term liquidity to help the company return collateral that investors and other parties had supplied to obtain AIG securities loans.

Under normal conditions, before the current credit crisis, Mr. Ashooh said the company would have been able to relend those securities to other private parties.

The Fed said, “As expected, drawdowns to date under the existing $85 billion New York Fed loan facility have been used, in part, to settle transactions with counterparties returning these third-party securities to AIG.”

This new loan program, the Fed said, “will allow AIG to replenish liquidity used in settling those transactions, while providing enhanced credit protection to the New York Fed and U.S. taxpayers in the form of a security interest in these securities.”

AIG said in an announcement that the securities involved were from its U.S. life insurance subsidiaries.

The borrowings by the New York Fed “will allow AIG to replenish liquidity to the securities lending program on an as-needed basis, while providing possession and control of these third-party securities to the New York Fed,” the AIG announcement said.

The company reported that as of Monday approximately $37.2 billion of securities were subject to loans under AIG’s securities lending program.

Under the lending agreement with the Federal Reserve Bank of New York, the New York Fed will borrow, on an overnight basis, investment grade fixed-income securities from these AIG subsidiaries in return for cash collateral, AIG said.

The company added that it “understands that the New York Fed is prepared to borrow securities to extend AIG’s currently outstanding lending obligations where those obligations are not rolled over or replaced by transactions with other private market participants.”

In reaction to the announcement Standard & Poor’s said it was maintaining a hold on AIG shares.

“It is our understanding the Fed action was necessitated by a decline in the value of collateral backing of a securities lending transaction, reportedly because AIG invested the collateral in mortgage-backed securities that fell in value, making it difficult for AIG to meet a collateral call.

“We view this as troubling and see further risk to AIG’s turnaround plan. We are cutting our target price by $1.50 to $4, assuming further book-value deterioration,” S&P said.

This article updated 10:28 a.m.