American International Group ( AIG - Get Report) won't be raiding its insurance subsidiaries for cash after all. The New York State Insurance Department confirmed Wednesday that the proposed asset swap announced by Gov. David Paterson on Monday is no longer an option following the $85 billion bailout by the Federal Reserve.

"It died last night," said David Neustadt, the department's deputy superintendent for public information. "The asset swap will not now take place."

The death of the plan is good news for policyholders, who were left in the dark about their policies as the National Association of Insurance Commissioners, known as NAIC, announced yesterday afternoon that the insurance commissioners of New York and Pennsylvania were working with AIG. The insurer would have swapped its illiquid assets for its subsidiaries' liquid assets.

Neustadt said they had been in advanced talks over the acceptability of assets that would have been used in the swap. The commissioners had rejected some of the proposed assets during the vetting process, he said. The insurance commissioners had only been discussing a $20 billion asset release, which turned out to be clearly insufficient for AIG's needs. Moves taken by the insurance commissioners were a catalyst for the Fed to take action, Neustadt said.

AIG spokesman Joe Norton said he was unable to comment immediately.

The New York Insurance Department is the regulator for insurance companies based in the state. It had been scrambling to agree with AIG on a way to generate $20 billion in liquidity for the company by using the municipal bonds of subsidiaries.

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Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.