The credit crunch hit the financial sector hard again on Thursday as Citigroup and Merrill Lynch said they would buy a total of up to $20bn in auction-rate securities (ARS) and AIG shares plunged amid fears the insurer might need more capital.

The protracted woes of three of the world’s largest financial groups underline the extent of the problems plaguing Wall Street and suggest that, even after a year of huge losses and writedowns, banks and insurers remain under severe pressure.