AIG officials are reportedly seeking an emergency bridge loan of $40 billion from the Federal Reserve Board in order to avoid a devastating ratings downgrade that could trigger a potential insolvency.

Over the weekend, the insurer has been working on a three-part plan involving asset sales, shifting regulated capital from insurance operations to the holding company, and working with private equity investors, said a person familiar with the negotiations.

AIG's board is considering the carrier's options after additional weekend meetings with New York insurance department officials to find a way for the carrier to avoid a downgrade and survive the subprime-generated financial market tsunami that has already forced Lehman Brothers to seek bankruptcy protection this morning.

The discussions followed Friday's announcement by S&P that because of the increasing likelihood that credit swaps involving AIG would force the carrier to pay counterparties, it wanted AIG to increase its capital.

S&P cited the $18 billion in losses over the past three quarters from credit swaps AIG wrote to insure mortgage-backed securities that included subprime loans, which have been deteriorating in value.

AIG reported $13.2 billion in losses in the first six months of 2008, largely owing to declining values in mortgage-related securities held in its investment portfolio and collateralized debt obligations it owns.

Ratings downgrades could force AIG to post up to $14.5 billion more in collateral, according to a regulatory filing last month.

Cuts in ratings could also be severely detrimental to AIG's commercial insurance business, since some policies carry clauses that nullify a contract in the event of downgrades below a certain level.

As of the most recent quarter, AIG had $20 billion of subprime mortgages marked at 69 cents on the dollar, and $24 billion in Alt-A securities valued at 67 cents on the dollar.

AIG--until recently the world's biggest insurer by market capitalization--has been attempting to hammer out an emergency strategic plan after its shares fell nearly 50 percent last week on fears it faced a liquidity crisis.

AIG stock opened at $5.08 per share, down 41 percent from its stock price Friday.

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AIG Considers Emergency Funding Options, With Rating Downgrade Looming

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