Gov't bailout of AIG seen more likely

AIG's failure could open the ugliest chapter yet of the financial meltdown.

"The glimmer of hope has turned into a ray of hope," said the person, who asked not to be named because of the sensitive nature of the talks to help American International Group Inc.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with members of Congress to brief them on options the government is considering. The meeting ended without Bernanke and Paulson commenting.

Hoping to stave off what would be the ugliest chapter of the financial meltdown, AIG executives huddled with Fed officials and representatives from top banks at the New York Fed in downtown Manhattan to find the cash the huge insurer needs to stay in business.

One solution: A plan to have the government provide financial backing to ensure that AIG could secure a short-term loan from banks worth up to $100 billion to stay out of bankruptcy court, the person, who had direct knowledge of the talks, said.

He said the discussions had stalled because AIG did not have enough collateral to obtain a loan of that size. Both sides were trying to figure out how to close the gap between the amount AIG needs and the amount of collateral it has.

The person said it was increasingly likely the Fed would step in with taxpayer money.