The Fed normally oversees monetary policy and supervision of banks. AIG was seeking the funds as a temporary measure and planned to repay the Fed with the proceeds from asset sales.





And in another blow to AIG, Standard & Poor's Ratings Services it lowered its long-term counterparty rating on AIG to 'A-' from 'AA-' and its short-term counterparty credit rating on AIG to 'A-2' from 'A-1+'.

Standard & Poor's also said that it lowered its counterparty credit and financial strength ratings on most of AIG's insurance operating subsidiaries to 'A+' from 'AA+'. All of these ratings remain on CreditWatch with negative implications, where they were placed on Sept. 12, 2008.

AIG Gets New York State Assistance

Meanwhile, New York State will allow AIG to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer to stay in business, Gov. David Paterson said.

The governor has also asked the head of New York's insurance department to talk with Federal regulators about providing an additional bridge loan to AIG. "AIG still remains financially sound," Paterson said.

The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Paterson explained.

AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets.

Meanwhile, AIG is no longer in talks to receive help from billionaire investor Warren Buffett, CNBC has learned.

Talks about a possible investment by Buffett's Berkshire Hathaway took place Friday and Saturday but have not led to anything and have not resumed.

Shares of AIG fell sharply Monday reports that the insurer had turned to the Federal Reserve for $40 billion in bridge financing to ward off a liquidity crisis and ratings downgrades.

AIG shares have fallen about 80 percent since the start of the year.

Paterson said he had worked with AIG in a bid to help save New York jobs, with the insurer employing 6,000 in Manhattan and 8,600 statewide. He added that the plan was carefully crafted to pose no risk to New York taxpayers.

New York Insurance Superintendent Eric Dinallo is appealing to the federal government on AIG's behalf to provide it additional access to capital, Paterson said.

Huddle in New York

The New York Federal Reserve was hosting meetings Monday on the situation of embattled insurer AIG with representatives of the Treasury Department, financial services firms and state officials, an official said Monday.

"At the request of AIG and a consortium of financial institutions, we are providing premises to discuss the situation," a New York Fed spokesman said.

Outlook: Why the Fed Won't Cut Interest Rates

A source told Reuters the New York Fed has hired Morgan Stanleyto review options regarding AIG. The Fed and the Treasury Department declined to comment.

The up-front cost of insuring $10 million of AIG's debt for five years jumped to $3.05 million from $1.3 million on Friday, in addition to annual payments of $500,000, according to Markit Intraday.

The insurer, which has incurred $18 billion in losses over the past three quarters from guarantees it wrote on mortgage derivatives, was hit on Friday by Standard & Poor's putting the company's credit ratings on negative watch, indicating a possible downgrade. Over the weekend, AIG executives and New York state insurance regulators scrambled to hatch a plan that would boost AIG's liquidity.

Several analysts, in research reports on Monday, warned that the company is unlikely to resemble itself after a much-anticipated restructuring. AIG has been considering "a wide range of options," the company said, including selling off valuable assets.