In addition, if AIG's book value falls below a certain level, as it seems certain to do, it will trigger default in certain of its debt instruments, say people familiar with the situation.

All of this adds up to a huge headache for the Federal Reserve and Treasury, which have already provided over $150 billion of assistance to AIG.

Talks between the government and AIG are focussed on how the company can swap some of the debt held by the government for equity in AIG.

The problem is that the government's ownership stake cannot exceed its current 79.9 percent, leaving officials to try and find a creative way to transfer value to the US in exchange for AIG reducing its debt so that it can then borrow more from the government to meet its collateral calls.

AIG has borrowed roughly $40 billion from a $60 billion credit facility provided it by the Federal Reserve Bank of New York. If it can find a way to pay that down by swapping equity, it hopes to take it back up to a level that will allow it to meet its collateral and capital calls.