The U.S. financial sector appeared to be on the verge of a substantial makeover Sunday as three major institutions were reported to be nearing massive changes, the result of the expanding credit crisis.

According to media reports:

• Investment bank Lehman Brothers may be going bankrupt after weekend efforts to find a buyer failed.
• Insurance company American International Group (AIG) was planning a major restructuring.
• The Bank of America is buying investment bank Merrill Lynch.

All three of the companies at the centre of the storm have been damaged by the related mortgage and credit crises and all three have lost much of their stock market value.

The potential fallout of a Lehman bankruptcy is so great that major U.S. and international banks were working on a plan to cushion the world financial system.

The U.S. Federal Reserve acted late Sunday, announcing an easing of the rules covering emergency loans to financial institutions. Chairman Ben Bernanke announced the changes after a weekend in which government and Wall Street officials tried to find a way to save Lehman Brothers.

The 158-year-old investment bank wasn't named in the statement Bernanke released, but he said that the talks had considered "potential market vulnerabilities in the wake of an unwinding of a major financial institution."

The moves by the U.S. central bank "along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets," he said.

The relaxed borrowing rules may help AIG, which is planning a major restructuring — perhaps involving selling parts of its business — to raise up to $40 billion US to cover real and potential losses it faces on derivatives and subprime mortgages.

Borrowing the money from the Fed was a possibility, the New York Times reported. Without the new money, from public or private coffers, the company could face a credit downgrade and even potential failure.

The Bank of America was negotiating to buy Merrill Lynch for $44 billion to $50 billion, reports said.

The Bank of America was cited in earlier reports as a possible buyer of Lehman Brothers, but decided against the purchase. British bank Barclays PLC was also interested, but also backed away.

With a takeover not possible, financial sources told U.S. media that that Lehman may have to fold.

The stock prices of all three companies have taken a beating, as investors have lost confidence in the firms' ability to manage the financial turmoil.

AIG stock began last week at about $24 a share, and ended at $12.14. Merrill stock closed at $17.05 on Friday, down from $26.73 the previous week. Lehman stock closed at $3.65, down from $16.20 the previous week.

All of the stocks are trading at a fraction of their 52-week high, a measure of the depth of the credit crisis.

AIG peaked at $70.13, Lehman at $67.73 and Merrill at $78.66 in the past year.