* Defendants call plaintiff claim absurd, schizophrenic
* Plaintiff says directors ignored CDS risk

NEW YORK - Sixteen one-time American International Group Inc (AIG.N) outside directors asked a federal judge to dismiss a shareholder lawsuit accusing them of ignoring red flags that brought the insurer to the brink of collapse and led to $180 billion of federal bailouts.

In a filing Wednesday night with the federal court in Manhattan, lawyers rejected as absurd on its face the argument that the defendants caused AIG to falsely overstate its financial health, and then authorized stock buybacks at inflated prices.

As a matter of settled law in this court and pure logic, the outside director defendants cannot have relied on their own alleged misstatements, the lawyers said. They called the plaintiff's claim schizophrenic. The defendants include Robert Willumstad, a former AIG chief executive.

A lawyer for the plaintiff, the Louisiana Municipal Police Employees' Retirement System pension fund, did not immediately return a call seeking comment.

The complaint accused the directors of ignoring the potential for catastrophic losses stemming from AIG's exposure to credit default swaps in its financial services unit.

Those losses led to a series of bailouts that left the government with close to an 80 percent stake in AIG, once the world's largest insurer by market value. AIG is now selling assets to repay the government.

The complaint seeks several remedies on behalf of AIG, including restitution and extraordinary equitable relief as appropriate.

AIG shares closed Wednesday at $37.69 on the New York Stock Exchange. The company conducted a 1-for-20 reverse stock split at the end of June.

The case is In re American International Group Inc 2007 Derivative Litigation, U.S. District Court, Southern District of New York (Manhattan), No. 07-10464. (Reporting by Jonathan Stempel; Editing by Derek Caney)

Aig Lawsuit