AIG Bailout Means Drastic About-Face for Feds

Too Big to Fail

Speaking at the White House Monday, Paulson said he "never once" considered it appropriate to use taxpayer dollars to help save Lehman, which he considered a different case from Bear Stearns.

But in the end, AIG's $1 trillion in assets and more than 116,000 employees was just too much to let go under.

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The Federal Reserve said in a statement last night that it had determined that "in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance."

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, asked the Bush administration "to become much more aggressive about addressing the root cause of this entire economic crisis -- namely, the foreclosure crisis. Only when foreclosure rates start to drop significantly will we see home prices begin to level out and our markets regain much-needed stability."

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The financial system is far from out of the woods.

Focus has now shifted to Washington Mutual, the country's largest savings and loan. Could it now be also called too big to fail?

The company's stock has plummeted in the last two weeks as investors worry that the bank has too many bad mortgages and loans on its books.