Business

RESCUE

Wall Street has just learned how big is too big to fail.

The stunning decision by the Federal Reserve to lend up to $85 billion to struggling insurance giant American International Group just two days after regulators opted not to toss Lehman Brothers a lifeline is providing the markets with some clues about who’s eligible for a bailout – and more importantly, who’s not.

“If [federal regulators] went into the weekend wanting to test the market’s resolve with Lehman, but turned out unwilling to follow through [with AIG], we’re in worse shape than we were before,” Vincent Rinehart former director of the Federal Reserve and fellow at think tank the American Enterprise Institute told The Post.

The government’s blockbuster move reverses a position the central bank and Treasury Secretary Henry Paulson voiced as recently as this afternoon, when they resisted pleas to step in and rescue the world’s largest insurance company with taxpayer money.

Indeed, with Uncle Sam having already footed the bill for the $200 billion bailout of mortgage giants Fannie Mae and Freddie Mac, the $30 billion backstop involved in the forced sale of Bear Stearns to JPMorgan Chase and multiple bank rescues, Washington began to grow leery of having to open its checkbook once again.

However, the regulators’ tune clearly changed once it was determined that AIG’s failure would have far more calamitous implications for the US economy than the collapse of an investment bank.

That could be bad news for other US companies that are struggling, and have asked the feds for help, including $50 billion for the US auto industry, which is seeking funds to help with its restructuring.

AIG’s problems came to a head late Monday when the three major credit rating agencies downgraded the company’s credit rating, forcing it to put up billions in collateral to companies that trade with the financial unit of the massive insurer.

Shares of AIG plunged 17 percent to close at $3.95 today and cratered further to $2.60 in after-hours as a plan was being hashed out. The company’s stock has fallen 94 percent this year.

Morgan Stanley, acting as Uncle Sam’s adviser, JPMorgan Chase and Goldman Sachs, which advised AIG, and New York Insurance Superintendent Eric Dinallo have spent the past several days attempting to hammering out a rescue.

Multiple plans had been considered to aid AIG, including having Wall Street firms offer funds to help the firm survive.

The Fed bailout was one of a handful of options on the table late last night, including the possibility that AIG be placed into a state-run conservatorship – a sort of bankruptcy that gives AIG more time to resolve its problems and sell assets – while equity is pumped into the company.

mark.decambre@nypost.com