Crisis on Wall Street: stocks plunge 440 points despite $85 billion bailout for A.I.G.

Despite an $85 billion federal bailout for the world's largest insurance company, the stock market took a nosedive on Wednesday, plunging 440 points as investors feared the worse.

The U.S. government Tuesday night rescued ailing American International Group, the world's largest insurance company, with an $85 billion loan. It's the third time this week that a major financial institution has teetered on the brink of collapse.

The bailout, provided by the Federal Reserve, would give the government control of AIG, just two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac.

The New York Times called the Fed's move "the most radical intervention in private business in the central bank's history."

Treasury Secretary Henry Paulson Jr. and Fed Chairman Ben Bernanke met with congressional leaders last night to brief them on the plan, which "puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with," according to the Times.

A.I.G. is so large that the government apparently feared that the insurance company's failure would have severe repercussions throughout the world financial markets. But the idea of a taxpayer-supported bailout would likely have implications on the presidential race as well.

Before the rescue plan was announced, Republican presidential candidate John McCain said he did not support a bailout of A.I.G., and rival Democratic vice presidential nominee Joe Biden agreed in a separate interview.

But the New York Times, in an editorial published today, criticized Republican deregulation policies for contributing to the financial crisis. "The regulatory failure is rooted in a markets-are-good-government-is-bad ideology that has been ascendant as long as Mr. McCain has been in Washington and championed by his own party," the Times wrote.

Democrats have portrayed the collapse of the financial sector as evidence that the G.O.P.'s anti-regulatory philosophy has failed. "I mean this is one more affirmation that the lack of regulation has caused serious problems," said Rep. Barney Frank (D-MA), the chairman of the House Financial Services Committee. Frank said "the private market screwed itself up and they need the government to come help them unscrew it." 

House Speaker Nancy Pelosi (D-CA) criticized the plan, saying the $85 billion rescue was "just too enormous for the American people to guarantee."

The Times called the intervention "a remarkable turnaround by the Bush administration and Mr. Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America."

But it's not the first time the government has intervened to save a troubled financial institution. Just two weeks ago, the U.S. took over Fannie Mae and Freddie Mac, and earlier this year, the government bailed out investment bank Bear Stearns by orchestrating a sale to JPMorgan Chase. The cost to taxpayers for that bailout: $29 billion.

As part of the A.I.G. rescue deal, it's new CEO Robert Willumstad, who started three months ago, will be replaced by Edward Liddy, the former chairman of the Allstate Corporation, the Wall Street Journal reported. But Willumstad could receive an exit package worth as much as $8.7 million, according to the New York Times.

"AIG's bailout caps a tumultuous 10 days that have remade the American financial system," according to the Journal. "In that time, the government has engineered rescues that insert it deep into the housing and insurance industries, while Wall Street has watched two of its last four big independent brokerage firms exit the scene."