According to Bloomberg, the Federal Reserve concluded that "a disorderly failure of AIG could add to already significant levels of financial market fragility."
At this point, the government has taken an entirely different approach to the troubles at Lehman (NYSE: LEH), Bear Stearns, Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE). The aid it has given to AIG broke a rule set earlier in the week. That is that the Fed and Treasury would not give financial assistance to troubled financial firms in the name of keeping them in business. The global banking systems would have to sort out its problems on its own.
The U.S. authorities will make the case that AIG was "too big to fail." No one will ever know whether that is true. Would the insurance company's demise lead to a partial collapse of the financial system? Who will ever be able to figure that out?
It is not unfair for the employees and shareholders to ask what happened to their lifeline.
The fact is that the Fed has the power to do what it wants. Whether that is arbitrary or not, fair or not, it is a fact of life.
Human judgment, not free markets are guiding the financial system now.
Douglas A. McIntyre is an editor at 247wallst.com.