SAN FRANCISCO (KCBS/AP)  -- With stocks falling despite the huge infusion of cash for insurance giant AIG, Rep. Ellen Tauscher, who once sat on the New York Stock Exchange, said Congress needs to review what is quickly becoming a series of federal takeovers on Wall Street.

The federal government agreed to inject $85 billion of taxpayer money into American International Group in exchange for an 80 percent stake in one of the world's largest insurers. In the most far-reaching private sector intervention by the Federal Reserve, the government also assumed the right to kick out top managers.

Wall Street had feared that the insurer, which has lost billions in the risky business of insuring against bond defaults, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

  KCBS' Holly Quan reports

Lehman, after filing for bankruptcy protection on Monday, sold its North American investment banking and trading operations to Barclays, Britain's third-largest bank, on Tuesday for the bargain price of $250 million.

AIG would certainly not be the last government rescue, said Tauscher, an East Bay Democrat who was an investment banker before seeking public office.

“This isn’t just Bear Stearns. This isn’t just Merrill Lynch. This isn’t just AIG,” she told KCBS reporter Holly Quan. “The globalized financial network has a virus and we’ve got to understand how to deal with it in a comprehensive way.”

AIG said it will repay the money in full with proceeds from the sales of some of its assets. It will be up to the company to decide which assets to sell and the timing. The government does, however, have veto power.

Tauscher feared the government would run out of money without coordinated, judicious action to save the financial system. She blamed the Bush administration for under-funding the SEC and letting the markets run wild without appropriate oversight.

The White House said it backed the Fed's decision Tuesday. Hearings in the House Financial Services committee could begin as soon as next week.

The government's move was similar to its bailout of Sept. 7 of mortgage giants Fannie Mae and Freddie Mac, where the Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke.

The Fed said it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

The decision to help AIG marked a reversal for the government from the weekend, when it refused to use taxpayer money to bail out Lehman Brothers Holdings Inc. Lehman, which filed for bankruptcy protection Monday, collapsed under the weight of mounting losses related to its real estate holdings.

(jro)