The reinvention of the U.S. financial landscape continued Tuesday night and Wednesday morning, with the U.S. government seizing control of its third large financial corporation Tuesday evening. The Federal Reserve announced Tuesday evening that it had, for all intents and purposes, taken over ailing insurer American International Group (AIG) -- after earlier refusing to assist Lehman Brothers Holdings Inc. (LEH), which was forced into bankruptcy on Monday. See the full Fed statement. Under the plan, the Fed will provide a bridge loan to AIG of up to $85 billion, a move that will likely prevent further downgrades to the insurer and keep it from bringing forth an unwinding of much of the hidden, huge and unregulated credit-default swap marketplace. The terms of the funding are onerous, however, to say the least; the loan comes with a rate of three-month LIBOR plus 850 basis points, and the government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders. The $85 billion credit facility is collateralized by AIG's entire asset base, essentially, providing overcollateralization that the Fed said will protect taxpayer interests. The insurer will begin what the Fed called an "orderly" sale of its assets as well, making the government takeover akin to a bankruptcy filing without the actual bankruptcy. Most focused on a likely sale of the insurer's majority stake in reinsurer Transatlantic Holdings (TRH), as well as the company's aircraft-leasing business as key sales likely to be pursued in order to repay the loan within the two year horizon set by the government. For its part, AIG said that it would not reduce capital at any of its subsidiaries or tap into Asian operations for liquidity; the insurer, echoing Lehman, said its subsidiaries will continue to operate normally. (Although, as with Lehman, it's tough to believe that.) The Fed said 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." In other words, allowing AIG to fail would have lead to a more costly outcome than bailing the company out. AIG sold banks and other investors CDS protection on $441 billion of fixed-income assets, including $57.8 billion in subprime-mortgage related securities. There are likely very few firms with this much exposure into the CDS market — and ratings downgrades can trigger collateral calls from investors, which would in turn likely lead to a massive counterparty default. All of which has left financial markets more uncertain than ever; while the Lehman failure rocked markets worldwide, most pundits saw the move as a signal the government was going to allow financial markets to right themselves. Now what should they think? "Is the U.S. going overboard on bailouts?" screamed a headline in the LA Times Wednesday morning. Others suggested to HW that the government's pick-and-choose approach is leaving markets more uncertain than ever, and early trading Wednesday in the U.S. equity markets certainly illustrated that point: the Dow Jones Industrial Average had fallen below 11,000 to 10,909.29, off 1.35 percent, by the time this story was published. Sentiment among HW's key sources in the market was mixed; most recognized the threat AIG posed, but others lamented what one source characterized as "strong and credible proof" that markets clearly are not as free as most believe. "The people who declined to regulate commodities, derivatives, lending to people with no ability to pay, short selling, and commodities speculation are pretty much the same people," said one source, an ABS analyst who asked not to be named in this story. "They claim free markets, but it's really the domination of money over common sense." Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.