(Washington, D.C. ; Right Commentary) The U.S. Federal Reserve Board reversed course Tuesday night and agreed to an $85 billion bailout of global insurer American International Group (AIG), giving the U.S. government an ownership stake in the troubled insurance giant.

Treasury Secretary Henry Paulson Jr. and the Federal Reserve Chairman, Ben Bernanke convened a meeting with House and Senate leaders on Capitol Hill at about 6:30 p.m. Tuesday to explain the rescue plan following a meeting with the President roughly an hour before. They emerged from Capitol Hill about 7:30 p.m. with Paulson and Bernanke looking grim but top lawmakers generally expressing support for the plan. The Fed and the Treasury department believed they had sufficient political cover to act, however, the bailout is going to be controversial during a hot election year, because it effectively puts taxpayer money at risk while protecting bad investments made by AIG and other institutions does business with. Come tomorrow morning on the campaign trail, the biggest question pundits and candidates alike are going to be asking is - why did the Fed “save” AIG… but not Lehman Brothers? (And where is all of this going to end?)

The main difference between AIG and Lehman is the network of webs that AIG touched versus Lehman. The failure of AIG would have significantly impacted the broader credit markets when compared to Lehman. Fed and Treasury officials had to face the prospect of not just another titan going bankrupt, but it also had to deal with the fact that given AIG’s role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased, AIG is potentially on the hook for securities that were once considered safe.

If AIG had collapsed institutional investors around the world who had AIG insurance against various debt swaps and credit lines would have been forced to potentially immediately write down billions of dollars in debt securities, which in turn would have reduced their own capital and the value of their own debt. The downward spiral could have been far reaching across the entire global credit market.

While both the Fed and the Treasury initially turned away from funding an AIG bailout, their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told U.S. government officials that they simply could not raise the money given both the general angst in credit markets and the specific fears of problems with AIG. The failure of The Reserve Prime fund this evening may have also played into their decision to save AIG having seen the interconnected nature of the home mortgage derivative markets when Lehman collapsed. The total market exposure that an AIG collapse could have caused might be in the hundreds of billions of dollars.

The Fed’s extraordinary rescue of AIG underscores how much global fear remains about the destructive potential of the complex financial instruments and the inability of investors to fully trace the interconnected nature of complex debt instruments, like credit default swaps, that brought AIG to its knees. When AIG began to teeter in the last few days, it became clear that if it defaulted on its commitments under the swaps, it could set off a devastating chain reaction through the financial system.

That is the main difference.

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• Reform, not Rescue… Buy in, not Bail Out.