Lehman Brothers just didn’t matter as much.

Despite proclamations earlier this week that the Feds weren't in the business of bailing out companies, the government did exactly that by offering the nation’s largest insurer, American International Group (AIG), an $85 billion loan. Over the weekend, the government let Lehman Brothers go bankrupt instead of providing financial support.

The turn of events, which happened late Tuesday amid intense negotiations, was driven by widespread fear of the impact an insolvent AIG would have on the entire financial system.

While Lehman Brothers is an important investment company, AIG’s reach expands beyond Wall Street to other investments like money market funds and pension funds. It insures everything from cars to lives. It’s among the largest global insurance and financial services companies, and provides insurance and investment products to over 45 million individual and institutional clients in close to 130 countries, according to UBS.

“Lehman is not as instrumental as AIG,” said Eric Ross, director of U.S. research at Canaccord Adams. “Lehman was an important player, but not like Merrill (MER) or Bear Stearns.” Ross noted that the impact of an insolvent AIG would be huge, which is why it couldn’t be left to fail.

Echoing those assumptions, New York Governor David Paterson said in an interview with Fox Business Network Tuesday that there’s a difference between Lehman Brothers and AIG, largely AIG’s impact on both big and small businesses.

"Obliviously the federal government put its foot down with Lehman Brothers the other day, because the more they peeled back the onion, the more they found that there was debt,” said Paterson. "But with AIG, we have an entirely different problem that affects Americans, that affects small businesses; it affects the regular civilian.”

As part of the plan reached late Tuesday, the Fed will lend AIG up to $85 billion and the U.S. government will get a 79.9% equity stake in AIG in the form of warranties called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points. The loan is being secured by AIG’s assets. The loan will enable AIG to sell off assets in an orderly fashion, said the Fed in a statement. As part of the deal, AIG Chief Executive Robert Willumstad will be replaced by Edward Liddy, former head of Allstate.

The Wall Street Journal reported in Wednesday’s edition that the federal government decided to step in with the loan after it concluded it would be “catastrophic” to let AIG fail. Federal officials had tried to get the private sector to help AIG, but when those efforts failed, the government came to the conclusion it had to step in. 

According to the Wall Street Journal, in addition to banks and mutual funds taking a hit, if AIG were to default, it could prompt writedowns by U.S., Asian and European companies that bought its credit default swaps. Credit default swaps are insurance against default on assets tied to corporate debt and mortgage securities. According to FOX Business Network's Elizabeth MacDonald, one estimate has AIG’s credit-default-swaps exposure at half a trillion dollars. Click here to read Emac's Stock Watch

The Fed’s move Tuesday marks the third time it has intervened in recent months, including with Bear Stearns and Fannie Mae and Freddie Mac. Although the loan will help AIG sell off assets in an orderly fashion, it did irk some Wall Street watchers who think the action will create more uncertainty.

“The Fed and Treasury have blinked in the face of market pressure once again,” wrote Merrill Lynch economists Drew Matus and David Rosenberg in a research report. “They continue to react to situations rather than getting in front of them, and now they have created uncertainly about what firms’ quality for bailouts and which do not.”