The move came after federal officials reportedly tried but failed to persuade private firms over the weekend to put up funds to save AIG.
With the vast insurance firm facing bankruptcy, Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and Fed President Timothy Geithner decided that a federal lifeline was needed to prevent a disastrous fall-out in the financial markets.
The final decision came on Tuesday, as officials agreed it would be "catastrophic" to allow the company to fail, the Wall Street Journal reported, quoting an unnamed source familiar with the deal.
Paulson and Bernanke reportedly went to Capitol Hill late Tuesday to meet with top leaders of Congress, and an influential New York senator, Charles Schumer, confirmed a historic move was in the works.
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times," Schumer said in a statement after meeting regulators about New York-based AIG.
"Hearing of t