Following the disappearance of Bear Stearns in March, and now the bankruptcy of Lehman Brothers and the surprise plans for Bank of America to absorb Merrill Lynch, three of Wall Street's five big independent investment banks have disappeared inside six months. After an astonishing weekend it is too early to predict the future shape of investment banking with confidence, but business as usual is not one of the possibilities.
Lehman is entering bankruptcy because the US Treasury refused to subsidise a rescue. That is a change of policy after Bear Stearns and a stark contrast to the nationalisation of Fannie Mae and Freddie Mac. It is emphatically a courageous call. The Bear Stearns bail-out was motivated, and probably justified, by the fear that a collapse of Bear would wreck the entire financial system, so interconnected was the bank with its peers.
Those concerns also apply to Lehman Brothers. But the US government does not have limitless resources; even if it did, the challenge in a serious financial panic is for the government to choose the right place to draw the line. Allow a Fannie Mae to collapse, and the US economy might well collapse with it. Yet bailing out anyone who asks nicely is a recipe for promoting (even more) recklessness and yet another crisis in the future.