Feature

Wall Street's uncertain future

Did Treasury's refusal to save Lehman Brothers from bankruptcy help, or make matters worse?

What happenedFinancial markets braced for turmoil Monday after investment bank Lehman Brothers, burdened with bad real-estate holdings, filed for bankruptcy protection. The distressed sale of Merrill Lynch to Bank of America and the impending restructuring of insurance giant AIG added to the anxiety. "We are in a hysteria," a banking analyst said. (USA Today)

What the commentators saidWall Street can only hope this is the worst of the "credit storm," said David Henry in BusinessWeek online. But it will take a few days to see how bad the “fallout” will be from Treasury Secretary Henry Paulson’s decision not to bail out Lehman, as he did by "reluctantly" arranging JPMorgan’s acquisition of failing Bear Stearns this summer.

“We are getting a Category 5 test of our financial levees,” said The Wall Street Journal in an editorial, but “the government had to draw a line somewhere or it would have become the financier of first resort for every company hoping to buy a troubled firm.” The gamble will pay off if Lehman can liquidate without igniting panic.

The financial system probably won't collapse, said Paul Krugman in The New York Times, but it's clear that the defenses set up to prevent a return of the bank runs of the 1930s didn't reduce risk the way they were supposed to. So, Paulson felt that “playing Russian roulette with the U.S. financial system was his best option. Yikes.”

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