Nightmare on Wall Street

With Lehman Brothers filing for bankruptcy, Merill Lynch being sold to Bank of America for less than $30 a share and AIG seeking a bridging loan from the Federal Reserve it was a bloody Sunday for Wall Street. It remains to be seen if bloody Sunday will be followed by a black Monday but there is considerable fear about what might happen next. As the Washington Post puts it this morning, “The titans of Wall Street have, over the past 72 hours, been forced to reckon with the reality that the financial sector they built is, in its current form, too big, uses too much borrowed money and creates too much risk for the broader economy.”

The New York Times reports that the Bush administration accepts that more bank failures are inevitable in the coming months. But the US government was right not to bail out another set of financial institutions as that would have exacerbated the moral hazard problem.  We will soon find out if the financial system is robust enough to absorb shock after shock and able to right itself.