Some of the biggest names in the financial world are in trouble. Lehman Brothers, a huge investment bank, is going into bankruptcy. Merrill Lynch remains afloat, but Bank of America is expected to buy it. And the insurance company AIG is examining its options after its stock plunged again last week, losing about half its remaining value.
Wall Street Journal economics editor David Wessel tells Renee Montagne that the federal government didn't come to Lehman Brothers' aid because it got a lot of criticism for saving investment bank Bear Stearns earlier this year, which put nearly $30 billion of taxpayer money at risk.
"It realized that at some point you have to say no or the entire financial system, every time there's a problem, is going to come to the Federal Reserve and the taxpayers and say 'we need your help here,' " Wessel says.
So Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and New York Fed President Tim Geithner decided to draw a line in the sand, "and now we're going to find out if they did the right thing or not," Wessel says.
"If things start to get better now, it will be seen as the right decision. If they made a mistake and they should've put taxpayer money into this, they'll go down in history as the guys who made the biggest blunder since 1930."
Bank of America, meanwhile, could come out of its deal a giant. If the U.S. economy now rebounds and the financial markets return to normal, the colossus of Bank of America and Merrill Lynch will be "a huge financial institution with all sorts of global clout." So Bank of America must have decided that, at a price of $50 billion, Merrill Lynch is a gamble worth taking — in a game where very few people are willing to gamble, Wessel says.
The latest developments in the financial crisis that has dragged on for more than a year herald a "sea change" in the way Wall Street does business, Wessel says. But the really big question is what the effects will be on the broader economy.
"The thing to worry about now ... is will the financial system be able to lend money to consumers and businesses in the weeks ahead, because if they don't, the economy will come to a standstill," he says.