Monday, September 29, 2008
Letting Lehman collapse may have sent the "right" message to investors and lenders about moral hazard, but that message could have been sent with a government assisted merger (like JPM/Bear). The problem is that the message was received by all financial system lenders - the repo market, the prime brokerage system and large depositors. And they are moving their money from the weak to the strong. That was what got WAMU and Wachovia.
It may be that the government is going to have to up the FDIC insured amount to stabilize bank liabilities. Or we will see more of this.