Death of an investment bank

THE ERA of big bailouts seems to be over. After US Treasury and Federal Reserve officials made it clear this weekend that the government would not risk taxpayer dollars to shore up Lehman Brothers, the 158-year-old investment bank was forced into bankruptcy. And Merrill Lynch - widely expected to be the next casualty of a crisis that began in the subprime mortgage business - hastily sold itself off to Bank of America.

These convulsions don't just indicate that more financial turmoil is on the way (the stock market plunged 504 points yesterday). They also point out the limits to how much a tapped-out federal government can do to soothe the crisis.

Amid an epidemic of home foreclosures, the public may not look kindly on saving one more Wall Street firm from itself. True, preventing the failure of a major investment bank could keep a credit crisis from getting worse. That's why the Federal Reserve committed to lending $30 billion to shore up the investment bank Bear Stearns. The Bush administration recently took over mortgage giants Fannie Mae and Freddie Mac for similar reasons. But that move could end up costing taxpayers another $200 billion. Add in two wars, huge budget deficits, and a looming explosion in Medicare costs. How much more can the Treasury commit?

Ten other major banking firms have set up a $70 billion fund to insulate themselves from short-term turbulence. And Washington isn't sitting idly: The Fed is loosening its rules for emergency loans to financial institutions.

But after this past weekend, foundering banks can't count on a taxpayer rescue as Plan B. And if the Treasury and Fed can't save firms that made bad bets, they still need to help find Plan C: an orderly way to sweep up the pieces.