golfgal – thanks for the links. The WSJ article was especially informative and answered a lot of my questions.
In the article, a senior treasury official comments that a year ago, confidence in the financial market was high enough that the Fed probably would have let BSC fail. But given the lack of confidence in the market today, the Fed felt that BSC’s bankruptcy could lead to something catastrophic. So its not as if BSC is “too big to fail”. Its more about avoiding the psychological straw that will break the camel’s back.
These comments lead me to the following conclusion: The Fed’s move to bail out BSC was really a symbolic gesture to calm everyone’s fears. They’re sending the message that the investment banks will be kept safe and there’s no need to pull your money out of them. By making these assurances, they hope to avoid a market panic, leading to runs on all the investment banks.
