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Lehman: This time, feds let a big bank fall

As venerable Wall Street firms succumb to the home loan crisis, focus shifts to limiting taxpayer cost.

People stood outside the world headquarters for Lehman Brothers in New York City, NY on Monday.

Shannon Stapleton/Reuters

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America's financial crisis has entered a difficult new phase as policymakers try to contain the fallout from the collapse of the fourth largest US investment bank.

The challenge is partly in the ripple effects of Lehman Brothers going into bankruptcy. But it's also much more. Lehman's fall, a battle for survival at insurance giant AIG, and a rushed merger between Merrill Lynch and Bank of America are just the latest signs that a real-estate investment bust continues to suck large financial firms into its undertow despite a year of government intervention and crisis management.

A central question for policymakers becomes, how can the problems be quarantined and resolved at least cost to taxpayers?

In a weekend of tense negotiations involving Wall Street's top bankers, the US Treasury Federal Reserve drew a firm line: Not every moment of panic will be met with an influx of federal dollars.

After the rescues of Bear Stearns, Fannie Mae, and Freddie Mac, the decision may have been necessary to dissuade banks of the notion that government is a willing partner for every large firm in crisis. The move also allows the Treasury and Fed to keep some powder dry for future needs.

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