The US Govt let Lehman fail because they thought it could fail "cleanly". Unfortunately, it turned out otherwise. Before that event, Bernanke and Paulson was reassuring congress and the nation that our financial system was stressed but sound. After the event, things fell apart incredibly quickly and they completely changed their tune.
The credit crisis and the need for this "rescue" package are the direct result of the Lehman bankruptcy.
Unfortunately, these institutions have become so intertwined with each other that they easily bring each other down. That is what "too big to fail" truly means. There have to be some controls in place to prevent the use of complex risky financial instruments and excessive leverage that threaten global financial stability when one company is allowed to fail. In other words, we need to clean up the financial system so that bankruptcy is an option in the future!
Audrey
P.S. In 2004 the SEC gave the major investment banks an exemption from the regulations that limited the amount of leverage they could use. I believe the rest is history!
How SEC Regulatory Exemptions Helped Lead to Collapse:
The Big Picture | How SEC Regulatory Exemptions Helped Lead to Collapse
Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk:
http://www.nytimes.com/2008/10/03/b...gin&adxnnlx=1223041610-ah39YEBMbevTinN4I1qN2g