Jeremy Warner: US Treasury has run out of patience

Like the passing of the dinosaurs, the great beasts of Wall Street are dying off, extinguished by what is now unambiguously the worst financial crisis since the Great Depression.

Until last night, it had been generally assumed that the US authorities would do whatever was necessary to prevent Lehman Brothers, one of the so-called "bulge bracket" firms of global financial markets, from going under.

After all, that's what they've done to date, by guaranteeing the country's two largest mortgage organisations, providing the wherewithal for an orderly takeover of Bear Stearns, and by making massive amounts of liquidity available to prop up the US banking system as a whole.

But finally the US Treasury seems to have run out of patience, and or money, and refused to provide the guarantees being demanded by Barclays and others as a condition for acquiring the stricken bank.

As a consequence, Lehman's is expected to file this morning for Chapter 11 bankruptcy protection, the equivalent of a UK administration.

It's a huge gamble for Hank Paulson, the beleaguered US Treasury Secretary. He was determined to draw a line in the sand at some point by saying to Wall Street "no more state bailouts".

But nobody knows for sure what the consequences of so doing might be. On the plus side, Lehman's is not a retail bank, so it will only be big wholesale investors and employees who will be damaged by its demise.

But it is a big provider of liquidity to markets, and with counterparties and creditors left high and dry, there's the risk of extreme collateral damage. Like falling dominos, there could be multiple bankruptcies through the financial system.

Mr Paulson's bet is that the damage will be containable, and that the collapse will prove cathartic, by stripping out capacity from the system and punishing the markets for the excesses of recent years.

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