The economic reasoning behind bailout or no bailout.

When it comes to institutional investing, though, the expectation of due diligence is much higher. Unlike individual citizens, banks can and do pay people to constantly gauge their risk in any given transaction. Essentially, this is why the Fed didn’t throw a life preserver to Lehman: It had been treading water for months already, and its distress was common knowledge. By last week, if you were an institution still doing business with Lehman, you had either already taken steps to insulate yourself from loss, or you had simply decided to gamble. Bear Stearns, on the other hand, went from robust to ailing in a matter of days, not enough time for its partners, including numerous overseas banks, to untangle their investments and escape the fallout zone.

And so what allows governments to accept a moral hazard, assuming they don’t want to? Principally, the desire to prevent panic. Although the United States hasn’t experienced an official one in nearly a century, panic is a boogeyman with a long shadow. When the choices are moral hazard or panic, moral hazard wins out every time.

There are other considerations, too. It’s not a stretch to suggest that Bear’s long global reach, as compared with Lehman and Merrill, played a role. If Bear went down, it would have dragged down numerous foreign investors along with it. In a global economy with a weakened currency, the United States can’t afford to alienate other countries with which it does business. It also didn’t hurt that Bear was the first—and, regulators hoped, the only—institution to land itself in such dire straits.