Everyone assumed that the government would ride to the rescue of doomed brokerage Lehman Brothers (NYSE:LEH). Everyone was wrong. The financial markets are close to ruin. But there is a bright side, says John Stepek in British financial magazine MoneyWeek. The remaining players now know that not everyone is too big to fail…

This from John:

It’s too early to say if it’ll be any more correct this time round. It certainly feels like the biggest disaster so far. And more to the point, it has the element of surprise which earlier events didn’t. Everyone knew Lehman Brothers was in trouble, but the assumption was that it would be bailed out, just as everyone assumed Frannie and Bear Stearns would be saved.

However, now we’ll get to see what a major investment bank failure looks like at firsthand. Sure, it’s Chapter 11 bankruptcy, which is very different to liquidation – half the US airline industry (or it seems like it at least) is in Chapter 11 at any given moment in time – but it’s still bankruptcy.

“We will be entering uncharted territory,” Ladenburg Thalmann & Co analyst Richard Bove told Bloomberg. “Forcing liquidation will set off problems in other companies and markets everywhere.” But then, as Gilbert Schwartz of Schwartz & Ballen puts it, “if every time a big institution went bust the markets expected the government to step in, no one would ever adapt.”

This is the thin silver lining on this particular blow-up. The market’s worst fears have been realized. The event that governments, regulators and finance bosses have been trying to avoid has finally happened, and the market is just going to have to deal with the fallout.

Source: Lehman Collapse: It’s Bad and It’s Going to Get Worse