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The real question is whether these institutions became too big to succeed. For over a decade, the financial services industry promoted the idea that American banks and investment firms needed to bulk up to compete on a global stage. Alas, it turns out that size can be as much of a liability as an asset.

As banks gobbled up smaller competitors, the ones that thrived were those that figured out how to combine operations efficiently and manage and control risk across the new banking empire. The ones that continued to operate as a collection of silos found it all but impossible to keep track of how much risk was accumulating in any one corner of the operation.

All it took was too much risk in just one silo — like bad mortgage lending or credit default swaps — to spring a leak threatened to sink the entire ship. When the global credit system began imploding last September, it turned out these financial leviathans were not particularly seaworthy in a bad storm.

So why save them? The failure of any large financial institution comes with collateral damage, from lost jobs to reduced lending and the money hole left when there are too many debts and not enough assets. A lot depends on how they fail. When a bank insured by the FDIC runs aground, depositors are protected, losses minimized and healthy pieces often sold off to new buyers. That’s a much better outcome than a sudden collapse.

Some people argue banks should be allowed to sink — if for no other reason than providing a “moral hazard” that will discourage other bankers from making bad bets and taking on too much risk. But the failure of Lehman Bros. demonstrated that these institutions have become so interconnected — having swapped trillions of dollars worth of loan guarantees — that the wreck of one major player in the modern financial system can quickly swamp otherwise seaworthy vessels.

It’s kind of like the power grid: If one part fails, and that failure spreads, pretty soon the lights go out everywhere. Since you can’t have a healthy economy without a healthy lending industry, the question becomes whether the cost of preventing the failure is less that the cost of the cleaning up damage that would result from that failure.

The bigger question regulators now face is: How do we make sure this doesn’t happen again? Chopping up a big bank with a portfolio of bad loans into a bunch of smaller banks with bad loans doesn’t really solve the problem. The solution is to keep banks from getting into trouble in the first pace.

That means “too big to fail” may not be the right measure of keeping the credit system healthy in the future. It’s more likely the solution will be finding a way to make sure banks don’t become “too big to regulate.” 

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