Henry Thompson provides the answer to the question, What should the government do about failing financial firms? (via Mises):
The present financial problems would disappear quickly if the government let the markets operate and let inefficient firms go bankrupt. The irony is that the government is stepping in to solve the problems it created. The solution might “work,” but the underlying disincentives in the mortgage and insurance markets will persist. Increased government meddling in the financial markets will only make the financial problems linger.
If the Fed hadn’t intervened last year, we would be through this already. They shouldn’t have allowed bad banks to borrow anonymously. They shouldn’t have bailed out Bear Stearns, Fannie Mae or Freddie Mac. All of these actions have merely prolonged the recovery process. Let the market work.