With Merrill and Lehman gone, the market is down to two independent investment banking firms.  The new weak link is Morgan Stanley, the one more deeply mired in the current financial crisis.  Indeed, Goldman released numbers today indicating that, while not unaffected, it had been able to make money in the prior quarter.  

Nonetheless, it is only a question of time before these firms cease to be independent.  The very actions of the Fed in the current crisis illustrate why this is the case. 

The Fed, in the name of market stability, stepped in and prevented the failure of Bear Stearns.  Ostensibly, this had to occur because of the role played by the investment banking firm, particularly as counterparty to so many complex transactions, and a failure would have roiled the market.  Lehman didn't get the same treatment.  Paulson has rationalized the disparity but the reasons don't hold up under scrutiny.  Instead, they reflect a change in policy that arose from the criticism foisted on the regulators by those who viewed the markets as sacrosanct and shouldn't be subject to such severe government intervention.

The message was heard and while it was too late to undo the intervention with respect to Bear Stearns, the anti-intervention philosophy would be applied to Lehman, as evidenced by the bankruptcy filing this week.  The approach sends an unequivocal message to the market that unlike the largest commercial banks, investment banks are not too big to fail.  The government can't be counted on to rescue the firms.  Whether in this crisis or the next, market participants will eventually flee from the uncertainty of independent investment banks for the certainty of commercial banks.  The end of independent investment banks is near at hand.  It will harm the US capital markets.