American Investment Banks and Russian Roulette

I was pondering for a while whether to write about the turmoil in the financial markets. My intention is to write on this blog about general issues with long-term implications. However, I do have something to say and I believe that it is related to long-term developments, rather than the short-lived turmoil present these days on the stock markets.
The US government decided to step in and take actions to tackle what many dubbed the “greatest financial crisis after the Great Depression”. I would not subscribe to this dramatic nomination, if only for the simple fact that I have not yet seen any Wall-Street financier jumping out on the window, like they used to, back in the thirties.
But what troubles me most is the disappearance of what used to be called investment banks. These institutions were at the heart of the financial crisis and probably one of its main catalysts. But the decision of US government to step in and impose deep changes to the business of investment banking, I believe it is not wise. It is clear that the government’s decision to intervene before the financial crisis is propagated in the real economy is a good one, and this move obviously requires tighter regulation. But to completely change the nature of the investment banking, by imposing regulation similar to commercial banks, it is not good. Investment banks used to play a vital role on the Wall-Street and they were at the forefront of financial innovation. They were experts at taking risks and identifying opportunities in real-time without the constraints of a supervising authority. That they can be wrong at estimating risk and they can go over-the-top with the scale of their operations, it is absolutely clear to me and it should have been clear to all market participants and especially to the rating agencies.
I think a fair way out of this crisis would have been to let the investment banks go bust, even if that would have induced losses to third-parties. An even wiser approach would have been to save some investment banks and let some other to go bankrupt. The criteria for choosing which to save and which to let fall should have been completely random. In this way, continuity and a fragile stability would have been created in the system, at the same time with avoiding the infamous moral hazard. Above all, investment bankers play a game of chance, much like a roulette player. It is the nature of their business, and they should be able to estimate and engage those risks that they can actually manage. And they should be allowed to learn the game the hard way, much like the players of Russian-roulette do. Belive it or not, but for some people this is a catchy game.