That is why large commercial banks, which have open account obligations to thousands of other banks, creditors and counterparties, can be said to be too big to fail. Applying the too-big-to-fail label to investment banks reflects a serious misunderstanding of how their business model differs from that of a commercial bank.

In order to sign their agreement, the Fed and the SEC had to ignore a request by two powerful senators – Christopher Dodd and Richard Shelby, the chairman and ranking member of the Senate banking committee – who asked the two agencies in a letter last week to respect the prerogative of Congress to assign responsibilities to regulatory agencies. Instead, the two agencies have created a fait accompli that takes the question out of the hands of Congress. If Congress wants to have anything important to say about the regulation of the financial markets and the liabilities to be borne by the taxpayers, it should step in now to nullify this agreement or limit it [...]

This is an important part of the article:

The agreement is very bad news for US taxpayers. Fed involvement with the regulation of investment banks will introduce moral hazard into the securities business for the first time and pave the way for a vast new US government liability. The agreement between the Fed and the SEC will seriously compromise market discipline, which only exists when creditors and other counterparties believe that they are financially at risk

This is why many, I count myself amongst them, who think that Bear Sterns should have been allowed to fail. There must be consequences.

Wilhelm posted a clip a while ago outlining some of the reason that failure is a desired outcome.

That sends a clear signal to the markets that risky investments will be ultimately rescued by the Feds and market discipline will be irretrievably compromised.