Washington - After the worst episode yet in a devastating, year-long credit crisis plaguing the United States, the question on some analysts' minds was whether the world's largest economy was in danger of losing its dominant grip on global finance.

Among Monday's stunning storylines in the housing bubble's seemingly never-ending soap opera: Lehman Brothers Holdings Inc declared the largest bankruptcy in US history; stocks had their steepest one-day tumble since the September 2001 terrorist attacks; Bank of America Corp announced a 50-billion-dollar takeover of Merrill Lynch & Co, a leading Wall Street brokerage and investment banking firm.

An even greater drama loomed from what Bank of America chief Kenneth Lewis acknowledged could be "a much bigger problem" for the financial-services industry: the potential failure of US insurance giant American International Group Inc (AIG).

But the practices that brought the US financial sector to this woeful state - repackaging questionable mortgages into enticing investments - that has some corners questioning whether Wall Street will ever fully recover.

Lewis acknowledged that a culture of "greed" had prevailed among investment firms and banks, which reduced capital reserves and went ever further into debt to deliver higher profits.

The lack of cash reserves left banks unable to deal with the defaults that inevitably followed a sharp downturn in the housing market, and regulators failed to spot the warning signs.

"Why the industry didn't recognize that quicker ... and react to it ... is a question a lot of us will be thinking about for a long time to come," Lewis told business news network CNBC.

The result is that Wall Street has taken a severe "credibility hit" for what was once viewed as innovative thinking in the market place, said Sebastian Mallaby, an international finance expert and senior fellow at the Council on Foreign Relations (CFR).

"New York's position as the preeminent global financial center is potentially at stake," said Mallaby, and whether Wall Street's reputation remains intact will depend in part on how policymakers manage the coming months.

The bankruptcy of 158-year-old Lehman Brothers came after the US Treasury refused to underwrite its sale to another bank, displaying the limits of the federal government's willingness to bail out investors at taxpayer expense in order to keep the wider financial system intact.

The US Federal Reserve in March guaranteed the 29-billion-dollar sale of Bear Stearns, the fifth-largest US investment bank at the time, to competitor JP Morgan Chase & Co. Last week, the government took over US mortgage giants Fannie Mae and Freddie Mac and has put up to 200 billion dollars at its disposal.

In addition, the US central bank earlier this year opened up billions of dollars in Treasury-backed securities to investment banks struggling to raise enough capital to stay afloat. As collateral, the Fed has accepted the mortgage-related assets that are at the heart of the credit crisis. On Sunday it broadened the range of damaged securities it will accept in return for loans.

But the Fed has to be careful about putting too much of its own reserves on the line. Too great an exposure to the credit crisis could prompt international investors and governments to pull their own holdings out of the United States, prompting a run on the dollar.

"We do have to be concerned about the Federal Reserve's balance sheet being littered by bad assets," said Benn Steil of the CFR.

In Lehman's case, the government has taken the stance that investors have had time to adjust to the new market reality. Lehman's unravelling, unlike that of Bear Stearns, was a long process that had been anticipated for weeks, said Steil.

Banks and mortgage lenders have reported more than 500 billion dollars in writedowns and losses as the value of mortgage-backed securities has plummeted since August 2007.

Lewis acknowledged that "dramatic" changes were in store for the US financial sector if it wishes to maintain its credibility in the future, starting with simplifying the securities market that brought in new profits but exposed firms to undue risks that were either unrecognized or ignored.

"We have gone through a golden era. It's going to be tougher" in future, said Bank of America's Lewis in announcing the Merrill takeover Monday. "There are going to be fewer companies, and we are going to have to be better at what we do." (dpa)