Once the spread on the 3 month Treasury and 3 month CD got as high as 500+ basis points all liquidity in the financial system ground to a halt; no more cash was moving between banks. If it continued, at some point, you’d go to the ATM and no money would come out. Banks that were safe would start to fail – on a massive scale.
Brad DeLong gives a good recap of what happened last Thursday and the cost/benefit of the bailout, no matter what you think of his politics (he's a Clinton D, Bush hater, he's econ writings are smarter than the Krugman types)
http://www.scribd.com/doc/6182778/De...Asset-Meltdown
And another…
"But those events would barely be noticed when compared with what happened last week. Following the bankruptcy of Lehman Brothers, the spread reached 527 basis points [3 month CD to 3 Month Treasury] on Thursday. Financial intermediaries, who earn their profit by lending at a modest markup over their borrowing cost, simply can not be expected to function in this kind of an environment. Lending institutions that had been solvent before this week would not remain so for long if this situation were to persist. Only the safest customers could be expected to obtain loans, and only after paying very high interest rates."
http://www.rgemonitor.com/financemar...aulson_bailout