Expectation of Bailouts

From Simon Johnson's testimony before Congress:

perhaps TARP's most significant legacy, the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are 'too big to fail.'"

5) Adjustments to our regulatory framework, including the Dodd-Frank financial reform legislation, have not fixed the core problems that brought us to bring of complete catastrophe in fall 2008. Powerful people at the heart of our financial system still have the incentive and ability to take on large amounts of reckless risk - through borrowing large amounts relative to their equity. When things go well, a few CEOs and a small number of others get huge upside.

6) When things go badly, society, ordinary citizens, and taxpayers get the downside. This is a classic recipe for financial instability.

7) Our six largest bank holding companies currently have assets valued at just over 63 percent of GDP (end of Q4, 2010). This is up from around 55% of GDP before the crisis (e.g., 2006) and no more than 17% of GDP in 1995.

8) With assets ranging from around $800 billion to nearly $2.5 trillion, these bank holding companies are perceived by the market as "too big to fail," meaning that they are implicitly backed by the full faith and credit of the US government. They can borrow more cheaply than their competitors and hence become larger.

9) In public statements, top executives in these very large banks discuss their plans for further global expansion - presumably increasing their assets further while continuing to be highly leveraged.