I frequently point to the big edge in funding costs that big banks continue to have over smaller banks as one bit of evidence that Too Big To Fail is alive and well on Wall Street and Washington. Indeed, TARP has helped cement the idea that Uncle Sam will come running if major financial institutions get into trouble.
But the results of a recent American Banker survey show those in the financial industry don’t believe TBTF is a thing of the past. That’s worrisome. If bankers believe Uncle Sam will backstop them no matter how dumb and risky their decisions, they are then being encouraged to make dumb and risky decisions.
Banks will make foolish decisions especially if government pays them to make those decisions – this was the genesis of the housing collapse.