Bailouts of systemically important financial institutions (SIFIs) have required interventions in the United Kingdom, the United States, and the euro area totaling over $14 trillion, equivalent to about a quarter of the global GDP (Haldane, 2009). SIFIs are deemed too big or too complex or too interrelated to be permitted to cause loss to creditors or counterparties, although generally these institutions are referred to as simply “too big to fail,” which ignores some of the most important dimensions of the problem. One of the most unfortunate legacies of the current crisis is the lesson that policymakers drew from the market chaos in the aftermath of the bankruptcy of Lehman Brothers, the one SIFI that was permitted to cause loss to creditors and counterparties. The ministers of the G-20 appear to have decided that they would provide whatever subsidy necessary to avoid the disruptions that might occur in subjecting any other SIFI to the bankruptcy process, with the headline in the Financial Times stating, “Ministers pledge ‘no more Lehmans’” (Guha, 2008).

Leaving aside the troublesome but important problem of identifying SIFIs, reliance on bailouts of all creditors and counterparties not only has been very costly to taxpayers but has purchased financial stability in the short run at the cost of a heightened risk of larger, more frequent, costlier crises in the future. When all creditors and counterparties are protected from loss, they have reduced incentives to monitor SIFIs. Moral hazard increases because managers can take greater risks without having to pay higher risk premiums. Indeed, as the stake of equity holders declines to zero, managers may be tempted to play “go for broke” on the basis of the implicit guarantee from taxpayers. As Mervyn King (2009:4), governor of the Bank of England, has noted, “The massive support extended to the banking sector around the world has created possibly the biggest moral hazard in history.”