As Johnson describes, countries which host TBTF banks become their hostages when those banks act irresponsibly and cause a crisis. This is TBTF's moral hazard:
"This [TBTF banks' global presence] is also a major problem for the 'just let 'em go bankrupt' philosophy. There is no framework for cross-border bankruptcy, in the sense of clear rules about who gets compensated with what kind of assets. The courts can presumably sort it out, but it would take many years and cost billions of dollars in legal and other fees. As a result, if a large bank is on the brink of failing, everyone will assume the worst around the world and run for the doors."
[...]
"Or we could also make the biggest banks smaller -- ideally, small enough to fail. This was the proposal of the Brown-Kaufman amendment to Dodd-Frank, which died on the Senate floor, largely because of opposition from Geithner and the Treasury Department. So we'll do nothing, it seems, except let these massive banks become bigger and even less well managed.
"Until next time, the people who run the country will again face the same choice as in November 2008: provide an unsavory bailout for management, shareholders and creditors that rewards failure and stupidity, or run the risk of causing a second Great Depression.
"If the big banks get large enough, we'll become like Ireland today -- saving those institutions will ruin us fiscally, destroy the dollar as a haven currency, and end financial life as we know it."
By Simon Johnson
January 18, 2011 | Bloomberg
January 18, 2011 | Bloomberg
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