How too-big-to-fail looked from the inside

There was an interesting exchange a few moments ago in the financial crisis hearings. The bankers were asked whether they ever built their "too-big-to-fail" status into their internal strategies. They said no, of course. But J.P. Morgan's Jamie Dimon had a slightly more convincing answer, arguing that the market didn't consider them too big to fail, either. If you look at the interest rates on the money we were loaned, he says, it's pretty clear that the market didn't consider us a riskless proposition.

That seems convincing enough, though it's part of the reason we need to build out some ways of handling banks that we can't let fail. What the market didn't know then was whether lenders would take a big hit if one of these firms failed. AIG could've been rescued by the government even as its lenders took a sharp haircut on their loans. But as we all know, that didn't happen. And the market now knows that, too. Which means it has to be explicit that the collapse of systemically important firms will never be again handled in the chaotic, tentative fashion we saw in 2008.