2. The wrong message
By preventing large institutions like Bank of America and Citigroup from failing, the government risked creating a problem of moral hazard—that is, of promoting irresponsible bank behavior that might not occur without the prospect of future bailouts. Earlier this year, then the special inspector general for TARP, told a congressional committee that the bailout of large financial institutions promoted a "'heads I win, tails the government bails me out' mentality." Harvard University economics Professor Ken Rogoff agrees: "[The financial sector] certainly had a stressful period, but they came out of it with huge profits and huge gains," he says. Baker says that this has repercussions for the entire banking sector. "Lenders expect government to back them up; they're more comfortable lending to Citi or Goldman [Sachs] than to smaller banks or another borrower," he says.