One hopeful sign

Some Banks, Citing Strings, Want to Return Aid says the New York Times today. In the beginning, taking TARP money was seen as a badge of honor, proof that the government would not let an institution fail. Now having TARP money is seen for what it is, a sign of weakness and an open invitation for government and media micromanagement. Just ask Northern Trust.

Surprisingly, sentiment is growing to stop bleeding the stronger banks in order to help the weaker ones:

At the height of the savings and loan crisis in the 1980s and 1990s, Congress and regulators adopted new rules known as “prompt corrective action” that required the government to quickly close weak financial institutions if they could not raise money to absorb mounting losses.

The rules were a response to a consensus that keeping weak institutions open longer, under an earlier practice known as forbearance, damaged healthy banks competing with the government-subsidized ones and ultimately destabilized the banking system. By shutting weakened institutions before their losses grew, prompt corrective action was also seen as less costly to taxpayers and the deposit insurance fund.

Although this looks like a better policy, the Administration argues that it can't be applied to the biggest banks today. Which suggests that part of the long-term remedy could be to cap the size of banks, so that none are too big to fail.