Investing in Too-Big-to-Fail Banks: More Dangerous Than It Looks


There is a line of thinking among bank investors that goes like this: Even if big banks take a lot of stupid risks, they can remain decent investments because they will always be bailed out by the government when those risks backfire. Not only will we never let Bank of America or Goldman Sachs go under, but we will flood them with cheap loans at the first sprinkle of trouble. So what's the risk?

The risk may be bigger than you think. Citigroup was bailed out, but only after shareholders lost more than 90% of their wealth. But it goes deeper than that. Last month, I sat down with Hoover Institute economist Russ Roberts. He argued there's precedent for ditching the entire philosophy of bailing out the largest banks. Have a look:

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Morgan Housel has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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