Too-Big-To-Fail As A Shadow Poison Pill

Aside from putting the economy at risk (and taxpayers in particular), banks that are seen as too big to fail have an unfair advantage over smaller banks because the perceived government backstop reduces their funding costs. Harvard Law School professor Mark Roe argues that the too-big-to-fail subsidy also acts as a ‘shadow poison pill’ that makes corporate restructuring a losing proposition.

“An operationally successful restructuring of such a too-big-to-fail financial firm will increase the firm's (or its spun-off divisions') overall value to the economy, but it will decrease the private value of the firm's stock to the extent the restructuring strengthens the constituent firms enough-or makes them sufficiently small that they are no longer too-big-to-fail,” Roe writes in his paper...