Originally Posted by stephanie
To a certain degree, although there's more to why larger banks can borrow more cheaply. But the problem is that doesn't support Timothy's point at all.
The other problem, of course, is that even if Timothy were correct that the creditors were as stupid as his assumptions would suggest -- that they were motivated by the expectations of a bailout -- that didn't happen. So we have people freely choosing to enter into a contract that turned out to be a bad decision, for whatever reason, and thus having to bear the cost of that. That's what is supposed to happen.
This isn't complicated, so let me try again: a company's cost of credit may decouple from the fundamental creditworthiness of the underlying business--if, for example, when push comes to shove, creditors believe they will be saved. That's been the case for our large banks, (until recently) for the peripheral European countries, and in the case of MF global. The exact state of mind of the bondholders is unimportant to the argument, unless there was a behind-the-scenes quid pro quo: in financial markets, perception is reality. The bondholders believed the company was more likely to fail without Corzine, a man with extraordinary connections. They bet wrong, but had MF not failed so spectacularly, who knows?