Implicit Bailouts and Moral Hazard

From Bloomberg comes news that ten banks are set to repay TARP funds. This is scarcely surprising as the banks have been complaining for some time about the onerous conditions attached to the bailouts, particularly limits on compensation. Boo hoo!

As Yglesias notes, repaying these funds does not alter the greater fact that the implicit guarantee remains. As he describes it

. . . merely repaying the funds won’t change the fact that all large financial institutions are now benefiting from a few different federal programs and an immensely valuable implicit federal guarantee.

What Yglesias doesn't say, and what for me is the even larger problem, is the moral hazard arising from these implicit guarantees. There is little incentive for prudent management and much for malfeasance when government signals that losses will be socialized.