From an interview with Sheila Bair on Obama's financial reform legislation:
If this had been law prior to 2008, would we have seen the bailouts that took place? Would we have seen capital injections into banks?
BAIR: No. You could not do an AIG, Bear Stearns, or any of that. Those were all one-off things, capital or asset guarantee transactions. This bill would only allow system-wide liquidity support which could not be targeted at an individual firm. You can't do capital investments at all, period. It's only liquidity support. No more capital investments. That's banned under all circumstances.
You can do systemwide liquidity support. But you can't do anything on an individual basis. They would have to be generally available.
Do you see any way left for the government to bail out a financial institution?
BAIR: No, and that's the whole idea. It was too easy for institutions to come and ask for help. They aren't going to do that. This gives us a response: "Fine, we will take all these essential services and put them in a bridge bank. We will keep them running while your shareholders and debtors take all your losses. And oh, by the way, we are getting rid of your board and you, too."
The whole idea is to get market discipline back.
That's what ending "too big to fail means." It means debtors and shareholders understanding their money is at risk and especially the debtholders starting to look at the balance sheet of these big institutions and asking their own hard questions instead of relying on government support.
Will this bill really end "too big to fail"?
BAIR: I think it will go a long way.(via Yglesias)