Via the Baseline Scenario (hattip to commenter on this blog).
In larry's Ely Lecture in 2000, he said "[I]t is certain that a healthy financial system cannot be built on the expectation of bailouts..."
Yep, that's why Lehman failed, they just knew they'd get bailed out.
The basic problem with worrying too much about moral hazard is this: suppose I wanted to prevent you from doing some kind of bad behavior, such as eating candy bars. As punishments, you could be fined $100, or have your house blown up with a nuclear weapon. Of course, a $100 fine is probably enough to get you to not eat candy bars if you can help it, w/ the added benefit that it won't also have lots of collateral damage. This isn't a great analogy for finance, but most firms weren't really aiming to go bankrupt and I don't think getting bailed out really enters into their thinking about how they trade. Regulating pay and higher capital requirements would do much more to alter behavior...
1 hour ago