And if the firm is deemed too systemically important to be allowed by the authorities to fail, the financial firm’s investors are unlikely to ever bear the full cost of big losses. This is a situation tailor-made for encouraging tail risk taking, because the firm makes a lot of profits in good times— everyone purchases tail risk insurance from firms like AIG that will be propped up by the government—and AIG runs to the government for a bailout if the costly tail risk ever hits.
