Sunday, 23 Oct 2011 03:16 PM

By Forrest Jones

The bailout of European financial institution Dexia highlights the fragility of banks worldwide, including in the U.S., experts say.

Dexia’s trading partners include U.S. institutions Morgan Stanley and Goldman Sachs, the New York Times reports, and have taken steps to limit their exposure to Dexia and to protect themselves from further problems in Europe as a whole.

While banks can lend less to their troubled counterparts, exposure still doesn't go away in a sense that nobody knows how long previous bailout money will keep the creditors paid whole and the system afloat.

Those who favor such bailouts say they are necessary to preserve financial institutions, while critics say they only encourage shaky lending behaviors to continue, citing those who did business with U.S. insurance giant AIG as examples.

Hence, phrases like "moral hazard" and "too big to fail" grab headlines again.

"The question is, did the AIG experience and the bailouts generally contribute to the current situation?" asks Jonathan Koppell, director of the School of Public Affairs at Arizona State University.

Would the banks "have had a different view in dealing with Greece — or with Dexia for that matter — if those who had dealt with AIG hadn't been made whole?"

Other experts point out that Dexia is not the only bank exposed to iffy European sovereign debt and operating on unfinished restructuring plans from the past.

"There is a reasonable likelihood that it could start unwinding, and once that starts it could all go in a blur," says Sony Kapoor, managing director of the European think tank Re-Define, describing an international banking system running into more and more trouble raising the money to operate, according to Bloomberg.

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