The banks did behave rationally within the confines of what they were doing.
Unfortunately they forgot that they had to behave rationally within the confines of a market[/b]. As such, because of the effect of the market, the banks are now in the sh*t. They failed to do what the free market fundamentalism considered the only rational outcome, and that was to consider that the market could move down as well as up.
In a perfect market, the banks would be allowed to fail. However, the market is not perfect because it necessairly has political outcomes. This is where the state comes in – if negatively affected, the state must intervene in the market.
So, the point of the FSA ought to be to act on behalf of the state in softening the effects of the market and reminding banks toact rartionally. Sadly, because it is a regulator within the system, it has essentially failed. but, within the context of the principles it was required to adhere to in the market, it could be said to be an amazing succewss – it allowed the market to f*** up economies of most (if not all) nations in that way that markets do.