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Some Things that Could Have Been Done--and That Could Still Be Done

We Need a Lot of the Upside: Rescuing Bank of America

Buce writes:

Underbelly: Geithner Rules: Oh dear.  Of course I haven't any idea whether this is true but it sounds like Tim Geithner hasn't learned a thing:

There is a rumor circulated on Wall St. that JP Morgan (NYSE: JPM) will take over Bank of America (NYSE: BAC) within the week. The government will support the deal with a $100 billion investment in preferred shares issued by the combined entity. Alternatively, the government may guarantee the value of a large pool of Bank of America assets. The word is that Treasury Secretary Geithner has discussed the transaction with JP Morgan CEO Jamie Dimon.The “merger” would completely destroy the value of BAC’s common shares.

Translated: okay, so equity gets hosed, which is just as it should be in insolvency. But it sounds like we will be paying $100 bill for something. And that would be? Why, the bondholders, I suppose--who else could it be, with numbers like this and on terms like this. It's been the one abiding principle throughout the Geithner--no matter how parlous the state of whatever, no bondholder gets left behind.  Apparently we need to say it again, guys: capitalism means the risk of failure, and real failure when things go bad.  Bank bailouts that protect bondholders are ring-fencing for which the rest of us pay.  Sheesh, is that so hard to understand?

I'm not that upset at rescuing bondholders of organizations that are genuinely Too Big to Fail--which B of A is.

But the U.S. government needs a big chunk of the equity upside of any such deal. Warrants. Tim Geithner's successors have to be able to stand up and say "we made $30 billion in profit for the taxpayer" for this to be politically viable.