Alex Schleber (URL) said:

Something to consider about the “nationalization” hand-wringing:

If junior bond-holder debt is converted to equity as part of the write-down/clean-up regimen on a given institution, then the equity in such a rehabilitated bank is NOT worthless, in fact it may suddenly become the most sound investment in the entire marketplace: A bank that is free to do reasonable business once again, without the sword of CDOs, etc. “toxic assets” hanging over its head.

And the repercussions for institutional investors and their risk rules could be solved very simply thus: Suspend those rules for 3-12 month for a given rehabbed institution, so that those investors can sell their new equity in a controlled way, and buy more conservative paper again.

Though I’d still argue that it would be very hard to find anything more conservative than fully rehabbed bank equity. They may wish to not have to relinquish those shares after all…

And BTW, if done right, it could well be argued that the junior and senior bond holders (through conversion or being kept whole respectively) never experienced a default event in the rehab, so that none of the CDSs should trigger. Even if they did, the gov’t could still declare the CDSs null & void as far as being valid insurance for the rehab event, somewhat like flood insurers claiming “act of God” or “man-made due to levy breaks”, etc. after Katrina.