Why Doesn't the Government Ask for More?

Some are asking why the government isn't getting a better deal like the one Warren Buffet received from Goldman and GE. Yes the government is only getting limited upside through warrants, but you cannot make them pay more than they are capable of or else they will fail under the burden of the payments to government. If we think banks will have to take more losses in the future, then making them pay 10% interest dooms them. There is no loan out there that banks can make 10% on, without taking a huge amount of risk! Buffet got his good deal because Goldman and others hoped that his investment would encourage others to invest with worse terms. So he was paid a premium as an advertisement to the rest of the world. His stamp of approval cost that much, Goldman cannot afford the same terms for everyone.

You also cannot wipe out existing shareholders and bondholders without a good reason, like the bank is insolvent. If there is anything left, there is no justification for government to take that away. Under bankruptcy, the bond holders are entitled to the assets, and the shareholders whatever is left.

If you are going to wipe out shareholders and bondholders, then why bother making this transaction? Why not create a new bank and allow the old one to fail? If the purpose is to prevent the bank from failing, then you cannot punish shareholders and bondholders beyond a certain point. This is especially true with bondholders which get the assets in a failure. As for common shareholders, they only get what is left after the government gets the dividend from the preferreds, their future profits are diluted, not to mention the warrants. And as I noted before, you can only ask the bank to cough up so much in dividends and interest before it becomes impossible for the bank to continue. A bank dies when its cost of funding becomes larger than the profit it can make from operations. A very high dividend rate on the preferreds and the bank cannot make money and is guaranteed to fail. People aren't stupid, if they calculate and see that there is no way for a bank to make that much to pay the government, they will start selling and we'll have a rout.