Dear readers, if my initial analysis of the JPM/BSC situation was wrong, mea culpa. But my analysis was predicated upon one key assumption: that the Fed is not populated by a bunch of morons. If they go back at this point and re-trade the deal, they will look like a bunch of wimpy, pencil-pushing bureaucrats stumbling right into the minefield of moral hazard. From Wikipedia:

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his car, because the negative consequences of automobile theft are (partially) borne by the insurance company.

Bottom line: BSC would be in Chapter 11 if not for the Fed's intervention. One can argue whether this was a mistake or not, but they elected to take draconian and immediate action to stave off what they perceived to be a clear and present systemic risk. In light of this fact, the equity was worth precisely zero at that time. BSC was dead firm walking. Nobody would trade with it. Employees were gearing up to flee. Its asset value would have rapidly eroded as values predicated upon firm reputation and people would have vanished in thin air. And this process would have happened in real time, if not for the Fed's intervention.

Fast forward to today. You've got a bunch of shell-shocked employees with lots of stock, Bill Miller, Joe Lewis and some other sad people and institutions who bought in at prices above $100. You've also got debt holders who'd rather buy deal insurance by accumulative votes to protect their claims. But you know what - sorry. To all of them. Because conveying the equity holders any value at this point is simply writing a check, courtesy of the U.S. taxpayer. This sets an awful precedent that the Fed won't soon live down, to the detriment of both the U.S. taxpayer and the financial markets in general. Because if they cave and toss BSC shareholders a bone, they'll be committing one of the most egregious kinds of moral hazard out there: the kind that didn't need to be, if they'd just stiffen their resolve and push on through.