Bank bond holder should not come out of a bad bank unscathed.  Jeremy Bulow at VOX submits a viable plan to deal with the banks:

A plan that isolates the bad liabilities rather than the bad assets of the banks, and pays the owners of those claims everything they legally deserve in liquidation but does not fully immunise them from losses, will achieve three major objectives.

• It will help unfreeze the credit markets by creating healthy banks able to lend.
• It will assure that depositors are paid in full, and all creditors are paid at least their entitlement.
• It will make the bailout cheaper for the government, increasing its flexibility.

VOX is on the right track. We believe, for any plan to work it must:

a. Make the bank bondholders pay before taxpayers do, and,

b. prevent CDS’s on bank bonds held by those without an insurable interest from spreading panic. We have previously discussed how this issue can be dealt with through taxation.

This is in line with VOX’s suggesion to focus on the liabilities and not assets.

David Brancaccio interviews Kenneth Rogoff, Harvard economics professor and former chief economist of the International Monetary Fund on NOW on PBS.  Dr. Rogoff says we won’t be back to the same level of GDP as 2008 until after 2011 and that we have to take the big banks “through some form of” bankruptcy…