Weekend at Henry's - WSJ.com

http://online.wsj.com/article/SB122083012951708369.html?mod=opinion_main_review_and_outlooks

We only wish Mr. Paulson had gone further and erased all private equity holders the way the feds do in a typical bank failure. Fan and Fred holders had profited handsomely for decades by exploiting an implicit taxpayer guarantee that their management claimed didn't exist. Now that the taxpayers are in fact stepping in, the current common and preferred holders deserve to lose everything. Mr. Paulson apparently wanted to dodge that political fight. If Fan and Fred share prices rally this week, we'll know Mr. Paulson didn't demand enough.

The Treasury chief also gave a free pass to the holders of some $18 billion in Fan and Fred subordinated debt. He did so even though these securities were understood not to have the same status as mortgage-backed securities or other Fannie debt, and even though this will set a bad precedent for other bailouts. Watch for Citigroup's subordinated debt to jump in price as investors conclude that the feds would do the same thing if Citi needs a rescue.

By far the biggest risk here, however, is that the companies could still emerge with their business model intact. That model is the perverse mix of private profit and public risk, which gave them an incentive to make irresponsible mortgage bets with a taxpayer guarantee.