Does Bank Of America (BAC) Get The Next Bailout?

The Paulson/Bernanke bailout is now spreading across the financial system like a prairie fire in a stiff wind.

AIG (AIG) got one deal. A number of banks got a piece of another deal, the $700 billion Paulson "special needs of banks" program. Now, Citigroup is getting a back-stop of over $300 billion for its toxic assets and $27 billion or so in additional money from the government in preferred shares. If those sums are not adequate, it is a reasonable bet that the Treasury will be back.

The Fed, Treasury, and FDIC are using the Citi plan an a guinea pig, and it the test works, the program could spread.

In among the small print of all the news accounts about the Citi rescue, the FT found a bit of interesting detail: "Citi and the US government made it clear that the Citi arrangement would be extended to other banks that pose risk to financial system stability, if need be."

The "arrangement" is probably not meant to save the Fifth Third Bank Of Akron. Logic would say that it is in place in the event that another large financial firm begins to teeter the way that Lehman did before it failed, the way that Morgan Stanley (MS) did before its got a capital infusion from Mitsubishi UFJ, and the way that Citi did last week.

Which bank could be next? Bank of America (BAC), which took on billions of dollars of mortgages with its buyout of Countrywide, may not be a bad candidate. Neither is Morgan Stanly (MS), which analysts believe will lose $.80 a share in the current quarter.

None of the large financial institutions in the US are out of the woods. As long as housing prices continue to fall, consumers defaults on credit card, home, and auto loans increase, and commercial real estate and corporate loans fail at a rising rate, there is monstrous risk in the entire system. Is it any wonder that junk bond debt coupons have risen to 20% and credit default swaps are priced at record levels? The sense of more crippling losses is already being built into the system.

The Citi bailout may be the largest so far, but it is not the last.

Douglas A. McIntyre