New issuance of preferred shares, backstopped by bazooka, with holders of the existing preferred given an option to participate proportional to their holding. New preferred placed on equal footing with existing to avoid clobbering the regional banks.

No explicit guarantee for the bonds, because the implicit one is enough.

Common shareholders have seen their last dividend.

Huh? If you think BofA is overpriced, you short BAC at this point, not MER.

A significant spread vs. the announced ratio implies one and only one thing: The market is pricing in a significant chance the deal does not close as announced. (Otherwise, there would be a straight-up long MER + short BAC arb.)

@19 -

You misunderstand the language in the JPM agreement you cite. It says that JPM may not repay the money for three years UNLESS they perform a Qualified Equity Offering sooner. (The key language being "Except as provided below".) This is identical to the provisions in the generic Term Sheet (http://www.treas.gov/press/releases/reports/document5hp1207.pdf).

And yes, the statute's language appears to be specifically intended to forbid Treasury from enforcing its own terms.

As for your example of "Tim and the regulators think this is a bad idea because BAC would be rendered insolvent", Tim has nothing to say about that because the Fed is the relevant regulator. This is kind of the whole point of EP's post.