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What Does a Bonus Really Cost?

I don't think you would like the outcome of following your logic. So, since most of these banks are insolvent, shouldn't all the bonuses be clawed back since they ended up losing the "game" at the end of the day? Banking is a "team" sport, and if your "team" loses, like most US banks and investment companies, why should the "team" receive ANY bonus. I think there are plenty of individuals that will play less risky, make less returns in the short term but not blow up the entire system during the process. These are the people that should have been hired to begin with. I wouldn't really argue that any single institution including GS or JPM did well.

Start Aggregating Already!

I think the thing you are missing is the degree of disparity between the bidder and the asker. If the last "trade" of a subprime MBS is 22 cents per dollar, but Citigroup still has it listed at almost 70 cents per dollar. We are talking about huge differences in value. I like the solution where the government pays market value, plus whatever else the bank asks for. However, this excess requires common stock dilution. Then, there should be an opportunity for the bank to "undilute" the stock if the actual asset is sold for more the price the negotiated.

This is essentially, the insurance "ring fence" solution without actually taking the asset of the books (which really shouldn't make a difference if enough transparency is present).