A disturbing fact pattern...

A disturbing fact pattern is starting to emerge. I honestly can’t tell if it’s cluelessness or evil genius.
US to put conditions on Tarp repayment The money quote, from an unnamed Obama Administration official is “…the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”. “The wider economic interest…” But who decides what the “wider economic interest” is? Somehow I think it won’t be the executives who run the banks. Many banks didn’t want the funds initially, but were forced to take them so no one could identify the “weak sisters,” leading to another Bear Stearns run on the bank (for the record, probably a good policy).
The government urged the banks to accept 15 cents in cash for every dollar that was owed them. According to the WaPo article, the recovery value of these senior secured (ie, first mortgage) bank loans is estimated at 11-50 cents on the dollar (Higher estimate from the banks, lower estimates from Chrysler.) I tried but could not find where the bank loans are trading in the secondary market. Generally, the loans should trade at the product of “Probability of Default” times “Loss Given Default.” Converting the debt at below market value is unquestionably in Chrysler’s interest, but not in the interest of the banks nor their shareholders.
So what happens if the banks refuse to play ball with the Obama administration? U.S. May Convert Banks’ Bailouts to Equity Share. By converting warrants to common equity, the US Government would gain the right to place Directors on the board, vote on shareholder resolutions, etc.
So, here’s where it gets ugly, as I see it.
--Global banks are more or less a commodity business. The same American banker might work for American, German, Japanese, or Canadian banks at different points in his career. If C, JPM, or BAC investors are abused, they can get essentially the same investment vehicle by selling their shares and buying Calyon or SocGen, (French), Credit Suisse or BMO (Canadian) banks, among others. Is it a good idea to destroy a sector of the American economic system for short term gain?
--If banks are forced to operate in a suboptimal way, it means that deserving companies lose out to more politically-connected ones. Further, one of the ways investors are irrational is “Home Bias,” which is the tendency of investors to hold an inappropriate level of domestic equities in preference to international investments. In my personal dealings with domestic and foreign banks, there is a similarity in the lending process…when lending decisions go “back to Paris” instead of being resolved in New York, probability of success is reduced. Do we really want to restrict the amount of capital available to US firms?
--I’m reminded of a story I heard about one way the mob does business…they find a small businessman and “persuade” him to take a Made Man as a “minority partner.” The Mafiosi partner proceeds to withdraw funds from the bank account, buy (and steal) inventory on credit, and generally loot the business, eventually leaving the proprietor with a bankrupted business and destroyed personal credit and reputation. Having pushed the limit on legitimate borrowing, is the US Government now using guile to loot the private savings and investments of even non-US investors?