Steve Randy Waldman gives the last word on how the banks were bailed out, contra the popular opinion that TARP “worked.” I appreciate this analogy:

Suppose my kid’s meth habit got the best of him. He’s needs to come up with $100K quick or his dealer’s gonna whack him. But he’s a good kid, really! Coulda happened to anyone. So I “lend” him the money, even though he has no visible means of support and the sketchiest loan sharks in town wouldn’t give him the time of day. Now I believe in bootstraps and hard work, individualism and self-reliance. So I tell my son. “Son, you are going to pay me back every penny of that loan. You are going to work it off. I have arranged with one of my golf buddies, a guy who owes me a favor or three, a job that pays $200K a year. You’d better show up every day at 9 a.m. and sit behind that desk, and get me back my money!” And he does! After a year, he’s made me whole. What a good kid.

No bail out, right? He paid me back every penny! Worked it off!

Bullshit. The opportunity I provided him, the $200K job that he would not otherwise received without my intercession was a huge grant. On the open market, if I were to accept bribes from the highest bidder to wangle the job from my friend, that opportunity would be worth more than the $100K advanced. I paid my son’s loan with my own money. I just obscured the cash flows, so my son and I can pretend and sustain our mutual self-regard and our righteous disdain for the moochers and the hippies and the riff-raff.

Let’s just stop pretending here, OK? The value of the free money that banks got – are still getting – is far bigger than they would have ever been able to raise on their own. The banks didn’t earn their way back to help, they were nursed.

But a funny thing has happened. One of the ways in which the big banks were paid off was through an artificially high credit rating based on the assumption that they would always get bailed out if they got into trouble. This was a major advantage for them over their competitors. And now it’s gone:

Standard & Poor’s Ratings Services has lowered its credit ratings for many of the world’s largest financial institutions, including the biggest banks in the U.S.

Bank of America Corp. and its main subsidiaries are among the institutions whose ratings fell at least one notch Tuesday, along with Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co.

S&P said the changes in 37 financial companies’ ratings reflect the firm’s new criteria for banks, and they incorporate shifts in the industry and the role of governments and central banks worldwide. The agency did not release its evaluation of each company but said it plans to discuss the changes during a conference call early Wednesday.

S&P, in other words, doesn’t think it’s a slam dunk that the big banks will get bailed out anymore. I’d introduce them to the Federal Reserve, where the bailouts flow all day long, including just this morning. So I’m not so sure.

But this could trigger a real death spiral for Bank of America. They may have to put up more collateral on their derivatives contracts, and their liquidity is threatened (though today’s announcement from central banks blunts that). BofA’s stock is trading around $5 a share, a real danger zone, because below that point trading may be difficult:

Beyond the S&P downgrade, trading could become even more complicated in Bank of America’s stock, if it falls below $5. Under that threshold, many broker-dealers will not allow investors to buy or short a stock on margin, according to a spokesperson for the New York Stock Exchange.

Buying on margin means that an investor can simply put down 50% of the price of a stock initially, and the trading firm advances the rest.

Maybe S&P is looking at the fact that, with all the legacy mortgage exposure and headwinds from Europe and elsewhere, there isn’t a way to unwind these zombie banks. Bank of America will be the first test case.