Last night I mentioned the J.P. Morgan report referenced by the Journal, which gamed out how much longer the government would be willing and able to protect the interest of bondholders or "senior creditors" from the losses associated with failing institutions like the big banks, AIG, etc.

TPM Reader BC was kind enough to send in a copy of the report. And here's the key passage about how long the federal government will be willing to protect 'senior creditors'.

Given these developments, we turn more cautious on senior bank credit given that we see no near-term catalyst (buyer) to cause spreads to tighten. Banks are the most widely held names in the corporate bond market, given the sector's heavy issuance: nine out of the top 10 largest bond issuers are banks (see Corporates). With that in mind, despite limited non-guaranteed supply, the technicals for investors adding further exposure here are not that supportive. Furthermore, we believe the systemic risk is pervasive enough that senior bank credit spreads can widen further as worse potential outcomes are considered. In the extreme, losses can be so large that the political willpower to continue bailing out banks and insurance companies evaporates, forcing senior creditors to share in losses or producing other unorthodox outcomes.

We are still a long way from that scenario, and it is not our baseline. However, we think that in the context of massive systemic risk, the risk-reward profile in owning the senior credit is not attractive.

The takeaway is that for now and for the foreseeable future they believe that the government will continue to keep the bondholders whole and insulate them from losses associated with the financial crisis. But things could get so bad that the 'willpower' is no longer there to keep making up for the losses with taxpayer money.