I think it's also worth noting that Risk of bankruptcy enables similar accounting games even for healthy company's. Basically a bank that's leveraged 10x might as well leverage 50x because the upside keeps increasing linearly with more debt but the downside is practically fixed.
The upside would not keep increasing linearly. When leveraging, the current debt burden of the company would be used to determine the level of risk and thus the interest rate.
The level is risk is associated with the level of assets of the company (thus the ability to recover in case of default).
I would agree that a bailout creates a floor to loss, but then again a natural floor exists anyways (the net assets of the company).
