Faced with a $34 billion hole uncovered in the stress test, Bank of America might have little choice but to dump its investment in China Construction Bank, China's second-largest bank. That would give it about a quarter of the $34 billion of additional capital we are told it needs to fill a yawning gap in its foundation. A lock-up on a portion of the stake ends tomorrow, and the opportunity may be too good for embattled CEO Ken Lewis to pass up, though the bank has plenty of incentive to hold onto the stake.

Citigroup's Keith Horowitz raised his price target on the bank, citing the end of uncertainty. He also says the total need at the 19 stress-tested banks will be $75 billion, with Bank of America accounting for the lion's share.

At this point, with hundreds of billions of public dollars having been heaved at the likes of AIG, Citi, Bank of America, automakers, auto suppliers, life insurers, etc. that number is hardly shocking. And with the S&P having recovered 25 percent of its recession-fueled losses, is it time to expect investors to become more aggressively exposed to the end of uncertainty?

Other deals of the Day:

* British insurer Aviva is exploring options to sell its Australian business, which has an estimated value of up to A$1 billion ($740 million), sources with direct knowledge of the matter told Reuters.

* GlaxoSmithKline has agreed to sell the U.S. rights to the antidepressant Wellbutrin XL to its Canadian partner Biovail Corp for $510 million, the world's second-biggest drugmaker said.

* The clans that control the Porsche automotive empire are set to meet in the hopes of finding a solution to its high-risk takeover plans for Volkswagen that have backfired.

(PHOTO: Ken Lewis, Chairman, Chief Executive Officer and President of Bank of America in New York, June 11, 2008.  REUTERS/Chip East)

Arzu Cevik, director at Thomson Reuters Strategic Research, writes:

“With Citi shares trading below $1, the first time since 1970 that a “penny stock” traded on the Dow Jones Industrial Average, it is widely expected that it will be removed from the index.

“The company was added to the Dow in 1997 when it was still known as Travelers, and the last company to be removed from the Dow was AIG last September (when its stock hovered above $1) and was replaced by Kraft Foods.

“It’s also expected that General Motors may be removed from the Dow. GM shares are trading slightly above $1 and there’s speculation it may be headed toward bankruptcy.

“There are other stocks in the Dow that are now a part of Wall Street’s Dollar Menu. In fact, there are currently five Dow stocks trading in the single digit range.

“Who will take their place in the Dow? Mostly likely, another company whose stock is faring better or relatively better in this recessionary environment.

“There aren’t too many of those but if I had to guess, I’d say it would have to be a company with a strong brand name and one that is viewed as influential. Also, one whose shares aren’t trading in the single digits.

“On the technology front, Apple and Google are possible contenders. In the pharmaceuticals/biotech world, perhaps Abbot Labs, Amgen, Bristol, Genentech and Gilead Sciences could be considerations. If terms of other industries and companies, perhaps Monsanto or Amazon?

“Some might argue about the relevance of the Dow as it doesn’t accurately depict what’s happening in the markets because of its limited number of stocks and because it is price-weighted rather than market-value weighted like the S&P 500.

“However, there is still a prestige factor involved in being part of this elite group and any company added would see a boost in volume and possibly price.

“The top editor at The Wall Street Journal, which is published by Dow Jones, decides on changes to the index. It was reported (by Reuters) that they are currently monitoring the situation ‘closely.’

“Who do you think should be included in the Dow and why?”

After the collapse of Northern Rock, AIG and XL group – which sponsored Newcastle United, Manchester United and West Ham respectively — the curse of English football is getting stronger.

Today Iceland’s Landsbanki went into receivership. Its chairman Björgólfur Gudmundsson owns West Ham football club.

In November 2006, Gudmundsson, Iceland’s second richest man, led an 85 million pound buyout of the east London club in November 2006, investing another 30.5 million pounds in December 2007.

Former Thai Prime Minister Thaksin Shinawatra sold his Manchester City football club to an Abu Dhabi-based company having gone into exile in London in August on corruption charges.

Still, Thaksin did make a fat profit.

Some financial firms, but not all, will be saved. The pattern was set with Bear Stearns in March and repeated with Fannie,  Freddie and AIG this month — but not Lehman Brothers. Information Arbitrage lays it out this morning here.

“Unwittingly or not, Treasury Secretary Paulson has effectively created the Paulson Doctrine. The doctrine states that firms that he deems too big to fail (but we’re not exactly sure where the line is drawn: LEH? No. BSC? Kind of. MER? Maybe. AIG, FNM and FRE? Definitely.) get the U.S. Government (and the U.S. taxpayer) as new senior shareholders, while the others are either left to execute an orderly private markets Good Bank/Bad Bank restructuring (if they can, like Mellon in the late 1980s) or a hurried Chapter 11 Good Bank/Bad Bank restructuring (if they can’t: see BCS/LEH circa 2008).

Sure, the headline reads that the Fed bailed out AIG, but was anyone other than Mr. Paulson pulling the strings? I doubt it. So what of this doctrine, and what does it mean for the global financial markets, the integrity of the U.S. regulatory regime and the U.S. taxpayer?

As for the Federal Reserve-backed rescue ofAIG, Reuters’ Emily Kaiser says that the “US central bank may have wiped out what credibility it won resisting Lehman Brothers’ rescue plea, and opened its door to countless other companies to come calling for cash.”

What do you make of the ‘Paulson Doctrine’?

Picture: Treasury Sec. Paulson/REUTERS/Paul Szep 

As CNBC’s on-again, off-again call for the calvary for AIG held the stock market’s attention, Tyler Cowen posted what may well be what we’ll remember about this unusual day: “It’s a little scary that the world’s largest insurance company hasn’t planned for a rainy day.” (Marginal Revolution)

Mark Thoma is monitoring the bailout-moral risk debate on AIG and sides with Willem Buiter in the FT this morning. “Unless we are very certain that telling AIG to ‘go away’ will not endanger the overall economy, then protect jobs and the economy first and foremost by ensuring, minimally, that an orderly liquidation occurs,” he posted in the Economist’s View.

Count Stan Collender at Capital Gains and Games as one of the surprised at the sudden shift of events. After two weeks off the gird, he returns Tuesday and notes “a substantial change in the reporting on the financial situation. There was a certain almost arrogance and swagger just before I left. The mantra was that Bear Sterns was the beginning of the end of the problem. I don’t hear that now.”

Marc Gerstein isn’t too interested in the blame game. “Exotics or not, if you lend a ton of money to people who can’t pay it back, you’re going to suffer.” He puts growth and sentiment models to the test and concludes “we’re still likely to be better off if we own reasonably valued shares of companies with demonstrated records of being able to grow earnings” despite the wrenching transition taking place in some sectors. (Gerstein used to write an investment column at Reuters.com and is now at Portfolio123).

On the broader economic front, Brad DeLong’s Semi-Daily Journal looks at Monday’s Industrial Production release and concludes: “For about a year we have been blessing the disconnect between financial chaos and construction depression on the one side and real-side economic ‘weakness’ elsewhere in the economy. Let’s hope the disconnect continues. But it looks as though it isn’t: the recession has spread out from construction into goods production broadly.”