Wednesday, September 17, 2008

Unlimited returns limited liability

First Northern bank, and now AIG. The money crisis has led to government takeover of some of glamor boys and bedrocks of a market driven economy. The fall of these companies would have had severe implications on the economy of these countries, banking sector in particular. So a government bailout with tax payers money. This was the only way to continue operations in these companies. The other option would have been the companies filing for bankruptcy which would lead to the company's assets stripped apart by creditors, and continued operations unlikely.

Now my goat with the whole process is that the government in these occasions made the tax payers pay for operational mistakes for which the management and shareholders who chose the management are responsible, while putting minimum costs on the shareholders. On the event of a bail out, the shareholders can still liquidate their shareholding and leave with whatever they get. They shouldn't be getting anything in a government bailout. A government bail out happens only when the market does not value on going operations of a company higher than the sum of its parts. The first right of whatever is earned out of the parts auctioned in the market is with the employees, debtors etc in that order, and equity holders come last. But a government bail out serves the shareholders before anybody else. And the economic cost of buying at a price higher than the fair market value is passed on to the tax payers. This is not just. This is my goat.

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Anonymous Anonymous said...

Boy! o Boy! U r obsessed!!!!

12:22 PM  
Blogger Sameer Sarma said...

What to do love? It's all you can hear of in the news these days.

3:35 PM  
Anonymous Anonymous said...

I thought u stopped watching the news these days???

4:46 PM  
Blogger Sameer Sarma said...

I did. But I still read. Unlike you:)

4:57 PM  

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