Lewis, Einhorn: Pretend Markets Are Rational, Then Sell Into Them

Michael Lewis and David Einhorn, on how the government should deal with future big-bank crackups:

If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside. [Emph. added]

Simple! Just take over the entity, sell off the good parts, and liquidate the rest.

There’s just one problem: Lewis’s and Einhorn’s scheme doesn’t sound too different than what’s going on with AIG lately, and that doesn’t seem to be going very well. . . .

The lesson of the ongoing Great De-Leveraging, remember, is that assets can’t be sold, or liquidated, or disposed on terms that are even remotely rational. There are no buyers. . . .

P.S. The two do a nice job teeing off on the rating agencies, however. .

Comments

[Carlos Slim:]

Matt,
The AIG deal is not a take-over by the government. It is some sort of monstrous creation caught in purgatory. If the government had just simply taken over AIG--similar to the FDIC taking over IndyMac--by wiping out common stock and subordinated debt and then guaranteeing all other liabilities with the full faith and credit of the US government, the company would be functioning much more smoothly. Individual subsidiaries could then be sold at its leisure.

The design of AIG's bailout was and remains disastrous.

Jan 06 09:39 AM