« Recommended reading: Broome on Article 9 Financing Statements | Main | RadLAX »

Subsidizing Shareholders (and the Sub Debt Too)

posted by Stephen Lubben

So there is a bit a kerfuffle going on between Luigi Zingales and Brad DeLong. By and large DeLong has the better of the argument, but there is one small piece where he could benefit from the services of an insolvency lawyer.

Oh wait, that's me.

So Zingales says:

    The “put options” offered to Bear Stearns Cos… were subsidies…

He's talking about the consideration given to Bear Stearns shareholders (originally $2, then $10) as part of Chase's takeover of the company.

And DeLong responds:

But Bear Stearns was not offered a put option. Bear Stearns was forced into liquidation over a weekend at a price of $2/share (then raised to $10/share). The market the previous Friday had guessed that it would be taken over at a price of $60/share. You can't call a Federal Reserve intervention that leaves a bank's shareholders $50/share poorer than they had thought they were the previous Friday a "subsidy'.    

I suspect DeLong is smart enough to know that's wrong. Until shareholder losses hit 100%, it is really irrelevant that they've suffered large losses already. And indeed if Bear Sterns was insolvent, and I think there is good reasons to think they were, shareholders are not even the right claimants to look at -- the real question is how much the subordinated debtholders should loose.


The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.