Subsidizing Shareholders (and the Sub Debt Too)

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.