RE: Re: [Pen-l] Obamas Ersatz Capitalism

["David B. Shemano" <dshemano@xxxxxxxxxx>]

Sabri writes:

Trying to follow your reasoning.  You write:

>> The issue is this: the values of the equity and debt are determined by
>> the market whereas the value of the assets are not because assets are
>> not traded in the market. If we have faith in the market, then we can
>> price the assets using A = E + D. But what if A is not equal to E + D
>> ? For example, when there is a buble and the connection among A, E and
>> D is broken, the knowledge of E and D does not give us any information
>> about A. This is what Stiglitz is talking about, except that the
>> assets he is talking about are themselves some derivatives. You may
>> try to back out the asset values from the prices of the derivatives on
>> them, but had the assest themselves been traded on the market, their
>> values would have been different than the values implied by the values
>> of the derivatives on them. It is a matter of degrees of separation,
>> in other words.

You seem to be reasoning a world where E + D = A, meaning that E and D are easily calculable (as determined by the market) and A is derivative of that calculation..  But that is not how the world works at all.  The world works by A - D = E, meaning that E is derivative of A and D.  That being said, the value of A, while rooted in relatively objective facts, is ultimately subjective, which is why we have M&A transactions and why people buy and sell E (and to a lesser extent D).

A substantial part of my work as a bankruptcy lawyer is selling A free and clear of D and E.  In other words, the buyer is buying the A and only the A with a clean balance sheet.  In such circumstances, trying to derive A from D + E has no meaning.

David Shemano
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