Re: Waiting for Godot (Henwood)

["John M. Legge" <jlegge@xxxxxxxxxxxxx>]

One of the key roles of financial markets is linked to the law of limited
liability: the stock market allows rentiers to participate in an unbounded
upside and a strictly limited downside.  I don't know US practice, but in
Australia/UK banks typically demand personal guarantees from start-up
entrepreneurs, effectively stripping them of limited liability protection.
Stock market investors enjoy limited liability; even if they buy on margin
and the shares go to zero, they are only liable for the amount that they
borrowed, and not for the dead company's debts.

A necessary condition of fundamental uncertainty is that some companies will
fail with unpaid debts, and it is impossible to predict from some quite
proximate time which companies are going to fail.  It is most obvious with
"bottom fishing" investors, who buy shares in companies in perilous
circumstances: some of these companies will fail, and the investment in them
is lost while society as a whole picks up the rest of their debts; but a few
will succeed and the speculator gains the whole of the manifold upside.

News Corp is one example of a company whose shares fell to pennies when it
became insolvent; it was rescued because too many banks would have gone down
with it and the shares have risen forty fold since bottom.  If a bottom
fisher had bet on forty companies including News Corp, and the other thirty
nine had failed he/she would still be in front.  Essentially the stock
market would have served to lubricate a major transfer of wealth from the
creditors of the thirty nine failing companies to the bottom fishing
investors in the successful fortieth.

JML