By DAVID MOON, Moon Capital Management,
September 21, 2008
When I was a child
growing up in Alabama, there was only one activity in the
fall that rivaled football: cotton-picking season.
When the giant pickers would return from the fields to
deposit their bounty, we would climb the sides of the wagons and jump into the
mounds of the soft bolls. It was like a low-tech version of those huge blow-up
bouncy things parents rent for their kids' birthday parties
Little did we realize that we were taking part in
in the history of Wall Street ' a lineage that appears to have ended this past
In the mid-1800s, three German brothers moved to
Montgomery, Alabama where, in 1844, they started a little
cotton-brokerage business. In an attempt to hedge their bets that Alabama might not become the financial capital of the
world, in 1858 they opened a second office in New York City.
A century and a half later, their little brokerage firm,
Lehman Brothers, has filed for bankruptcy.
Trying to avoid the same fate, Merrill Lynch agreed to be
acquired by the former North Carolina National Bank, currently known as Bank of
Although the feds passed on Lehman Brothers, they apparently felt frisky enough
after wiping out the shareholders of Freddie Mac and Fannie Mae to try the same
trick on insurance giant AIG.
How does the government decide which companies get saved and which are left to
Who gets to have their bad assets backstopped by
taxpayers in a negotiated purchase?
When do the Feds wash their hands and walk
Treasury Secretary Henry Paulson has seemingly declared
himself god and guru of the financial markets, with the responsibility for
deciding when to use taxpayer money and government regulators to wipe out some
shareholders to benefit others.
Despite apparently long discussions among the remaining
large banks with strong balance sheets and the federal government, no one was
willing to buy Lehman at a price that would save the stockholders and satisfy
When a similar circumstance occurred at Bear Stearns six
months ago, Paulson forced a sale of Bear to rival JP Morgan Chase at the
bargain-basement price of $2 a share. The government also agreed to reimburse JP
Morgan if certain of the Bear Stearns assets turned out to be worthless.
One day earlier, Bear shares had begun trading at $57.
Predictably, the stockholders complained. The government relented and came up
with a new price: $10 a share.
How in the world had the feds managed to miss the value
of the remaining Bear Stearns assets by a factor of five? Had they just
plucked $2 out of the air?
Even at $10 a share, the government allowed JP Morgan to
buy the company for essentially nothing. The brand new Bear Stearns office
building was, by itself, worth almost that amount.
Later the government decided to fully back the Freddie
Mac and Fannie Mae bondholders, but it used recently and specifically
appropriated Congressional authority to nationalize the equity interests.
Venezuelan strongman Hugo Chavez would have been
In the case of Lehman, the Feds decided to let the market
and existing legal system handle the situation. The bondholders will get that to
which they are legally entitled. Same for the stockholders.
Now there's an interesting
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).