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 _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
