Spero Consulting

Oh, what a party we’d have. We used that title once before and got a decent num­ber of hits from it, and we’re noth­ing if not an oppor­tunis­tic – albeit neo­phytic – SEOer, which is why we men­tion Lip­stick Jun­gle, too.

Since August, when we began pay­ing closer atten­tion to our daily hits and the rank­ings of var­i­ous posts, our silly lit­tle post dur­ing the Olympics, What Do They Want From Us?, about NBC’s pro­mos for Lip­stick Jun­gle remains among our most viewed articles

Actu­ally, for new read­ers we’d like to men­tion that our reuse of the title is part of Spero Consulting’s green strat­egy of recy­cling still valu­able mate­r­ial so as not to harm the envi­ron­ment. Per­haps we’re more gen­tle and car­ing because we’re majority-​owned by a woman, or per­haps it’s because we are lazy, er, efficient.

Regard­less, it is an apt title to intro­duce our crit­i­cism of Lucian Bebchuk’s op-​ed piece in today’s (the Sep­tem­ber 26) edi­tion of The Wall Street Jour­nal, enti­tled How to Pay Less for Dis­tressed Finan­cial Assets.

Mr. Bebchuk’s entire essay sum­ma­rizes to a sin­gle point: the gov­ern­ment should pay only the fair mar­ket value for the dis­tressed, illiq­uid mort­gage assets and secu­ri­ties that finan­cial insti­tu­tions own (that don’t have mar­ket). Now, why didn’t any­one else think of that? Clearly, it takes a Har­vard Law prof with, as the arti­cle men­tions, a “white paper” to reach such a heady conclusion.

Pre­sum­ably, the white paper’s argu­ment goes some­thing like this: let’s ignore for the moment that there is no mar­ket for these items, and let us assume that one exists. In that case, the gov­ern­ment should pay no more than fair mar­ket value. Hmm, very clever. (Reg­u­lar read­ers may recall that we occa­sion­ally use ital­ics to sig­nify deep and mean­ing­ful sarcasm.)

Now, we must admit that up to this point, we’ve been a tad bit unfair. See, Mr. Bebchuck’s essay actu­ally makes three points, not just one. The sec­ond one is very sim­i­lar to the first: pay fair mar­ket value for other stuff, too. So there is no need to dwell on it.

The third rec­om­men­da­tion goes beyond either of the first two has to do with sell­ing the illiq­uid secu­ri­ties that the gov­ern­ment buys. We would neg­li­gent and mis­lead­ing if we didn’t men­tion it. See, Mr. Bebchuk rec­om­mends that the gov­ern­ment design opti­mal incen­tive schemes to sell the inven­tory of illiq­uid, mortgage-​related secu­ri­ties at the high­est pos­si­ble price. Again, bril­liant.

He rec­om­mends, plac­ing the secu­ri­ties with man­agers who do not have con­flict­ing inter­ests – any good eco­nomic the­o­rist could have con­tin­uüm of them in a flash – and he con­cludes that com­pe­ti­tion will pro­duce prices at fair mar­ket val­ues in a jiffy. Bril­liant, indeed. So, assume away conflicts-​of-​interest and have the gov­ern­ment design opti­mal incen­tive schemes because we all know that the fed­eral gov­ern­ment is a very effi­cient designer of incen­tive schemes: see The Gov­ern­ment Will Save Us! Not! for a recent exam­ple of the fed­eral government’s effi­ciency at induc­ing cost-​saving behav­ior. We’re sure that you could sup­ply your own, too.

Inter­ested read­ers are also encour­aged to read a few posts from yes­ter­day: The Uncer­tain Value of Mort­gage Secu­ri­ties dis­cusses the fact that no one seems to know how to value the secu­ri­ties and The Cri­sis and Free Mar­ket Crit­ics pro­vides a bit of detail about the nature of the val­u­a­tion prob­lem – see the aside towards the end, which is about CDOs. We also have a few other posts about the bailout in which we crit­i­cize the plan’s likely effi­cacy and oppose it for a vari­ety of rea­sons. (Note that our argu­ment against sub­si­diza­tion, or hav­ing the gov­ern­ment pay more than the thin­gies are worth does not pre­sume a mar­ket for them but does pre­sume that they can be val­ued in some man­ner. Despite the upcom­ing dou­ble neg­a­tive, we’re not being incon­sis­tent or hyp­o­crit­i­cal by accus­ing Mr. Bebchuk of doing some­thing and then doing it ourselves.)

Like most posts, we’ll prob­a­bly revise this slightly in the next day or two.

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