Monday, September 22, 2008

Underwriting to undertaking.

James Surowiecki suggests that the downfall of Lehmann Brothers and the other (former-) investment banks was hastened (at the least) by their decisions a few years back to go public:
[F]or Wall Street firms, going public was a deal with the devil, because it meant exposing themselves to what was, in effect, a minute-by-minute referendum, in the form of the stock price, on the health of their operations. This was fine as long as things were going well—the higher the stock price, the richer everyone got—but, once things started to go bad, that market referendum started to look like a vote of no confidence. And that made the problems that the companies were already facing much, much worse. . . .

This doesn’t mean that stock prices don’t reflect reality—Lehman’s business really was in bad shape—or that Lehman would have survived had it been private. But being publicly traded makes it harder to take the long view and survive market storms. It’s possible that a year or two from now many of the toxic assets that financial firms have written off will turn out to have considerable value. (That, one assumes, is why the private-equity firm Lone Star Funds spent almost seven billion dollars, in July, to buy such assets from Merrill Lynch, at a steep discount.) However, public companies, in order to satisfy ratings agencies and convince shareholders that they were cleaning up the mess they’d made, had little choice but to dump those assets.

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