Tuesday, November 21, 2006


Stock market at all-time high...women & minorities hit hardest

In the realm of liberal pundits, Michael Kinsley is notable because he occasionally can make some sense. Not often but occasionally.

But not today. Nope – today Mr. Kinsley wildly springboards off the celebration of Milton Friedman’s genius to alert us as to some imagined nefarious goings on in the capital markets. Michael Kinsley - A Capitalist Swindle.

“The free market cannot be setting the right price for financial assets such as shares of stock because often there are different prices with equal claims to be the product of free-market capitalism. They can't all be right.”

His point is that public companies are often bought up by private investors, re-packaged and then sold off at a higher price. He believes this is inherently unfair to the poor public investor who sells out (willingly) to the rich private investor.

“Defenders of this procedure say it's not that the stockholders have been swindled. It's that the company is actually far more valuable in private hands because managers -- even the same managers as before -- can manage far better without the constraints of public ownership, with its meddlesome stockholders and nettlesome regulations. Maybe so. But if these deals aren't a swindle, then the stock market itself is a swindle. It does not maximize value for its working- and middle-class investors. The stock market leaves money on the table waiting for "private equity" to swoop down and pick it up.”

Very simply – and I’ll try to put it in words that even a Harvard Law graduate like Mr. Kinsley can understand – the stock market price normally reflects a minority interest price. This is a simple reflection of common sense – owning a non-controlling interest in a company is worth comparatively less – on a per-share basis – than owning a controlling interest. That’s why offers to buy up a company come in at a premium over the current market price. (This is also true politically – the value to a party of an incremental Senate seat is worth a lot more if it brings you to 51 votes vice 41 – which is why Joe Lieberman isn’t publicly shunned by his former party mates). The use of this concept is particularly prevalent in estate planning as a tool to reduce a potential estate’s value (and consistently upheld by courts).

And Mr. Kinsley’s lament that the stock markets do “not maximize value for its working- and middle-class investors” is just populist preening. The markets don’t have different values for the likes of the rich like Ted Kennedy, Jay Rockefeller and John Kerry (to name three at random). Their stock holdings have the exact same per-share value of a particular stock as that neighborhood investment club that meets down the street. Still, if the stock market truly does have piles of money just waiting on that proverbial table for “private equity”, why not just beat them to the punch? Mr. Kinsley’s a smart guy (c’mon – he went to Harvard Law) - he should organize a restrictive private equity fund. It could be limited to that most maligned of peoples – working and middle-class investors – and, from the way he describes the markets, would be practically a license to print money. I mean, where’s the risk?

Finally, I am resisting a whole screed about his “maybe so” response to the observation about managing better without “meddlesome stockholders and nettlesome regulations.” Such an observation is so patently obvious that I find his “maybe so” just another indication of a deficiency in his understanding of economics and business. Hell, Sarbanes-Oxley alone can tilt the balance in favor of private ownership.

Want a scary thought? Michael Kinsley is probably indicative of the brain trust that now informs the ruling party of Congress.

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