IBJOpinion

SKARBECK: Trading in failed firms really isn't 'investing'

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Click to the Web site of Motors Liquidation Co. and on the front page you will find this warning message: “Management continues to remind investors of its strong belief that there will be no value for the common stockholders in the bankruptcy liquidation process, even under the most optimistic of scenarios.”

Motors Liquidation is the “old” General Motors, a corporate shell that holds the bankrupt assets and liabilities of the automaker. Punch in the stock ticker MTLQQ.PK and you will find a stock priced near 70 cents per share, with “investors” busily buying and selling millions of shares a day in the pink sheets.

With 610 million shares outstanding, Motors Liquidation is valued at $425 million despite statements from management and securities regulators that the shares are likely worthless.

Similar trading activity is taking place at other former industry titans that are now wards of the state. Fannie Mae and Freddie Mac share values have tripled since July, while shares of American International Group have quadrupled. Although not bankrupt, the government owns 80 percent of these companies in the form of preferred stock, which needs to be repaid in full before common shareholders receive any value. AIG would need to repay the government $85 billion before any excess value would accrue to shareholders.

Who is “investing” in these stocks and why? It is safe to say they are not investors who have done the exhaustive work of valuing the assets and liabilities, who then reached a conclusion that they were getting good value for their money. And while it is possible that there may be a small contingent of confused investors who think they are buying the “new” GM, the majority of the trading in these companies is being done by day traders.

So, let’s call it what it is—gambling. These participants apparently operate under the belief that they can get lucky and outmaneuver other like-minded traders.

Take Motors Liquidation. There is no business value attached to the shares. Unlike an operating business, Motors is not investing its capital into ventures that can grow and create value for its owners. “Investors” in this stock have already been told it is worth zero. Yet, thousands sit at computer terminals each day trading among themselves, hoping to net more winning trades versus losing trades.

The trading in AIG seems a bit seedy. The company did a 1-for-20 reverse split in July, which helped set off the trading frenzy. Then, a new brash-talking CEO came on board and was granted millions in stock as part of his pay package. Some observers have pointed to his comments as helping to fuel an unwarranted rise in the stock. Speculative option trading in AIG has exploded in the past two months.

The Wall Street Journal highlighted a hedge fund that had hopped into AIG for the ride with the firm’s principals boasting of their trading profits in AIG. Presumably, this hedge fund was formed with contributions from “sophisticated investors.” Here, I have to confess, the idea that anyone would commit a hard-earned investable dollar to a day-trading firm just doesn’t even cross my radar.

The word “investing” connotes that there is something of value, like a business, attached to the monetary outlay. There is injustice done to that definition when people who hyperactively dive in and out of stocks are described as investors.•

__________

Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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  1. to mention the rest of Molly's experience- she served as Communications Director for the Indianapolis Department of Public Works and also did communications for the state. She's incredibly qualified for this role and has a real love for Indianapolis and Indiana. Best of luck to her!

  2. Shall we not demand the same scrutiny for law schools, med schools, heaven forbid, business schools, etc.? How many law school grads are servers? How many business start ups fail and how many business grads get low paying jobs because there are so few high paying positions available? Why does our legislature continue to demean public schools and give taxpayer dollars to charters and private schools, ($171 million last year), rather than investing in our community schools? We are on a course of disaster regarding our public school attitudes unless we change our thinking in a short time.

  3. I agree with the other reader's comment about the chunky tomato soup. I found myself wanting a breadstick to dip into it. It tasted more like a marinara sauce; I couldn't eat it as a soup. In general, I liked the place... but doubt that I'll frequent it once the novelty wears off.

  4. The Indiana toll road used to have some of the cleanest bathrooms you could find on the road. After the lease they went downhill quickly. While not the grossest you'll see, they hover a bit below average. Am not sure if this is indicative of the entire deal or merely a portion of it. But the goals of anyone taking over the lease will always be at odds. The fewer repairs they make, the more money they earn since they have a virtual monopoly on travel from Cleveland to Chicago. So they only comply to satisfy the rules. It's hard to hand public works over to private enterprise. The incentives are misaligned. In true competition, you'd have multiple roads, each build by different companies motivated to make theirs more attractive. Working to attract customers is very different than working to maximize profit on people who have no choice but to choose your road. Of course, we all know two roads would be even more ridiculous.

  5. The State is in a perfect position. The consortium overpaid for leasing the toll road. Good for the State. The money they paid is being used across the State to upgrade roads and bridges and employ people at at time most of the country is scrambling to fund basic repairs. Good for the State. Indiana taxpayers are no longer subsidizing the toll roads to the tune of millions a year as we had for the last 20 years because the legislature did not have the guts to raise tolls. Good for the State. If the consortium fails, they either find another operator, acceptable to the State, to buy them out or the road gets turned back over to the State and we keep the Billions. Good for the State. Pat Bauer is no longer the Majority or Minority Leader of the House. Good for the State. Anyway you look at this, the State received billions of dollars for an assett the taxpayers were subsidizing, the State does not have to pay to maintain the road for 70 years. I am having trouble seeing the downside.

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