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

October 3, 2009

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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