Comments on: Do Jubilee shares make any sense? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: econ2 Fri, 20 Apr 2012 02:52:29 +0000 I think you have missed the game theoretic implications. Take a company like Birkshire Hathaway, for example. You mentioned that with no dividends or possibility that the company will be sold, class H stocks would be worthless. But that means class G shares are also worthless, because you would only be able to sell them at whatever price someone is willing to buy H class shares, which is $0. That means that class F is worthless, and so one all the way to A. It is not enough for the class A through G stocks to be non-expiring, but they also have to be fully transferable, because the value of Birkshire Hathaway stocks really only in the limit–the value comes from the amount that liquidation of the company will yield shareholders, but if that liquidation won’t come in our lifetime, and we can’t transfer stocks without them becoming perishable, then none of the stocks have value. This means that the firm would bleed equity until it is forced to offer regular dividends, which in turn reduces the profitability of the firm.

This backward’s recursion principle would apply to all classes of stocks: a class H stock would be priced at the discounted sum of 50 years worth of dividends, and a class G stock would be worth that plus the discounted sum of dividends expected before selling it, and so on. But ultimately, all of these classes of stocks have value if and only if the firm pays regular dividends. At this point, we have to call into question whether these should be called “dividends” at all–since it is now an obligatory payment needed to maintain the company’s capital valuation, it should be called “interest” not dividends, and recorded as an operating expense, not profits.

My point is what you have described is just an incredibly complicated reformulation of a financial instrument already available to corporations: a bond. Essentially, Keen wants to turn stocks into bonds, so that a stock is really a debt issued by the company that has to be repaid in 50+some odd number of years with interest. We could simplify the whole thing if we eliminated all 8 classes of stocks and simply specify that bondholders have voting rights.

By: DavidMerkel Tue, 17 Apr 2012 20:26:46 +0000 Too complex to be useful.

By: TFF Mon, 16 Apr 2012 21:04:50 +0000 Strych09, read the comments above. Without additional regulation it would mostly just slant the market to “sophisticated investors” who can and do find ways to invest in things even without buying them directly.

Have pity on the little guy!

By: Strych09 Mon, 16 Apr 2012 14:46:41 +0000 realist50 says that this proposal would have “a devastating impact on liquidity”, which is just another way of saying that it would discourage trading of shares for trading’s sake, which I’m sure in Keen’s mind is a feature rather than a bug.

By: Quarrel Mon, 16 Apr 2012 09:09:15 +0000 Surely large tranches of shares would just trade through an SPV? Buying and selling shares in the SPV rather than the actual shares.

This is similar to the way many large properties are often sold (ie you buy the company with the sole asset of the property rather than the property), although there it is about getting around stamp duties etc.

This would be even more likely if, as you say, a lot of the trading would be OTC because of the lack of volume.


By: TFF Mon, 16 Apr 2012 09:09:04 +0000 Well put, realist.

And Petras, I was just thinking of ways to circumvent it myself. But yours is far more elegant!

By: alea Mon, 16 Apr 2012 07:08:40 +0000 Beyond idiotic, in Steve Keen’s own words:
“There’s a twist to my proposal of course: it wouldn’t be a liability that was abolished but an asset, but the intent is to stop the liability of debt…”

(Hint: a liability/debt is someone else asset)

By: Petras_Kudaras Mon, 16 Apr 2012 06:48:58 +0000 Wouldn’t this complicated capital structure be totally worthless, because it can be circumvented by using derivatives?

I would guess it would be possible to set up a SPV, which would buy A class shares at IPO and then issue CFDs or any other similar instrument that would allow trading in those shares without actually moving them to the balance sheet of other investors.

You can tell I used to work in an investment bank :)

By: realist50 Mon, 16 Apr 2012 03:48:46 +0000 I’ll answer the question posed in the title with a resounding “No.” This idea is crazy for a host of reasons.

I fail to see why it would prevent bubbles – I don’t see how the prospect that a share could be worthless in 50 years would have stopped the tech bubble in the late 90’s. People happily buying shares at a multi-billion valuation for a company that had never made money weren’t doing so because discounting cash flows told them that the years 51 to infinity dividends would be worth piles of money. They did it because they thought these companies would quickly dominate some market and/or because they thought they could flip to a fool at a greater price.

It would have a devastating impact on liquidity – not only because each sale of a share makes it less valuable, but also because the common shares of a company are now a series of classes (more than 8, since a class H share is also defined by its expiration date) rather than 1 identical class. This illiquidity probably also makes bubbles more likely, not less. A shared feature of both the residential real estate bubble and newly-public tech stocks during the bubble was transactions involving only a small fraction of assets driving the valuation of a much larger, illiquid group of assets. (For housing, it’s obvious that the asset is relatively illiquid. For the tech stock bubble, newly public companies had a small float, due to insider/VC ownership and lockups, so the trades of a float of about 10% to 20% of total stock were setting the price.)

Valuation of any class of shares becomes extremely complicated, because the non-expiring shares become more valuable if a company doesn’t pay dividends, allows a large number of Class H shares to expire, and then pays dividends to the now smaller remaining group of shares.

Building on that valuation point, corporate governance would be even more of a mess than it is now, due to these fights on the timing of dividends. Boards currently have reasonably well-defined fiduciary obligations in theory, even if in practice they often don’t live up to them. In this new world, what is a board’s obligation to holders of Class H shares that expire in 2013 or 2014? Is it to pay a dividend this year, being equitable to all shareholders? Or is it to delay a dividend, which benefits the vast majority of shareholders who don’t own such Class H shares?

Then there’s the regulatory arbitrage we’d get. I’d obviously much rather own a mutual fund or ETF that owns shares than actual shares, assuming that I can still trade in or out of the fund/ETF.

So, if our goal is to bring some of the worst of the complexity and regulatory arbitrage of the pre-crisis structured finance market to the equity market, while also handing dramatic arbitrary power to corporate boards, then this proposal is a winner.

By: EconMaverick Mon, 16 Apr 2012 03:43:48 +0000 This seems like a fascinating experimental idea to combat the epidemic of short-termism that’s rampant in the economy