Tuesday, November 25, 2008

Jekyll and Hyde revisited!

Yesterday's Financial Times had this headline: "Citi plans good bank, bad bank structure". In effect, Citi plan to separate all the toxic assets and put them in the bad bank and keep all the money making assets in the good bank. Well, I guess we should carry this to its logical extreme and let every company do this - break up into good and bad parts. Thus, Microsoft can consign Office and Windows to the good part and throw Xbox into the bad part.. The next step would be to have two listings for every company - with investors allowed to trade each part separately (we could call them MSFT-G and MSFT-B).

Here is the practical problem. Investors will undoubtedly mark up the prices for the good part, but how are we going to induce them to buy the bad part? After all, if the assets in this part are proven money losers, you would have to pay people to take parts of these assets. In the case of Citi, the plan is obvious. They want to keep the good part and spin off the toxic part to the government; in effect, tax payers will be left holding pieces of assets that will generate negative cash flows as far as the eye can see. If I were negotiating for the Treasury, I would demand a large chunk of the good part (in options or equity) in return for taking the bad part. Otherwise, it seems like a bad deal!


  1. I bow down before the XBox -- especially with the new UI, the integration of Windows Media Center, and Netflix.

    I have no idea if it makes them money, but it is the best integrated gaming experience in the history of mankind, and it has made my computer obsolete.

  2. Well said Sir! But how good can be the good? In today's scenario it is almost impossible to estimate how bad is an asset untill we see the next company, where we had invested, falls.

  3. Interesting article featured in The Economist offering support to the good-bad bank structure -



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