Should an equity position be an important part of the bailout?
Greg Mankiw quotes an anonymous "smart friend" to give a witheringly condescending dismissal of the popular idea that the taxpayers should get equity stakes in the firms they are helping to bail out. Here's an excerpt from Greg's "lil friend":
2. "Taxpayers will be better off if Treasury gets warrants."
"This is essentially the assertion made in David Leonhart's column in the NY Times on Wednesday. And it again illustrates that we would all be better off if high schools taught the Modigliani-Miller theorem. MM implies that the price of the asset (again,assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives."not surprisingly Mr. Leonhardt took exception to the idea that he needs remedial training (probably didn't like the misspelling of his name much either):
Jonah Gelbach also takes issue here.
Modigliani-Miller (MM) is explained here.
My own view is the MM is a mighty thin reed on which to base an argument in this current situation (or perhaps even in any real world situation). I am not an expert on the capital structure literature, but the empirical evidence testing whether capital structure is irrelevant is far from being conclusive in MM's favor (check the introduction to this paper for example).
I actually think we'd all be at least slightly worse off if the MM theorem was taught in high school.
Here is a picture of my lil friend.