Tuesday, March 13, 2012

Is this the market working?

Here is a very interesting WSJ article involving customer claims to their money from the failure of MFGlobal.

Recall the basic situation: customers who held funds in accounts at MFGlobal have not been fully paid, and the money as of yet has not been located. It appears that in the flurry of MFGlobal's plunge into bankruptcy, those sacrosanct customer funds were mis-appropriated...but nothing has been proved yet.

Now comes a couple banks, Barclay's and Royal Bank of Scotland, offering to pay US customers of MFGlobal 91 cents on the dollar in return for the customer's claim against MF. Not too bad...those customers as of now have received 72 cents on the dollar from the bankruptcy process.

Why would the banks do this? Well, they or the investors on the other side think that 91 cents is a good price for the claim.

I wonder if there is a chance that the owner of the claim could get more than 100% -- maybe due to penalties.

My colleague Randall Thomas and I once wrote a paper where we discussed the sale of claims arising from class action lawsuits to the highest bidder. The advantage here, as with the MFGlobal situation, is that you will get a concentration of economic incentives to litigate the case efficiently.

Fascinating how markets work.

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