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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: wonk who wrote (11449)	2/10/2006 1:44:32 PM
From: TimF	Respond to of 541851

The government took away Tim Fowler’s RIGHT to recover from me personally - for my debt. Because I didn't contract with you personally, I made a contract with "Wonk Corporation". I own Exxon Mobil stock. I didn't directly purchase their shares, but I have mutual funds in my 401K, and the S&P 500 fund (and maybe others) contains XOM. So if one of their tankers springs a leak I should be directly open to lawsuits? What a crazy idea. 1. The cost of equity capital to each individual company would go up By a lot. People would be very reluctant to own stock in a company if they are directly liable for any action the company takes. If your idea was implement I would immediately be liable for the actions of thousands of companies all across the world. 2. The cost of debt to each individual company would go down What makes you think that would happen? There would probably be a greater supply of credit available (people wouldn't poor money in to stocks and it would have to go somewhere), but there would be more demand for such credit. Its possible interest rates would go up, and even if they didn't since more capital would come from debt the total interest paid would go up. The fact that creditors could go after the owners of companies not just the companies themselves might lower the risk for the creditors which itself would push interest rates down a bit. But there are many other factors at work. For example some companies have much greater debt than the value of their equity. Your plan would increase and encourage this situation as it favors debt finance over equity. The huge amount of debt can easily be something that the equity owners might have a problem paying. They might declare bankruptcy, or otherwise be unable to pay. If a large widely owned, highly leveraged company was unable to pay its debts or other liabilities and action was started against the owners there would be so many owners effected that they might be powerful enough politically to restore the limited liability concept. Imagine if GM went under, even under our current system it has a market cap of $12.32 billion and a "Enterprise Value" (market cap minus cash and cash equivalents, plus preferred stock and debt) of over $250bil. Make equity financing less favorable and the market cap goes down even more (and perhaps the debt goes up). That's an awful lot of debt to try and collect from the an equity base more than 20 times smaller. 3. The weighted average cost of capital by Company would probably go up, but by a modest amount I don't think it would be so modest. Also the capital would mostly have to be provided by debt, reducing risky start ups (even junk bonds don't provide the type of return needed for some high-risk, high reward investments). Your plan would cause a stock market crash, and result in a smaller and riskier equity market. There would be fewer new high risk startups and probably slower growth in the economy as a whole even after the adjustment period (and the adjustment period would probably include a shrinking economy for a time). …As a result their "limited" potential losses cannot exceed the amount which they contributed to the corporation as dues or paid for shares. This allows corporations to raise funds for riskier enterprises by removing risks and costs from the owners and by shifting them onto creditors and to other members of society, thereby creating an externality. They can only shift them on to lenders who agree to accept the risk. Its not an externality its an agreement, and both sides understand the way it works. There is no shift of the risks and costs. It would be a shift it the lending was done with the owners being liable and then the law changed, but its not like limited liability corporations are a recent innovation, and an owner of a company that is not a limited liability corporation can not get rid of his liability for that debt by incorporating. This allows corporations to raise funds for riskier enterprises Shutting down, or greatly reducing the ability to raise funds for riskier investments would be a bad thing not a good thing.