More: A Reverse Market For Lemons: Why The Bear Stearns Story Is So Bizarre

There aren't many situations where the buyer of an asset has more knowledge about the asset than the seller. But that is the case with Bear Stearns.

On the surface, you have a classic information asymmetry -- actually lots of them. Bear Stearns shareholders couldn't understand how a $60 stock could be worth $2 the next day. JP Morgan thought (rightfully) that Bear Stearns was essentially bankrupt, and so a $2 per share offer was perfectly reasonable. Bear Stearns never knew that on Thursday night the company was this close to declaring bankruptcy, thus probably wiping out equity in its entirety.

And from a stock that could have been worth $0 per share, you have a stock trading at over $12 per share -- as if shareholders are once again looking to get into a game of chicken with Jamie Dimon.

So unlike a typical market for used cars, where only the seller knows the condition of the car, you have the opposite. The buyer knows exactly how close Bear was to dying. Most of the sellers had no idea. Instead they've been told to just take Fed's wort for it, that they were getting a totally fair deal.

What other examples are there of an information asymmetry such as this one?

More: Akerlof's original paper on the so-called Market For Lemons discussed the need for trusted third parties to facilitate transactions. In this case, JPM must've thought that by having the Fed's lipstick traces all over the deal, the BSC shareholders would believe that the price was right. Unfortunately, the Fed doesn't carry as much credibility as it would like to, and some thought that a conspiracy was formed to ram-rod Bear into the deal. Perhaps the Good Housekeeping seal of approval might've carried more weight.

Comments

[Dear John Thain]

I bet the closest asymmetry has to do with legal issues. For example, when a prosecutor (or, perhaps more pertinently, the police, since prosecutors are limited in their use of deception relative to the police) tells a suspect/prisoner how they are better off taking a deal, the person giving up the confession/information actually knows if they are guilty, but they also assess the risk of a conviction and costs. Odd dynamic.. just a thought.

-DJT