Barriers To Exit

14 Aug

I had the unfortunate experience of visiting a K-Mart recently and it got me thinking about the concept of “barriers to exit”,  and not simply because I could not wait to exit the store which should be used as a field trip to show what the communist era Russian shopping experience must have felt like. I first ran across the term barriers to exit, during a conference call with a South African Platinum producer, in which the very laws of supply and demand were suspended as the company director described a situation where the sub-cash cost platinum price was not adequate to close production as the social cost (barriers to exit) were deemed too high. Keep in mind, that the company we are talking about is not a quasi-governmental concern such as Codelco, but a publicly held firm with stockholders and ostensibly a profit motive. While it is easy to understand the reticence to cut production  (and staff) in a country with 28% unemployment, one wonders if the thought process of said platinum producer and Eddie Lampert are simpatico: Stay alive, even in the face of massive losses. However, staying alive to fight another day is only a working plan to the extent that it is facilitated by the capital markets willingness to accept the asymmetric risk offered by such plans. The Platinum Industry and Sears Holdings have enjoyed the benefits of such asymmetry, however one wonders that as reality bites, the term barriers to exit will be utilized to describe the options available to bondholders.

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