Chip Taylor

Isn't this how rationality and efficiency are maintained?

Steven Pearlstein in the Washington Post:

Anyone who thinks markets are perfectly rational and efficient hasn't met Wilbur Ross.

Ross is a former bankruptcy attorney who saw there was big money to be made unlocking the value of assets irrationally shunned by the markets. He starts by shorting the stocks of weak companies in industries in the midst of a death spiral. Then, once a target goes into bankruptcy, Ross steps in and buys the assets for a fraction of their book value, selling them off a few years later for several times what he paid for them.

...

What's curious, however, is why so many parties allowed Ross and his investors to benefit from this restructuring rather than getting together and taking the necessary steps to capture the gains for themselves.

When bankruptcy threatened, why did the steelworkers union refuse to strike similar deals with previous managements? Why weren't executives more ruthless in closing uncompetitive facilities, outsourcing services and cutting out management fat? Why didn't creditors signal their willingness to restructure debt? And why didn't other investors move in and outbid Ross for the assets?

The answer, of course, is that we aren't as rational as economic theory assumes. Countries decide that it is a matter of national pride to make their own steel rather than import it at lower prices. Companies cling to the thin hope that the other firms will save them by going under first. Management gets so set in industry practices that it can't imagine another way of doing business, while unions grow so distrustful of management they'd rather let the company go down than give another inch. Directors, blinded by pride and spooked by sunken costs, are reluctant to close plants and cut their losses. And investors remain notoriously risk averse, even in the face of overwhelming evidence that they'd do better breaking from the herd and taking bigger risks with even bigger potential payoffs.

It is a testament to the self-correcting nature of the U.S. economy that there are a few well-funded Wilbur Rosses around who, by exposing and profiting from these inefficiencies, manage to salvage what's valuable from once-mighty industries. Some call them vultures. You might call them heroes.

Pearlstein cites this as an exception to rational and efficient markets, but isn't this "self-correcting nature" the essence of rational and efficient markets?