United States Vs. McGraw Hill: The Case For Efficient Markets

The stock market may not be perfectly efficient, but it is beautifully close. Monday, the S&P Ratings announced that they were anticipating being sued by the United States Department of Justice over their role in the financial crisis. S&P is part of the McGraw Hill conglomerate (MHP). McGraw Hill's stock fell almost immediately about 13%. Yesterday, the Attorney General placed a number on the damages being sought, $5 Billion. Within hours, McGraw Hill had fallen another 5.7% on the news. McGraw Hill's total loss of Market Cap reached $2.7429 Billion by 12:00 pm on February 5^th, 2013, or 54.85% of the amount of damages being pursued by the Us Attorney General.

One could say that the market participants have given the US a 54.8% chance of winning; Or to be more precise since the courts can award partial damages, the market believes that court costs and damages will add up to approximately $2.75B for McGraw Hill. By market close on Tuesday, MHP had lost over 22% of its value, losing $3.75 Billion in market cap, an astonishing 75% of the total damages sought by the DOJ.

The investment opportunity, for any who doubt the efficiency of the stock market, lies in speculating upon the outcome of the trial. A settlement for anything less than $3.75B should cause McGraw Hill's stock to appreciate, with a slight premium added in for the removal of uncertainty. A full victory for the Attorney General will cause McGraw Hill to fall by another $1.25 Billion.