Modigliani-Miller theorem

Greg Mankiw, through a "smart friend", has invoked the Modigliani-Miller (MM) theorem to argue against government taking an equity stake in the firms selling distressed assets.

He writes, "MM implies that the price of the asset (again,assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives. In this case of a reverse auction, imagine that the price is set at $10. If Treasury instead demands a warrant for future gains of some sort, then the price will rise in the expected amount of the warrant - say that's $2. Then the price Treasury pays for the asset will be $12." He therefore feels that neither the firm nor the equity holders do not gain anything extra by equity warrants.

The MM theorem states that in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt, or what the firm's dividend policy is.

The problem with the aforementioned plan is that the assumptions may (will) not hold. There surely is information asymmetry between the bailee and the Treasury. About efficient markets, with the events of the past few weeks, do we need to say any more? An alternative plan would be to get issued warrants whose value is an increasing function of the loss Treasury books when it sells off the bailee's assets.