lavalyn

Short Selling: Myths and Facts

glassbox: institutional investors allow the borrowing of shares because it generates additional revenue. "Yes, you may use these shares in this pension trust to be lent for short selling, in exchange for a fixed fee per month." The brokerages make money on the lend too, of course. There's apparently some interesting tax ramifications as well, as dividends paid by shorts are not treated the same as dividends received... I am unfortunately not a tax expert.

Short Selling: Myths and Facts

American: yes, that is correct. Ideally, the locate should also be a lock, so that other people can't use those shares as well for the short. In practice, because the successful locate for shorting generates revenue for the lender, that doesn't happen. I wouldn't blame the resulting increase in float on the borrower (short) side, but on the lender side... oh, who's on the lending side? The prime brokerages, like Morgan Stanley et al.

AIG: America's Insurance Giant

I'd go one further and say that financial guarantees are actually not all that hard to enforce. In probably one of the most free markets out there, the Futures markets have one of the most stringent protections against default risk out there: daily mark to market, automatic closeout of positions, a clearinghouse that backs all transactions, in a tightly regulated market.

A testament to how we can actually become more free by adding regulation.

AIG: America's Insurance Giant

"Never finance illiquid assets with liquid liabilities."

I'm sorry, but this blanket statement will be the one that will topple the entire banking system. The entire point of banks is to borrow short term and lend long term. What are bank deposits if not demand liabilities? What are mortgages if not long term and illiquid debt? And more to the point, how in the world did the banking industry exist before the wave of securitization, when you couldn't even repackage mortgages to, say, Fannie Mae?

Four Questions About How We Got Here

JasonC: on the global scale, does it really make a difference? Lehman going bankrupt and debtholders getting pennies... versus Barclays buying Lehman out, and Lehman shareholders taking the hit instead. Barclays buying the shreds of Lehman doesn't make the value of Lehman assets increase. Surprisingly enough, it *is* a zero-sum game, just a matter of who gets burned.

Given that the Bear Stearns, and then Fannie Mae/Freddie Mac bailouts created a reputation that the "Fed has your back," a collapse is definitely necessary. Systemwide, worldwide, maybe some sense can be put back into credit worthiness review, instead of letting the US Treasury subsidize every ailing company.

Four Questions About How We Got Here

There has to be a (fuzzy) line between maintaining stability in the marketplace and letting the market reward and punish its participants. Wall Street, what do you think of when you read those words? To me, they bring images of ruthless profit-hungry vultures that will punish any misstep of any company from the corporate ideal of the bottom line. Look at their analysts, moving markets with the magic words "Market Outperform," "Conviction Sell," "Overweight." Listen to the conference calls, hear them harp on next quarter's profits... lash out at any deviation from the mantra of profit profit profit.

The very meaning of the phrase Seeking Alpha is an underlying belief that superior research, superior reasoning, and superior decision making results in superior returns. The flip side of that is that inferior decision making results in inferior returns.

Lehman Brothers made inferior decisions, choosing first to hide their assets and refrain from deleveraging in April, then continuing to try to hide their assets in "Level 3" in July. They chose to redouble their bets when they had a good base of capital (share price) that they could have deleveraged with instead. They chose to ask too much of a price of the Korean Development Bank in June. And in doing so, they totally forgot that they were a bank, a wholesaler of financial risk. The role of a bank is to *manage financial risk*.

Equity holders deserve nary a penny for holding to the end like this. Debt holders deserve, as dictated by insolvency law, that they will get priority recovery on those debts. Why should they get more, at your and my expense?