Cut across Shorty

1 Feb

In comments exchanged below my recent Buddhas of Wall Street & Pentagon post, the issue of ‘shorting’ or ‘short selling’ came up. Its tangentiality notwithstanding, I linked to a capitalist-friendly explanation, prompting fellow Sheffielder and rambling partner Dave Hansell to say:

I still don’t understand why any rational individual or Corporate entity who holds stocks or shares would let a broker lend what they own to someone else for purpose of driving the value of that stock lower before returning the now devalued asset?

He was referring to this paragraph in that linked explanation:

In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value by a set future date—the expiration date. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase them at a lower cost. The risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity.

In other words unless the share borrower – call him Mr Risky, though in truth “he” is likely to be a consortium – has gamed the system in some way (insider knowledge, power to influence the markets and turn Bull to Bear) he is taking a chance. The share lender – Mr Cautious and clients1 – makes a modest profit from the trade whether or not Risky’s move pays off.

But as Dave implies, under Really Existing Capitalism the fact Risky needs the borrowed shares to take a dive introduces a motive. Should he also have both means and opportunity, we have a crime in the making. The US, its Constitution underwriting the right of every free man to pursue happiness, aka loadsamoney, is – I say tellingly – the world’s most draconian enforcer of “fair” trade speculation.

(Ask Bernie Madoff, currently on Year Twelve of a 150 year stretch handed down in the wake of the 2008 threat to the mass somnolence essential to the casino’s future wellbeing. Better get a move on though. He’ll be 83 in April.)

I liken it to a murderer’s Code of Professional Conduct, put out by the Murderers’ Guild to which all responsible killers belong. Clause 6, Paragraph 13b, stipulates a Close Season between July 14 and August 8 – the glorious eighth – during which no murder may take place. Paragraph 13c goes on to forbid all slaying on the third Tuesday after a full moon.

(Pressure groups like The 28 Club and 3rd Tuesday Sanity, arguing respectively for a fourteen day delay to the close season, and an end to lunar restrictions no longer applicable in today’s world, vie with sects like Homicide Unfettered and its more militant breakaway, Stranglers for Justice. These last two advocate 24/7 killing throughout the year.)

Further clauses adjudicate between competing homicidal rights, else outlaw unfair methods. Yet others prescribe/proscribe certain dress codes, and by such means set boundaries for the law abiding liquidator. The full weight of the Code will be brought to bear on transgressors. Unless these have protection in high places they will be named, shamed and jailed – the key encased in concrete then dropped in shark infested waters.

Society demands no less. These people besmirch the sanctity and good name of out-rubbery.

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Oddly enough, a comparable thought occurred when I wrote this footnote by way of erratum to that Buddhas post:

It was Nixon who in March 1969, just weeks after taking office on an end-the-war ticket, ordered the illegal bombing of Cambodia. The initial version of this post had erroneously blamed his predecessor, Lyndon Johnson. This was careless.

Interesting concept, that: “illegal” bombing. It’s a reference to the fact that Congress – an entity in this instance analogous to my Murderers’ Guild (see also Caity Johnstone’s remarks on crazy Marge) – had been kept in the dark over the Nixinger decision to escalate America’s war on the yellow man.

And woman.

And child.

Twenty years earlier, in what Heinrich Himmler had rightly called “victors’ justice”, senior Nazis went to the gallows for the crime of “waging aggressive war”.

Funny old world, innit?

* * *

  1. “Mr Cautious and clients”. At the limits of my knowledge of such nitty-gritties of capitalism in tooth and claw, I confess ignorance as to how and in what forms the share owners for whom Mr Cautious acts are compensated. Are they compensated at all? Indeed, are they ever aware of such loans? Enlightenment from the cognoscenti please!

5 Replies to “Cut across Shorty

  1. From what I gather in the text contained within the link provided in that previous thread about the process of shorting there is an interest payment involved. There are also fees. Though my understanding is these go to the middle man (broker).

    However:

    A. It does not specify what level of interest rate is involved. It may be a standard level or vary with each general or individual transaction? Whichever, it would also seem reasonable to surmise that with interest rates being low, and in some cases negative, such a sum would not be particularly high.

    Leading to:

    B. The likelihood that any payment to Mr Cautious would not fully compensate for the decrease in value of their asset from the lending process for this purpose.

    C. If Mr Cautious has concluded that the value of the asset stock/share in the company is likely to decrease anyway, given the market view/sentiment of the future of the company and it stock/shares, it would be more rational to sell now rather than lend it out knowing it will be driven even lower in value from this process resulting in larger losses for Mr Cautious. Assuming of course the stock/share is at a lower value now than the original price paid to own it.

    Which is why it seems logical to conclude by definition that Mr Cautious, being by nature cautious, does not know this is happening. This being a transaction between the broker and the hedge fund in which the broker gets to make some money via the fees involved?

    Should this indeed be the case most, at least normal, people would recognise this as a scam. Carried out by most normal people it would also be recognised in law as a scam.

    However, as alluded to in the Guild example a totally opposite set of rules and legal ethics apply in the case of, let’s refer to them as, the Thieves and Assassin’s Guilds.

    Funny old world.

    • Nicely argued! And thanks for reading my own linked text rather more closely than I had, enabling you to answer the questions posed in my footnote.

  2. The thought also occurs that I’ve neglected to consider the other point originally raised – which is based on information contained in reports on the matter – of how it is permissible for hedge fund entities to carry out this process by actually borrowing more stock/shares in the companies involved than actually exist?

    The explanation in the link provided about the process does at one point refer to the consequences of the stock/shares increasing in value during a short by hedge fund entities as a result of the kind of occurrence seen last week in which hordes of retail traders drove up the price of GameStop, Nokia etc. In that instance the cost to the hedge funds ran into some $70 billion and I read this morning that one hedge fund lost something in the region of 40% or more of its value in January 2021 as a result.

    The point being that the explanation in that link observes that the losses in such cases can be infinite. What it fails to make explicit is how that can be so when the amount of stock/shares existing in a company are not infinite. The only conditions which logically exist to attain a situation in which losses in this equation can be infinite is if the number of shares borrowed within this process are also infinite. This is because basic arithmetic dictates that all equations must balance.

    It is difficult to envisage any explanation for this other than a legalised scam which places organised crime within the category of kids messing about with a bit of petty cash.

    • It’s uncanny how the more intelligent capitalists – not to be confused with the lettered useful idiots who act as its relatively well-salaried apologists – concur with Marx on some at least of the fundamentals. (Or are they just reflecting those tensions between industrial and finance capital?) Here’s that crypto-Marxist, the industrialist Henry Ford:

      It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

      Of course, some of the apologists – bright enough to face some of the more flagrant facts, hampered by a rudimentary conscience and/or insufficiently rhino-hided for flat denial – acknowledge the shortcomings of rentier capitalism. In my experience they locate the problems anywhere – “the Jews”, Davos, Planet of Lizards, bad governance – but the logic of capital. In this, of course, whatever meagre commonality they may have had with Marx’s analysis ends.

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