What other predictions has this short seller made in a verifiable manner?
It's really pointless to find someone who just guessed correctly once and take their advice. Particulalrly if their failed predictions are never made public, or are too abtract to be verifiable.
I used to invest in gold and silver, expecting them to be stable investments. Back in mid 2008, I noticed a lot of large price swings. I made a few trades to exploit the swings before realizing the whole point of me investing in them was because I expected them to be stable. So I cashed out everything, and a few weeks later the economy (and the gold and silver prices) tanked. I don't consider myself a savy investor at all, I just got really lucky that one time.
Bleecker Street Research is a hedge fund that has been shorting since 2014. They wouldn't be in business if they were only lucky once.
Shorts perform significantly more analysis than longs, as they have to have great timing in addition to being directionally correct.
In the article, Bleecker are not making any specific predictions, just explaining their reasoning for shorting this stock.
Their one prediction is "This is not a contained event…. I don’t know what happens."
Yellen has said she is monitoring a small number of unprofitable banks carefully.
From a market perspective, short interest in the regional bank ETF KRE has been rising steadily for a while now.
Looking at unprofitable banks with high implied volatility, the market seems to think First Republic Bank FRC is under some duress.
It is exceptionally costly to short FRC right now, but I imagine anyone with more than $250k in a single account is moving money out right now. Which is the definition of a bank run.
> Bleecker Street Research is a hedge fund that has been shorting since 2014. They wouldn't be in business if they were only lucky once.
I disagree. Their model is similar to VCs in a way. Hedge funds don't care about the number of times they were correct vs. wrong, they care about the wins from the correct bets being more than losses from the bets that went wrong. It goes even further, if you think about what the point of hedging positions really is (which is essentially making a bet on something you actually believe the opposite of, as an insurance policy in case your main hypothesis goes wrong).
Just like with VCs, they don't expect most of their bets to work out. They just expect those bets that work out to bring in so much money, that the losses from the rest of the bets won't matter.
So yes, a hedge fund can be extremely successful and profitable, even if only 10% of their bet predictions end up being correct. It is all about what those bets are and how they are structured.
With that in mind, I am definitely still of the same take as the grandparent comment.
With all due respect, you have no idea what you are talking about.
A traditional hedge fund is the opposite of a VC. VC's want huge gains, which means huge volatility. Traditionally hedge funds minimize volatility rather than maximize returns. Traditional hedge funds are for those who care more about wealth retention during down times than increasing wealth during uptimes.
The maximum theoretical gain from shorting is 100%. A stock can only go to zero. If only 10% of your shorts are wildly correct and go to zero, you just made 10% on that one bet.
The maximum theoretical loss from shorting is infinite. Any one of the other shorts could blow up your fund if it went up 10x. Of course, this is a hedge fund, with risk management that would either hedge the risk or exit the position before it blew up the fund.
But shorting costs money. Especially if it's a popular short or if it pays a healthy dividend. Even if your stars align, and all the other 90% of short/long pairs just went sideways, neither generating a profit nor a loss, you are unbelievably lucky if you come anywhere close to the 8% a traditional index ETF returns over the long haul, with a 10% win rate on shorts.
> The maximum theoretical gain from shorting is 100%. A stock can only go to zero. If only 10% of your shorts are wildly correct and go to zero, you just made 10% on that one bet.
That's one way to look at it. A stock can only go down 100%. But shorting can make tons of money because:
a) stairs up, elevator down, it takes shorter amount of time to get the same price movement.
b) leverage, corollary of (a).
c) A stock going from 400 to 200 is a 50% move, from 200 to 400 is a 100% move, in terms of points its exactly the same so you earn the same amount.
No their model has nothing to do with VC.
Maybe it would be useful if at least you read the definition on Wikipedia before trying to pass completely incorrect notions as truth?
You are missing the point I was trying to make. I was not implying that VC and hedge funds operate similarly or even have the same mechanisms.
I was trying to say that their success metric is the same: the total amount of dollars gained, not the number of bets on companies (VC) or the number of positions (hedge fund) that worked out.
VCs can be wildly successful making 999 losing bets, as long as one bet is a 100 bagger. VCs are running off imperfect information, they don't know which horse will be a winner, so they spread their bets. The more bets the better.
Short hedge funds are betting that they know more than Mr Market, one of the most efficient pricing mechanism known to man. A long fund can be no smarter than a monkey throwing darts, and it still does well. A short fund needs to be the smartest person in the room. They go deep, to find an edge that no one else but them has spotted. So they are highly concentrated, because you just can't go that deep on more than a handful of companies.
To say a short sellers insight is not worth anything because they just got lucky once is incredibly... short sighted?
what incentive do they have to actually give out valid information about "their reasoning for shorting this stock?" they have a serious disincentive as a hedge fund to share their insight since someone else can now make the money that they would have made.
The guy isn’t asking people to believe in him because he is a prophet. They are saying, “this is some things I found suspect, and was right about so maybe this can help you make your own inferences later.”
You didn't tho. Investing in gold should be a long-term investment, and in a long term price of gold trend is still rising. It was constantly rising till 2012, then fall a little bit in 2012-2016, and is rising again.
Not many people want to sit on slowly-rising gold for 20 years. People are often trying to find high-yield, low-risk compromise so they are trading instruments and switching between them instead.
The point is that it is very difficult, practically impossible to time the market. So the commenter was right - he got lucky that one time.
And if you were trading in the markets for many years, you would see that occasionally you would be lucky too. But unless you employed some kind of risk and money management, the other times where you would be wrong (and those times would definitely happen as well) losses would cancel out all your lucky profits.
I was lucky a couple of times too and it means nothing.
My company has seen quite a few sell side analysts talking about SVB earlier this year, so I guess the risks were not unknown to financial markets.
Problem is, we are in a scenario of great macroeconomic uncertainty. That can make borrowing costs (needed for shorting something) quite high, because everyone and their moms want to protect themselves from market downturns.
So even if you guess correctly that some company will fail, you might still lose money if you're not lucky with timing. Many short sellers were squeezed in the last months, but we don't hear their stories on Fortune.
One may argue the markets were irrational during the ultra low interest rate period and this disaster here is the result of hoping they would return to irrational before liquidity ran out.
Eh, during the low interest rate period things seemed to behave as one might expect: companies deploy capital and hire like crazy, companies have access to mountains of investment pools, home prices rise, inflation rises, etc...
Many of the things happening today are contradictory, but eventually a domino falls to topple everything else. Knowing which domino does that would make you lots and lots of money, albeit maybe with some guilt as everyone else suffers.
Timing is exactly the challenge! The share price of $SIVB actually climbed pretty significantly since the prediction back in January before collapsing this week.
You don't need to look too hard to see examples of share prices doing weird things despite reality ($BBBY most recently)!
This is very true. I have also tried shorting couple of times and while I got lucky a few times, there were trades where my PUT options expired just a week before a big downturn. :D And they say "market is perfect" or something like that in the sense that everything is priced in. So if you wanted to short in already-bearish market, the implied volatility would make it cost-prohibitive. And if you would try shorting in "good times" where IV is low, often you would see bullish market and your option value just slowly decreasing to 0... It is always about timing and predicting the future, one way or another.
there is also naked short selling, if I got it right you need to have the stocks within 3 days of the closing date of the short, seems to work most of the time, the only failure in recent times was when Porsche shorted Volkswagen and and had to pay enormous amounts when the shorts were due (they shorted too much of them and had to buy them at any price to close the deal)
Isn't the question though, if you acted on the set of companies/banks that were showing these signs, how often would you be right and saved your money (or made money)?
The analyses that tell you what led to a particular crash are hard to stomach as a reliable bet for the next time.
I think Ally is very focused on auto loans, so again industry concentration. They raised the rate they pay on their savings accounts yesterday.
Will be interesting
But is it more interesting than the reasoning of the losers? I'm tempted to say the losers' reasoning is more interesting.
A winner's reasoning could be completely unrelated to the event at hand and we'd never know the difference. A loser's reasoning is definitely wrong in some way, so we can learn something from it.
Generally yes, that’s how engineers figured out where to reinforce war planes so they could survive longer in battle.
In markets the loser’s reasoning often comes down to poor timing. They see similar red flags but can’t quite catch the right time. Predicting markets is relatively straightforward, predicting when something will happen is infinitely harder :)
I take issue with the characterisation of "poor timing" which makes it sound like a matter of accurately predicting an event occurring at some instant in time. Failure to do that teaches us comparatively little, much like failure to win the lottery.
In reality, it's about picking a position that one can hold through various trajectories and that is profitable in most of the more likely ones. If one has assessed the actual trajectory at a lower probability than reasonable, that's still something we can learn from.
I mean I can give you that strategy right now: go buy index funds.
You can be right 99% of the time and still lose money because the market always rewards based on risk. Conversely you can be right 30% of the time and make billions.
With market timing you don't need to predict the instant something will happen, your time horizon really should depend on what your drawdown is. The predictions don't have to be single events, it can be a market environment. Timing a bear market when everyone is bullish, etc...
Every time you short the market you effectively open yourself to infinite loss, whether you are leveraged or not. There are effective hedging strategies in place, but unless you're doing this for a living or a very serious hobby, its tough to figure all the pieces out. That is why staying on the buy side can be pretty helpful for not losing one's shirt.
Most people buying options don't primarily buy one side. They exercise some sort of inverted position as well to cover. Those who play one sided, short term, options can often be referred to as gamblers.
It’s dubious asking the winners of any survivorship bias. I’d say hear what they’ve got to say(if you’ve got time), but never take it as gospel until you’re sure they have earned that respect. A broken clock is accurate twice a day, but the rest of the day is full of times it’s obviously wrong if you cross check with external sources.
Not really, because people who didn’t short SVB probably didn’t look at them in more depth, so it’s not survivorship bias. It’s just a case of we looked where others didn’t look so we discovered something, and this article is about that something.
I'm thinking of the times they short other companies because of the same red flags but lost in the end.
To make a silly example, if I short every company when it's CEO wears a red tie and than one of these goes down I get interviewed and can explain my great red flag I used.
> if I short every company when it's CEO wears a red tie
No matter how ridiculous your strategy may sound, if this is how you successfully grow your fund over many years then perhaps it's a great red flag and not just survivorship bias, so let's do an interview and hear your thoughts on this topic.
Amusingly the interest rates episode from a couple weeks ago got into the relationship between deposits, customer interest rates, and rising rates on assets:
As of Dec. 2021, SVB’s interest expense on its deposits was $62 million. By Dec. 2022, it was $862 million. By the end of this year, Wettlaufer was projecting it to be nearly $4 billion.
When Silicon Valley Bank posted its annual report at the end of last month, non-interest-bearing deposit levels were clearly deflating. And it seemed like those figures would keep falling. Wettlaufer was projecting non-interest-bearing deposits might go down to $40 billion, from $80 billion, meaning that SVB would have had to come up with $32 billion somewhere else to fill that hole.
So basically the rapid increase in interest rates combined with lack of diversity in the bank’s clientele and investment choices quickly turned SVB into a collapsing inadvertent pyramid scheme?
It's not a pyramid scheme. A pyramid scheme can only continue it people keep putting money into it. SVB didn't need more money coming in, they just couldn't handle money coming out.
Doesn't it seem like the definition of "pyramid scheme" is in the middle of expanding to mean roughly "any finance-related issue that seems a little shady to me"? I see it being applied so broadly when it's by rights a pretty specific and identifiable concept.
A $20 billion deposit would have saved them, yes. But that doesn’t make it a pyramid scheme. $20 billion can fix a lot of problems.
If a person is on the verge of bankruptcy and they get a cash infusion that saves them, they have not magically become a pyramid scheme. The fact that money helps fix a massive financial problem does not indicate something is a pyramid scheme, just that they have a massive financial problem.
Startups have expenses. SVB had a customer base that was net unprofitable. This means outflows, and tons of it. SVB depended on a continuous stream of new venture capital being shoveled into the ecosystem to compensate for these outflows.
They needed new startups to bring in new cash to make up for the cash burn of their current startup customers.
This is a textbook Ponzi structure. Not criminal, just a totally irresponsible bet on interest rates staying close to 0 for another 10 years.
If that's a textbook Ponzi structure, then every bank is a textbook Ponzi structure by this logic.
It's irresponsible to paint ordinary accepted business models that have been in place for hundreds of years and that work fine the vast majority of the time with a criminal brush.
SVB is not like other banks. Ordinary banks don't have catastrophic interest rate exposure. Regular banks don't have money burning startups as their main customer base. Regular banks don't have the problem of having billions of dollars in deposits but no way to put that money to work.
If you think SVB is a regular bank practicing accepted business models I'm not sure you appreciate how unusual SVB is in terms of their customer base and interest rate exposure.
My point is about banking as a business model being mischaracterized as a Ponzi scheme, not about SVB’s particular level of risk exposure.
> Regular banks don't have the problem of having billions of dollars in deposits but no way to put that money to work
SVB chose a way to put that money to work, but they miscalculated what would happen to the bond market. I don't know how or why they overexposed themselves to this risk, but I'm fairly certain it wasn't some decision made without the review of numerous investing and risk experts.
SVB was not a fly-by-night operation. It was founded over 40 years ago. My first paychecks from the startup I worked for during the dot-com 1.0 era were drawn from them.
SVB literally needed a constant stream of new startup customers to cover the withdrawals of their current customers. Maybe you don't like the word ponzi, but it's an accurate description of the dynamic at play. Other banks don't have this problem because they don't have money-losing startups as their core customer base.
VC investment is highly sensitive to interest rates. Always has been, and everybody knows this. Instead of hedging against this risk SVB decided to double down on it and bet the bank on interest rates going back to zero. I'm sure they had a bunch of risk experts sign off on it, but we both know that doesn't mean anything. Complacency sets in after 15 years of low interest rates, and I think it's exactly because SVB did so well in the ZIRP environment that they got careless.
> SVB literally needed a constant stream of new startup customers to cover the withdrawals of their current customers.
Isn't it true of any bank that experiences a sudden and unexpected flood of withdrawals that they need an infusion of cash to cover them? Whether they get the cash from new depositors or by liquidating investments, the cash has to come from somewhere.
I think you're mistaking a bad investment decision for a criminal act and intent, and nobody is claiming SVB of a crime at this point in time; the evidence isn't there so far. Every bank invests cash deposits in a mix of liquid and illiquid investments, and the illiquid investments often can't be liquidated quickly, if at all. (Think mortgages.) As I said, that is the business model of a bank.
I wanted to add that I learned today that SVB was operating without a Chief Risk Officer between April 2022 and January 2023. And apparently the former CRO sold $4M worth of stock immediately before she left. (Source: https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...)
Is it not easier to select the paywall element in the inspector and delete it? Well, not easier than reader mode, of course, but easier than fiddling with styles.
I couldn't find anywhere in the article where it gave an amount of the short position. Did this guy bet the farm on it? If so, he deserves praise (and the returns) for his insight. If, on the other hand, this was just one of dozens (or hundreds) of small short positions his fund invested in, then not so much.
Anyone can bet small amounts all over the roulette table and then only tell their friends about the ones that won while ignoring all the ones that lost.
Says the commenter in a community for a startup ecosystem where the big money throws a million bucks at a hundred different projects and hails themselves as genius world leaders when one of them doesn’t fail. And where publishing a detailed investment case to be criticised on later is not the norm.
They might have bet a million dollars on it, but if their normal short position is also around a million dollars, then I am not as impressed.
If they wanted to show everyone how smart they were, I expected a quote something like: "We were so confident in our analysis that we invested 10x our normal short position in it!"
it's not about being smart or anything, they just explain how they figured it out, doesn't matter how much money they made, that's just focusing on the wrong things
It does matter, because it's very easy to construct an explanation for how you "figured it out" after the fact, if one of your hundred small bets happened to work out. The person doing it may even fool themselves!
There is a reason the interviewee pivots from questions about how big of a take to from the short to the situation “certainly not something to be celebrated.”
Of course the underlying issue (maturity mismatch) would be entirely preventable. Why the current banking system is setup in a way that makes regular banking crashes practically unavoidable: https://news.ycombinator.com/item?id=35106315
I don’t think what you should take from this is “always do the opposite of what Cramer says”. Rather that you should not consult him at all when you’re deciding how to invest your money.
See also, this amazing gem from the FT last year[0]:
> In a previous Alphaville post we may have implied that Jim Cramer’s peak-inflation call was a reverse indicator for our readers. We regret the error. It was not our intention to give Cramer’s opinions any credence whatsoever.
It's not about his predictions, but his admitted market manipulation. I don't know how "in the know" he is now, but all you need to know about his motivations is encapsulated in the first minute of this interview: https://www.youtube.com/watch?v=8DJlogbrDcA.
He's a market manipulator, or was when he was in that hedge fund, and there's every reason to believe that he still would do this now for his own personal benefit if he could. Basically, if he's promoting a position it's probably a really good idea to strongly consider taking the opposite one, or just ignoring it (which is likely the better idea).
I don’t know if he consistently made bad predictions, but he had a few howlers during the 2008 global financial crisis. He very loudly declared on his TV show that Bear Sterns was safe on the eve of its collapse: https://youtu.be/V9EbPxTm5_s
Oh yeah there's definitely plenty more than I mentioned. But I just wanted to highlight that his reputation as this sort of accidental Grim Reaper of companies originated in the GFC back in 07/08
Heh, ok so he's still got the midas touch then :) I hadn't really seen anything of him recently but I figured in a "stopped clock is right twice a day" way he can't possibly always be wrong, but maybe I gave him too much credit
It's something of a meme to say talk about shorting what he recommends his viewers buy. Sometimes people will come up with data showing that if you did that over such-and-such a period you'd be up like 50%, but I don't think that's necessarily worse than anyone would do if they had to pick stocks on national TV every day.
The background on Jim Cramer is less about his accuracy and more about his tv show. He has this show where he just goes off on what to buy and what to sell, on a major news network, from before YouTube, and it's enthralling. If we were to do a montage scene of America and capitalism, he'd be in it, yelling BUY! SELL! BUY!
I only know Cramer from the fun and others meme is been the originator. But that statistics should be taken with caution. Being long equity since 2008 was not really a proof of creating a alpha ( aka adding superior return than the market).
That's the long term low interest rates environment that incentivize W Buffet to make his famous 10 years long sp500 won't be beaten by any HF.
I remember how Jon Stewart on the Daily show made fun of him about getting predictions for Bear Sterns wrong and got under his skin when the financial crisis of 2008 was afoot.
my brain can't even focus on that. from the drunk guy running the camera on an unbalanced gimbal, to the extreme wide angle lens that makes me think the producer of the show used to make music videos for MTV, to any of the other whacked out things that goes along with the guy that can't even utter a sentence without tripping over his own words before he barely takes half a breath. (this sentence was written in a toned down style of the host's on the show)
Bleecker Street Research, of course, has made out quite nicely from the demise of Silicon Valley Bank (The team won’t comment on how much they made off their short bet).
How much could it be? 60-70%? That is how much the stock fell. The problem with these kind of stories is you don't hear about all the times these firms sold short and or were wrong or lost lots of money before eventually being right and would have been better off with an index fund. It's easy in hindsight to explain what was wrong with the bank or why the trade was a success.
Regulators took over SVB: trading was halted. It's unlikely stockholders will get more than a few cents per share so it's a 99.9% drop. The story was interesting because they explained how the bank got into such a bad situation that regulators had to take it over.
What happens with short positions when something like this happens though? The firm is going to be liquidated so where would the shorter buy back the stocks to give back if they haven't exited by now (trading was halted)?
from https://www.investopedia.com/ask/answers/maintain-short-posi...
When an investor has a short position in a company that gets delisted and declares bankruptcy the investor never has to pay back anyone because the shares are worthless. The short seller owes nothing. That is the best possible scenario for a short seller. Eventually, the broker will declare a total loss on the loaned stock. At that point, the broker cancels the short seller's debt and returns all collateral.
One day from bank run until interception by financial regulators, we live in fast times. Oh man, this Monday will be fascinating from the early morning!
>>>don’t know how it all shakes out, or at the end of the day where that money ended up and where it went,” he says.
I'm going to take a stab - the money ended up at the issuer tbill or mbs, that has been funding the profligacy of the feds with very low interest rates.
In the meantime, fed stakeholders will declare a dividend and pay themselves for the priviledge of keeping musical chairs going
The federal reserve dividends are set by statute and are an unvarying 6%/yr and have been since 1913. So, in this case, the 'fed stakeholders' are the US Congress. Moreover the amount of stock owned by member banks is also set by statute at 6% of the bank's capital plus surplus with the share price set at $100/share also by law. Banks are required by law to buy a certain amount of stock and they can't buy or sell the stock or loan the value of the stock as an asset (hypothocate), except to the fed as their capital goes up and down. All of this makes much more sense if you think of the Federal Reserve Banks as legally mandated bank run insurance providers. See here: https://www.federalreserve.gov/aboutthefed/section5.htm
So yes, the whole purpose of the fed is to ensure that we don't have a systemic, cascading bank failure (keeping musical chairs going). Banking panics and ensuing failures were a widespread problem in the 1800s and early 1900s. The Fed was established after the particularly nasty 1907 banking panic which threatened to bring down most large banks in the US and destroy the national economy. https://en.wikipedia.org/wiki/Panic_of_1907
> the whole purpose of the fed is to ensure that we don't have a systemic, cascading bank failure
I thought they set (or manipulate) the price of money via interest rates. And they help provide liquidity to primary dealers of US Treasury debt which helps govt ignore persistent budget deficits. They also hold USA's gold on their balance sheet and there hasn't been a full audit since ..?
So when you short like that there is no risk for you as a borrower other than if the assets go higher?
Do you need to have enough assets to cover a x-times the price of the stocks to insure your position?
There’s actually a lot of risk and costs when shorting. You need to pay borrow fees to borrow the stock, you need to post collateral that can be liquidated in the event that your position gets too risky, you need to post more collateral as the price of the a stock increases to cover the increased risk, and you can in theory lose an unlimited amount of money. You have to be right both about the stock decreasing in value, and the timing around when it will decrease in value. Otherwise your position might get liquidated before you can realize your possibly correct directional prediction. This is what the phrase “the market can remain irrational longer than you can remain solvent” refers to. Shorting is really hard.
1. Even if the price has not moved against you, your broker can decide the stock has become more volatile, and therefore a higher collateral ratio is required.
2. Regulators can halt trading, making it at least temporarily impossible to buy back the shares and book your profit on the short sale.
Hence FTA: “You never short something thinking it will go into receivership,”
I wonder if the pie has been cooked enough and there aren't other vulnerable banks in the same position. Also I wonder if massive short selling most banks now doesn't make them trip over.
Just wondering, why do posts like this consistently have an unpaywalled archive link as the top comment, and it's unreply-able? It almost seems automated except it's a different commenter every time. Is there some system detecting those comments and floating them to the top, then disabling replies? ( @dang )
I imagine it’s unreplyable to prevent hijacking - we all think we have something important to say, so there’s a temptation to put it as an unrelated reply to a top comment so more eyeballs see our comment. You’d want this in place regardless of whether the link is organically voted up or artificially pushed to the top for convenience.
I guess comments consisting only of a link are automatically set to be unreplyable? The posting and the floating to the top is just the normal posting and voting system, it seems to me.
When you buy a stock, you pay money and someone else gives you a stock. Once you have it, you can hold it for as long as you want. Its value can go up or down. When you sell, you get money, which might be less or more than what you paid. If the value goes to zero, you can no longer sell and you will never get any money.
When you short a stock, you are basically selling a stock you don't have. Thus you get money and owe someone else a stock (in practice what happens is someone else unknowingly gives you a stock for free and then you sell it, and they get an IOU for a share of the stock later; but let's not worry too much about the mechanics). Once you have this IOU, you can hold on. The value of the liability associated with the IOU can go up or down. If it goes down, then when you discharge that liability by buying the share you owe, you will pay less than you were paid for the short, thus making a profit. If it goes up, then you will pay more and thus lose money. One risk with a short is that your liability is unbounded. In a traditional stock purchase, the worst that can happen is that you lose the money you put in. In a short sale, you can lose many multiples of the money you put in if the stock does very well. Under a few circumstances, the IOU can be called, forcing you to prove that you have the money to buy a share; for instance, if you were to short $1,000,000 in shares and the share price triples, you owe $3,000,000.
To summarize: when you buy a stock, it's because you think it will be worth more later (again, let's set aside dividends and other things). When you short a stock, it's because you think it will be worth less later.
The reason shorting is permitted is because in general, there is a belief (mistaken or not), that additional liquidity -- more trading -- benefits everyone involved in a market by reducing the spread between prices for buying and selling; additionally, shorting makes it possible to hedge your exposure to a sector (i.e. to trade off some upside in a sector with some corresponding downside and vice versa).
Thanks for the explanation! What happens when someone shorts a stock and then the company goes under? In this case of SVB, you short a stock, company gets taken by FDIC, trading is halted and I'm assuming the company will be sold/dissolved? So what happens with the shorts?
> (in practice what happens is someone else unknowingly gives you a stock for free and then you sell it, and they get an IOU for a share of the stock later; but let's not worry too much about the mechanics)
That's a mis-characterisation. What makes you think the counterparty lends you the stock unknowingly?
> The reason shorting is permitted is because [...]
You forgot the most important reasons:
First, why forbid voluntary transactions between people? Stock lending is an activity between consenting adults.
Second, short selling is a way to finance muckracking and investigations. Short sellers are the only people with an incentive to burst manias. They are an important mechanism for the market to regulate itself.
Eg 'in practice what happens is someone else unknowingly gives you a stock for free':
Someone else willingly and _knowingly_ loans you the stock, and _charges_ borrow costs. As a private investor you can participate in stock lending, just check with your broker. Index funds are often more than happy to loan out their shares, partially because it's one of the few ways they have to make extra money.
(Also maybe partially because it helps offset their impact on the market. If a new company makes it into the S&P 500 and all of a sudden index funds have to own 20% of that company, you might expect prices to go up in _anticipation_, ie before the index fund can buy. But if at the same time the same 20% of that company's stock becomes available for loan and thus short-selling, that might help counteract this move.)
A simple explanation is that you borrow a certain number of stocks, sell it, and re-buy at some point in the future (at a lower price hopefully) to return the number of stocks you borrowed.
Imagine you think widgets that are worth $1 today are going to be worth $0.50 tomorrow. You say to me, "Hey jpdb, can I borrow 100 widgets and give them back to you tomorrow?" I say sure and you turn around and sell those widgets. Tomorrow, we meet up and you take your $100 and buy 100 widgets for the new price of $0.50 each. You return the 100 widgets you borrowed and you now have $50 in your pocket. In this example you have "shorted" widgets.
You borrow some stock. You sell it. You wait a while. You buy the same stock again. You give it back.
It's very similar to when you take a loan:
You borrow some money. You 'sell' the money for goods and services. You wait a while. You acquire some money again. You give the money back.
In both cases, you pay some interest while the loan is outstanding. (In both cases, you typically pay the interest with money. Instead of with small pieces of stock.)
You literally borrow someone else’s stock and sell it. You now owe them the stock which effectively leaves you with a negative position. Eventually you have give them the stock back which will require you to buy it. If the price has gone down you make money.
A short seller borrows shares from a shareholder - a bank, institutional investment group, or an individual who makes them available in return for interest payments - and sells them on the market at the current price. They hope to return the shares by buying them back at a lower price later and pocketing the difference.
Short selling on its own is trading on the hope that a stock goes down by borrowing shares from someone who owns them and immediately selling them. Your broker will match you to an owner who is willing to lend the shares if there are any available. To exit the trade, you buy back the shares you borrowed.
Your profit from this trade is the stock's price when you entered the trade minus the price when you buy it back (i.e. you want to sell high and then buy low), less any financing costs from borrowing the shares.
Shoring is, financially-speaking, quite complicated and can be very opaque. It's also fundamentally different than longing (not merely the "opposite").
Silicon Valley Bank (SVB), a lender and banker to the startup industry, was closed down by California financial regulators after a bank run triggered by its announcement that it was raising over $2 billion in capital through a share sale. SVB's downfall came as a result of a rapid change in liability composition, as interest rates rose and inflows of non-interest-bearing deposits at the bank fell below outflows. Non-interest-bearing deposits fell by $45 billion in 2022, forcing the bank to replace them with higher-cost liabilities, resulting in the bank being left with an empty bag and leaving the entire startup ecosystem frozen.
So you'd prefer articles be replaced entirely with outlines that only bullet point specific items? I suppose that's a position one can take, but I think many people prefer to read articles that include a coherent narrative. This one isn't even particularly long. If you'd prefer to read the ChatGPT summary you can certainly generate it.
As far as I know it's a "technical term" that has a negative connotation, whereas a word-by-word translation doesn't. (I'm not a native English speaker, nor French, and I might be completely wrong on the semantics of that, because I'm just a lazy-ADHD autodidact when it comes to ... almost anything, really. So I welcome any criticism, tips, and FYI/explanations.)
What exactly do you consider irrelevant about the opening line of the article? I'll quote it here since the comment I responded to was flagged.
> Less than an hour before the California financial regulator closed Silicon Valley Bank’s doors on Friday, short seller Dale Wettlaufer is walking me through their financials, and laying out some metrics he’s been closely eyeballing for months.
This establishes who the short seller is, when the interview is taking place, and makes clear that short seller has come to his position after heavy review of SVB's finances over the course of months. It also makes clear for anyone who's come upon the article without context that SVB was shutdown by regulators and that it their decline was newsworthy before that happened.
> The journalist could have spent a few sentences explaining why and how this short seller is giving an interview, why this bank matters, etc
Do you really think the specifics of how the short seller is giving the interview is more important than establishing why they took a short position? The logistics of an interview seem like the least important aspect of it, but if you disagree I'd love to hear why. That said, the article makes very clear why the bank is important in it's fourth praragraph:
> The bank had long sat at the very heart of the private markets as a lender and banker to some half of the industry’s startup companies—not to mention as a prominent lender to venture funds, private equity funds, and a wealth manager to rich entrepreneurs. The bank has a fund of funds, investing in the likes of Accel or Sequoia Capital, and it invests directly in startups itself. The bank effectively touches every part of the private markets.
Also, why the short seller is giving they interview is pretty obvious if you're able to understand subtext. According to the article Dan Wettlaufer works for Bleecker Street Research which is an investment firm focused on short selling. They just made a huge return on a short play that most people never saw coming. When your organization has an outstanding moment, you publicize it.
> They just made a huge return on a short play that most people never saw coming.
Debatable. The amount is not disclosed. Also just in this HN thread there were some talk about how even if someone saw it coming taking the actual position was a bit risky (because borrowing the stock in a high-interest rate env can easily lead to closing the position too soon).
> This establishes who the short seller is, when the interview is taking place, and makes clear that short seller has come to his position after heavy review of SVB's finances over the course of months.
That sentence is too evocative of fluff. (To me. And I'm guessing to other HN commenters too.)
Its style does not match the subject matter, nor the rest of the article. It's too eloquent, too visual, yet imprecise. Were the doors really closed? What does that even mean to today's "terminally online" audience, who read these articles? What's the name of the regulator? Walking through, closely eyeballing for months ... yet in the next paragraphs they mention "last two years". Okay, sure, it's not a "gotcha" or some huge logical contradiction, but it's just unexplained to me as a reader.
All in all, I don't like the pacing, the format, the style, the terrible one sentence paragraphs of this article.
> The bank effectively touches every part of the private markets.
Yeah, but that's like saying buying a lot of SP500 touches every part of public markets. Yes, SVB was big, 209B big, but when the Vision fund is 150B, and VC has more than 2T, and PE has more than 4T assets under management, I'm not sure what to think of this.
To me this article, while has some interesting factoids, comes off as a strange almost personal account of the writer's "oh no one knows what will happen now" emotionally charged state. (Which is okay for a blog, but underwhelming for HN front page.)
> Debatable. The amount is not disclosed. Also just in this HN thread there were some talk about how even if someone saw it coming taking the actual position was a bit risky (because borrowing the stock in a high-interest rate env can easily lead to closing the position too soon).
Regardless of how much money they actually made on the play, they can now openly claim to be the ones who saw this coming. The marketing value to them is distinct from the actual financial return and clearly why they decided to do a public interview with a major financial publication on the subject. And yes, it was obviously a risky even if the position made sense logically, hence the old maxim, "the market can stay irrational longer than you can stay solvent". But all of that is irrelevant to the fact that this particular play worked out for them and they can use it to promote themselves. There were people who tried to short mortgage backed securities in the early 2000s and got the timing wrong. Michael Burry got the timing right. At least a part of that was luck, but it hasn't stopped him from using it for self-promotion.
> Its style does not match the subject matter, nor the rest of the article. It's too eloquent, too visual, yet imprecise.
I honestly don't even understand what you're trying to say. Stylistically it seems completely coherent to me, and how can the sentence be "too eloquent"? I also don't see what's imprecise about it. I also have no idea what "too visual" means. Are you referring to terms like walking through and eyeballing? These are very common terms for explaining and tracking respectively and quite clear in context.
> Were the doors really closed? What does that even mean to today's "terminally online" audience, who read these articles?
"close its doors" is a very common idiom [0] meaning to shut down. I have no idea why a "terminally online" audience would be relevant to that fact.
> What's the name of the regulator?
There's only one California financial regulator. They're directly referencing the state entity responsible for regulating financial institutions in California. The official name for that organization is The Department of Financial Protection and Innovation, but it's quite clear who they're talking about based on context.
> closely eyeballing for months ... yet in the next paragraphs they mention "last two years". Okay, sure, it's not a "gotcha" or some huge logical contradiction, but it's just unexplained to me as a reader.
You're taking two referenced timeframes out of context. "Eyeballing for months" is how long Wettlaufer has been tracking the situation. "Last two years" is the amount of time the situation has been unfolding. The author is stating that Wettlaufer has spent the last few months reviewing the last two years of activity. There's nothing inconsistent about that.
> All in all, I don't like the pacing, the format, the style, the terrible one sentence paragraphs of this article.
That's fine if you don't personally like it. We can agree to disagree here. But I objectively I don't think your criticisms land.
> To me this article, while has some interesting factoids, comes off as a strange almost personal account of the writer's "oh no one knows what will happen now" emotionally charged state. (Which is okay for a blog, but underwhelming for HN front page.)
Again, perhaps we're at the point of agree to disagree, but I don't see anything emotional about this article at all and it in no way seems like a personal account. It's a narrative written form a perspective but I think it very clearly lays out a number of facts about the situation.
>> The bank effectively touches every part of the private markets.
>Yeah, but that's like saying buying a lot of SP500 touches every part of public markets. Yes, SVB was big, 209B big, but when the Vision fund is 150B, and VC has more than 2T, and PE has more than 4T assets under management, I'm not sure what to think of this.
You've cherry picked one sentence out of a paragraph. The rest of the paragraph makes very clear why this bank is important and important to start-ups and VCs specifically.
I'm familiar with the idioms (and there's the picture of people literally standing in front of the HQ), and them being common, I just don't think they are good choices here. Just as I don't think referring to the regulator without naming it is a good practice. It's just too vague.
> But I objectively I don't think your criticisms land.
Fair, matters of style preferences are subjective anyway :)
The reading experience of your comment was much more coherent to me than the article's.
I know it's a strange claim, especially after spending half a page discussing somewhat unfruitfully what's "my beef" with the article.
It’s an SEO play. Wordier articles are ranked higher. The best example is cooking recipes which are among the most finely tuned seo. They all start with a paragraph about their old family recipe.
Shocking to me how much of the public don’t understand that modern news is literally just entertainment for bored masses.
I got chastised for saying this in company not long ago and responded with “don’t blame me, you’re the one obsessed with endless tragedy porn” which didn’t go down well.
Objective, informative, relevant news is long since dead if it ever existed at all.
Well... to be honest, what fraction of all news you consume daily actually affect what you do or think? I guess it's mostly "entertainment" for most people except professionals in their respective trades.. you could easily ignore reading any news for a few weeks and your life wouldn't change.
