Dreary Wrote: ------------------------------------------------------- > Joe, no bafflement needed, the question asked at > top is not about a company in a precarious > position as you describe. He is asking about a > “sound” company and how it might be impacted by > short selling, which I don’t belive is by much Not so - companies that need financing are “sound” companies. If our current definition of a sound company is a company that can rely on its own internal sources of financing, we really have dropped into the Great Depression.
mh7 Wrote: ------------------------------------------------------- > Good luck getting suppliers & customers to > continue doing business on a regular basis with an > apparently distressed company. Anyone who relies > on credit extended from suppliers can have their > working capital negatively impacted soley by > negative impressions, regardless of the actual > reality of the situtation. > > For some companies/industries (e.g. insurance, > brokerage, etc), public perception of the firm is > of paramount importance to their continuing > operation. Right. How many companies out there borrow funds for operating capital? (Ans: many, many…). Take a really fundamental example, I am a farmer with my modest field of wheat. I need to buy a combine so I go out and float some equity and buy a combine. The stock price now reflects the view of the market on the future earnings of my farm; a call option on the residual value past the debt. In Spring, I need to borrow a bunch of money say $10M to pay for my expenses for planting, fertilizer, irrigation, hedging crop prices, to bring in a crop worth $13M in 6 months. Everyone knows this and it is a pretty normal thing. My stock is selling at 12. bchadwick, my next door neighbor, then starts shorting the crap out of my stock. My stock is now worth 0.12 and my company has been delisted. Apparently my company is not worth anything more than my current debt (which is 0). According to Dreary this is pretty silly so I go to the bank. My banker says that I have nothing of worth to collateralize the loan with. The market thinks my farm is worth nothing. I say that Dreary says this is just psychology. He shrugs. People ought to be buying my farm’s equity, but bchadwick has caused massive downside momentum and everyone knows not to grab the falling knife. Hmm… Where to get operating capital? I can’t. So now I can’t plant my crops, so I have no source of revenue. I still need to pay taxes, the electric bill, and keep the place together but I have no income and no way to get it. I’m in a pickle, except that my neighbor bchadwick decides to bail me out by buying my farm for $843 even though I used to be able to net $3M/season. What are neighbors for?
Most companies have no market price to look at anyway, how do you suppose credit analysts go about their job?
Dreary Wrote: ------------------------------------------------------- > Most companies have no market price to look at > anyway, how do you suppose credit analysts go > about their job? An important point - if you have a market price, they look at it. If you don’t, they won’t. That means that you need to be pretty careful about issuing equity in a place where unrestricted shorting is allowed (like pretty much the US). If you issue equity in India, you are safe from this kind of abuse because shorting is much more tightly controlled.
I’ll be a good neighbor, Joey, I’ll let you drive the combine.
bchadwick Wrote: ------------------------------------------------------- > I’ll be a good neighbor, Joey, I’ll let you drive > the combine. Of course, since I am bitter about my financial debacle, I will be driving the combine down I-95 with a bottle of hooch and some Brazilian supermodel (inflatable).
How about Private Equity? Wasn’t the whole creation of PE capital to take advantage of such situations, places where Mr. Market has beaten a company so badly down? So the question is why are no PE firms running to help Citi? Or even parts of it? As a second question, could extreme shorting ever take down Exxon or Berkshire?
Sure - PE might be a good solution. Except that I can’t plant my crop in October when I get done with negotiations. I might also be a little bitter about giving away all my earnings to the PE guy (who is probably the local mobster, in this case).
Nah, just my brother. I do HF, he does PE.
How many PE funds have the size to put a dent in Citi’s situation?
Kkent, you are right, zero to none, the root of citi’s problems is it’s size, it has no flexibility to save itself because the universe of firms large enough to provide a workable solution is very small and consists mostly of other large firms with similar problems trying to find their own capital. The market wide correlations are the true demons right now, everyone’s in the same pickle. It will be interesting to see how this is handled. When you grow to the size of city you’ve outgrown your external safety nets and your key defense then is the sheer size, strength, and diversity of your own balance sheet, you have to be your own ecosystem and maintain an internal equilibrium. Somewhere citi either forgot this or failed to realize it altogether, as their balance sheet appears to be neither diverse or strong, only massive and problematic. I guess the key here is that leverage is fine as long as your assets are stable, and high risk assets are fine as long as your leverage is kept low, it’s where these two paths cross that trouble starts. I think the biggest problem with wall street was a classic case of an ecological disintigration following generations of rampant unrepentent inbreeding. Executives from key ivy league institutions recruited well connected future executives from those same schools (100x repeat) until groupthink and assimilation had blinded otherwise intelligent individuals into drinking the cool-aid.