The $2B Mall Rats
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Is there any other reason one would borrow securities?
So for eg a company like Tesla, securities borrowing and short sellers make it so that effectively there are more shares to buy on the market for people who want to go long.
1. You could have exposure to an asset that you want to hedge. So being able to purchase a financial instrument that's negatively correlated with an asset price is useful.
2. Putting downward price pressure on an asset sends an important market signal and reduces volatility
3. It provides income to owners of this asset as they have an option to lend to others and earn interest off of that.
4. Practically speaking, if you own something and you're free to sell it, and you can make an agreement to purchase at a future date at a specified price. So I don't see how you could be unable to lend it without arbitrary restriction around your ownership rights
The over simplified version of how to make money on this is person A owns the stock, they lend it to person B who lives in the country. Person B gets the cash payment, returns the stock, and some of the cash payment to A. When B "borrows" a stock, they are the owner of the stock, plus they have a contract to give the stock back to A at some future date. So it's legal.
Last I heard, this was being phased out by one country after another. Each year, there was less and less opportunity to make any money. It might be totally gone now.
There are three questions you should ask instead of one:
- Is there any reason for a borrower to borrow stocks other than betting that a stock is going to go down? The answer to that is basically "no". That's the main reason to do it. There are a few weird edge cases which are the exception to this general rule.
- Is there any reason for a lender to loan out stock? If I run a mutual fund, most of my stock is just sitting in a big dusty pile most of the time, doing nothing. I give the impression to my customers that I'm constantly buying and selling, but really, I just buy and hold most of the time. My main problem as a mutual fund manager is not the market going up or down. All of my peers are in the same market. My main problem is figuring out how to get a tiny edge over the other mutual fund managers, so my fund is on the top of the list at the end of the year. If I lend out my stock, my mutual fund might make a quarter of a percent per year extra. That's usually enough to bring my mutual fund up to the top of the list, relative to my peers. Profit.
- What is the benefit to the market of stock lending? As others have pointed out, the exact language you use to describe this transaction can be interpreted in a negative way. My opinion is that markets that allow this type of bet are much more resilient when the market inevitably turns down. Markets that don't allow stock lending tend to have artificially high prices for a long period of time, and inevitably crash hard. So, I think stock lending is a good thing. It evens out the highs and lows better.
Well, indeed.
It's not like the CFDs in the article would have stayed up if they hadn't made the trade or made it long.
> "COVID-19 also revealed a dirty secret hidden in the crawlspace upon which many commercial mortgage-backed securities were built. A University of Texas at Austin study published in August claimed that banks knowingly inflated underwriting income for $650 billion worth of commercial real estate mortgages issued between 2013 and 2019, including by 5 percent or more for nearly a third of the roughly 40,000 loans. “A well-documented historical pattern is that fraud thrives in boom periods and is revealed in busts,” the university researchers wrote, adding that end investors were unaware of this hidden risk, a deception akin to buying a Ferrari secretly outfitted with a rusted-out Kia engine. It could be argued that CMBS had been a magic trick all along, with big banks one step ahead, luring investors to pick a card from a rigged deck. It took a global pandemic—an act of God—to reveal this financial sleight of hand."
Isn't that the real scandal?
Shorting on businesses, because of a global pandemic... yes, that's bad.
It's just as silly today as it has ever been.
It would have been immoral if they had done something to influence the outcome in their favor. Like lobbying the government against bailing out the landlords/bond-holders/originators. From what I read nothing of that sort happened.
So why bring up morality? Is it a misplaced sense of jealousy? Or a case of sour grapes?
These failed investments destroyed lives.
All he's pointing out in the scene from the movie is that just because you've called it right (and you'll become wealthy yourself as a result) doesn't mean that it's necessarily a good thing for society as a whole, especially in this case where they did not know there would be bailouts and fully believed they would be entering complete economic apocalypse.
Would be like saying "I despise War, but War is inevitable, and so I'm gonna become the greatest General in history to overwhelm the enemy and end Wars the quickest way possible".
I feel like if he has enough knowledge to exploit the system and become rich in the process, he could instead use it to lobby for change.
Obviously unemployment is bad for people, and it had adverse effects on people leading to depression and suicide. But the 1%-unemployment-40k-deaths stat seems too neat to use as a statistic, because there are so many variables that affect health & suicide in a community to make drawing a specific numbered correlation like this accurate.
Yes, they would've eventually been right but being right at the right time is where the trick lies. This just seems like pure luck.
Their contracts are absurd and they are not willing to negotiate. Because they own to bigger fish on the supposed idea that some big companies will pay however they're asking for it (I can't find the thread explaining this in r/nyc right now, sorry)
I believe it's the same thing with malls. Can't say I'm sorry.
Amazon got to be their size because the other retailers dismissed digital. That's why.
Betting against malls in 2018 sure seems a sure thing. The trends were obvious, much discussed. USA over built retail, something like 4x more sqft per capita than 2nd place UK. Retail revenue (per sqft) underperformed, was going down. The bodies have been piling up for the last decade. The success of the exceptions (Apple Store) further proved the point.
Mega trends killing retail, and therefore malls, were (are) e-commerce and urbanization.
One cliche that Scott Galloway likes to say is (paraphrasing) "A crisis like coronavirus accelerates change, compressing 10 years into 10 weeks."
I'd be more interested in learning why asset bubbles take so long to pop.
I'm also very interested to see how malls can be repurposed. The article's example of the low rent WeWork clone is very interesting. Many others have dreamed about community hubs, cheap rent for day cares, etc.
If it was obvious then why wasn't that already priced in to the cost of shorting the securities?
I'm more interested in why some people don't follow the herd.
Why would GS sell these if they know the insurance policy is going to go badly for them (GS)?
- CDS is basically a way to bet for or against some bond defaulting. It's pretty much like car insurance: you pay each month, but if something happens to your car, the insurer pays you. You make money on the trade if the malls can't pay, basically the car crash scenario. The thing is, you don't need a car to be involved.
- The bonds they were trading against are actually big bags of loans on shopping malls. You make a big bag because investors want to lend to shopping malls, but they want to diversify against more than one mall, and they also don't want to keep track of thousands of malls. Of course this means there's a bag-maker who has an interest in organizing bags that investors will be interested in, on both sides of the trade. There's a fair bit of critique that fits here, eg are you really helping both sides or is one side a dummy that you can fleece to help your relationship with the other side?
- The thing about bonds is you get paid a higher interest if they are distressed, but they look just fine as long as they are able to pay. Even if they are just able to pay by the skin of their teeth, the bondholder gets whatever they were owed. If there's a default a lot of messy things happen, and as the bondholder you really don't want that problem. So the Putnam and AB had good reasons to make some noise and try to get politicians to help. There's more questions here, people should ask whether it's right to go to the news to affect the outcome, vs letting a bunch of more or less anonymous investors make their bets and letting the market decide.
- For the fund, betting on stuff going down isn't all that different to betting on things going up. Either way you are weighing the cash flow (carry) against the potential movement. This goes for just about any security. The environment is typically also one where you don't question the wider implications of what you're doing. If you buy an oil company, it's because you think it's going up. Maybe you are an ESG fund and you have some angle, but the default is to think about what will happen from what you think the dynamics are, not whether you thik it makes the world a better place.
- The most standard excuse for the above is that it's better for the prices of things to get to where they are supposed to be sooner rather than later. If malls are no longer going to be as large a part of the economy, it's better for people involved to find new jobs now, and not later. This is not exactly bullet proof, but you can't avoid this argument in any critique of how the market works, someone will come up with some version of it.
So many smart people, so many working hours, for what? Making tons of money without improving society one single bit. Yes, it's how the system works, no, I don't blame people for taking advantage of it, but I find it still depressing.
If you want an example of something in finance that's an unalloyed Good, have a look at Vanguard's rise.
None of this would have been affected by Glass-Steagall, which dealt with separating commercial and investment banking [1].
[1] https://en.wikipedia.org/wiki/Glass–Steagall_legislation
Not really. Most lenders into this mess never made a dime on the shorting. And most of the shorts’ beneficiaries never loaned a penny. Short selling pre-dates Glass-Steagall. Credit default swaps predate Gramm-Leach-Bliley.
https://www.nytimes.com/2020/08/24/business/mall-short-hedge...
And those home loans were allowed because Glass-Steagall was removed, is it wrong to think that although short selling has been around it has been exacerbated by the removal of Glass-Stegall into things like people's homes/livelihood and not just stocks?
Short selling is our best defense against bubbles.
"They had to lay off three people."
Versus how many Toys R Us and Radio Shack employees were laid off?
Why should it be legal to make billions of dollars in profit off of the failure of something? How does that make economic sense? These guys walk off with a huge bag of cash, a bunch of investors that were trying to invest positively get screwed, the mall dies, and all that money and economic opportunity vanishes. The economy objectively gets poorer in that area, and the ramifications are widespread as areas start to become 'food deserts' and so forth.
Are we _really_ to believe that the era of the physical marketplace, the Third Location where you can take your family and kill a rainy day, is really dead? Does nobody want this at all, anymore?
Is it possible that we'd already let the malls decay into places people didn't want to be, through lax enforcement of any kind of social discipline that would make it a welcoming space, and this is just the death rattle of the mall from the same problem that will ultimately kill the city itself?
Or is it possible that this is robber-baron capitalism, exploiting anything it can find for profit, lobbying and changing laws to make it easier to vampirically suck the remaining wealth out of troubled areas?
There are a few bigger issues here: why did the malls go bad? Could they simply not adapt to online or were they saddled with debt like some take over companies do? And should a mall ever take out a position like hedgedund did to protect against their own downfall?
I’m not really trying to pick sides here but to me we should be more worried about why snd how the malls fell snd less about who made money when they did.
Should it be OK to have unchecked long pressure on assets? You think prices are inflated now? They'd be insane without short pressure.
Fuck malls. They're reaping now what they sowed a long, long time ago when they killed the family-owned business on main street.
The footprint of the modern mall is outrageous in its size. I'd like to think that creative and forward-thinking cities will come up with a much better use for that real estate.
Most small towns don't have a one off Chanel or LV store, and some people want that stuff.
https://www.aerialphotosofnj.com/_images/_photos/aerial/shop...
Well, you understand that a mall is just a covered street you can't drive on, right? With some shared infrastructure? In the rainy wastelands of North America, it turns out that people like that kind of thing. It's appealing to not worry about cars when your children are scurrying about. It went more upscale than anyone needed - the prototypical "bazaar" turned corporate - but it's hard to argue in the big flat commons the occupies much of this country that it's really a waste of space.
Time was there were a lot more mom-n-pop style stored in the mall. It was an easier place to start one, you just lease your space and all the facilities are provided for you!
Malls may have damaged Main Street, but it was the big box / department stores that really did that, and it was through efficiency and better logistics pushing prices down, and corners being cut every which way, that they did so - not just by virtue of their size and location. Nobody gave a shit that Main Street was dying because they could get their own needs for less than before.
Now, imagine if we could keep the logistics, but force the profit back into the communities where the spend is happening. Paying retail workers a lot more is a good way to look at doing that.
There's nothing in the article to suggest they took any proactive steps to hurt the malls or the businesses in them. They simply identified some risky securities and placed a bet that they would decline in value. The investors that were 'trying to invest positively' should have perhaps some more due diligence on the assets they were buying.
Activist short sellers do exist too. For example Hindenburg Research who it seems have done very well off the collapse in the Nikola share price. They certainly provided value to the market through their exposure of corporate frauds.
The way you've written this kind of implies that the mall dies because they bet against it. That isn't the case at all. The malls were going to die either way.
> and all that money and economic opportunity vanishes.
Live by the sword, die by the sword. Malls were part of what killed small mom & pop shops. Things change. Government programs should be in-place to protect people (especially like, normal people) from the worst/unpredictable outcomes of market based economy, but overall, markets are good at allocating capital to what people actually want (whether its actually good for us or not, see: social media).
> Are we _really_ to believe that the era of the physical marketplace, the Third Location where you can take your family and kill a rainy day, is really dead? Does nobody want this at all, anymore?
Can we please aspire to a better 3rd place than an advertising/consumerist mecca? How about community centers with pools, basketball courts, and arcades? With a mall's food court attached?
>Can we please aspire to a better 3rd place than an advertising/consumerist mecca? How about community centers with pools, basketball courts, and arcades? With a mall's food court attached?
> "COVID-19 also revealed a dirty secret hidden in the crawlspace upon which many commercial mortgage-backed securities were built. A University of Texas at Austin study published in August claimed that banks knowingly inflated underwriting income for $650 billion worth of commercial real estate mortgages issued between 2013 and 2019, including by 5 percent or more for nearly a third of the roughly 40,000 loans. “A well-documented historical pattern is that fraud thrives in boom periods and is revealed in busts,” the university researchers wrote, adding that end investors were unaware of this hidden risk, a deception akin to buying a Ferrari secretly outfitted with a rusted-out Kia engine. It could be argued that CMBS had been a magic trick all along, with big banks one step ahead, luring investors to pick a card from a rigged deck. It took a global pandemic—an act of God—to reveal this financial sleight of hand."
Our (capitalistic) system is rife with fraud, and as the saying goes "fraud creates alpha", i.e. a competitive advantage. Now in a perfect market, the regulator would step in and prevent and punish the fraudsters. However, fraud has positive side effects such as creating employment opportunities (Wirecard employed 2000ee on avg. for 10 years, say), and regulators are underfunded and overwhelmed because less regulation is good for business.
So the economic function of short selling is to help price discovery at the minimum and expose fraud at the maximum.
Also short selling is a stupid and highly risky idea: You take unlimited (!) downside for a limited upside, and any short portfolio will ultimately go to zero due to markets going up on average.
In essence what they did was negotiate away the share's/bond's owner's rights to sell the shares for a period of time - the person doing the short is betting they'll go down, the person renting out the shares is betting they wont
Why should it be illegal?
One might make an argument in case of naked short selling, but even that is tedious at best.
> social discipline ... death ... kill ... robber-baron capitalism ... lobbying ... vampirically suck the remaining wealth out of troubled areas
With this choice of emotionally loaded words, I think you want to make a moral or political argument, not a legal or financial one.
Naked short selling is fraud.
The investors didn't get screwed; they made a bad investment, and the short sellers didn't have anything to do with the malls failing. It boggles my mind that people look at speculators helping make markets in risk hedging as the vultures. The vultures are swine like Bain who levered up viable companies on debt to "increase shareholder value," looted pensions on bankruptcy and moved manufacturing abroad. Meanwhile McKinsey advising giving pharmacies "rebates" every time someone ODs.... but it's the guys shorting dying shopping malls who are the problem....
If you get rich from someone else's failure, you're a vulture, end of story. I think we ought to ban shorting stocks and a pile of other usurious business practices that have become commonplace. Failure should not be making other people rich.
The money they made was not in any way extracted from anybody connected to the malls.
Imagine sitting on earth with a friend, observing the Death Star through a radiotelescope. You bet the friend $1000 that the Death Star will vaporize Alderaan.
You have made $1000 off the event, even though nobody in the Empire or on Alderaan even knew you and your Friend existed, or had any economic involvement in your transaction (and, in fact, given the distance, the event happened before the transaction even took place).
> How does that make economic sense?
In a larger sense, any transaction where you can bet on the success or failure of particular economic endeavours allows an individual investor to fine tune their portfolio to their dreams or concerns (e.g. if you own a skyscraper in a coastal city and are worried about Kaiju, being able to buy Kaiju insurance helps you sleep soundly at night).
Collectively for the economy, such transactions are beneficial, because in their aggregate, they can be a more efficient resource allocation mechanism than a central planning mechanism.
> These guys walk off with a huge bag of cash, a bunch of investors that were trying to invest positively get screwed, the mall dies
None of which was the hedge fund's doing, see above.
> and all that money and economic opportunity vanishes.
Analyses like yours often fail to consider what happens with the "huge bag of cash" you mention above: It has just been transferred from the pockets of one investor group to the pockets of another investor group who have arguably demonstrated that they better understand how money is productively spent. So the money is not only going back into the economy, but may well be employed more efficiently.
This is where I differ. When there is an entire financial industry built around the idea of making billions off of the failure of something, what on earth makes you believe they have no incentive to spur it along?
> It has just been transferred from the pockets of one investor group to the pockets of another investor group who have arguably demonstrated that they better understand how money is productively spent.
Spent _on what_? Are financiers and capitalists just an interchangeable commodity? Do you really think they all have the same interests, the same agenda?