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Comment by konschubert | Hacker News Reader

Shitty companies failing is a necessary and important mechanism of a functioning economy.

Look at the Soviet Union for an example of what happens when no companies ever go bankrupt.

Short activists expose shitty companies and as such, they play an important role in the economy.

Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers.

Maybe shorting, in particular naked shorting, is not ideal. But there needs to be a way to reward people for taking shitty companies down.

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>Shitty companies failing is a necessary and important mechanism of a functioning economy.

True

>Look at the Soviet Union for an example of what happens when no companies ever go bankrupt.

The Soviet Union was not a free market economy.

>Short activists expose shitty companies and as such, they play an important role in the economy.

In free market economies, shitty companies fail by themselves because their competitors offer better good or services. Short activists don't help make better competitors.

Companies in the Soviet Union needed more competition than short selling.

>Maybe Wirecard's fraud scheme would still be going on if it wasn't for short sellers.

Who knows? Tesla wouldn't exist if short sellers had their way either.

> In free market economies, shitty companies fail by themselves because their competitors offer better good or services. Short activists don't help make better competitors.

If you want the market to encourage people to investigate fraud and bad news, then they need to be able to profit off of announcing it.

When people don't figure out fraud, the company still suffers eventually but it does so much harder and hurts more people. For example, if Enron's cheating had been exposed a lot earlier it could have been stopped.

Shorting has real and important benefits. And real downsides too, when shorters try to tank companies that had perfectly acceptable fundamentals. But it's definitely a tradeoff, not shorters being parasites.

Why would Tesla not exist? A low stock price doesn't bankrupt a company.

It can because if you want to raise money, the banks wont accept your shares as collateral making your job to raise money very difficult.

Only if you need to raise money in order to survive. Which most companies don't.

> Which most companies don't.

and some companies do, that is the point.

in free market economies people can lend each other ownership shares in public companies

Shitty company will go down in a natural way in a free market economy.

Why do you feel you need to help it to go down?

Why let people make money on someone's fail?

Why let people have incentives to ruin other people lives?

> Why let people have incentives to ruin other people lives?

We should build safety cushions for people, not companies.

> Why do you feel you need to help it to go down?

https://en.wikipedia.org/wiki/Wirecard_scandal

Fraudulent company is not a general case. Such companies must be closed by regulators, not short sellers.

Do you think it is a good idea to help Intel go bankrupt because it's shitty right now in comparison to AMD?

> Do you think it is a good idea to help Intel go bankrupt because it's shitty right now in comparison to AMD?

Of course not. But if either one of them has secret bad information, it's good for everyone to have it revealed to the public so the stock price can be more accurate.

Fraud may be rare but companies have negative info all the time.

No company goes bankrupt because of a low stock price.

What is the mechanism by which you think shortsellers cause companies to go bankrupt? Can you think of any examples of short sellers causing a bankruptcy?

They soak up investor money that would have otherwise gone towards sufficiently capitalizing the company (via equity raises).

Short selling has both supply and demand effects. So while it 'soaks up investor money' it also creates demand for incremental money through lower prices.The laws right now basically exist to constrain the supply that can be brought on quickly to prevent that getting of line. That's one of the main reasons to ban naked short selling - because it removes the friction to massive and infinite supply increase. It's also super risky because if you don't succeed you end up short a bunch of shares at artificially lower prices. So practically the scenario you are worried about is already addressed in securities regulation.

I would say that short sellers are even more important around primary transactions because then share price matters more. Good prices prevent new investors being left holding the bag and inefficient allocation of capital which could have gone to a different business with better investment opportunities.

> Shitty company will go down in a natural way in a free market economy.

This is the crux. "Shitty" as in obsolete business model: Yes. Shitty as in fraudulent company behaviour: No.

In fact, fraudulent behaviour creates a competitive advantage. And there is only an incentive for the regulator to intervene in the most extreme cases.

Wirecard employed thousands of employees, paid taxes, contributed to social security, and created wealth for investors. Tesla has accelerated the spread of EVs and similarly created enormous wealth for investors. These are real, significant positive effects.

If it's a free market economy why would shorting be banned? When it comes to that, why would naked short selling be banned? Free market means the market would decide on whether they want it or not and regulations would be gone.

Japan banned naked shorting (of course Japan did not ban shorting) and seems to be doing fine. US probably can ban naked shorting without much problem too.

I am not sure Japan is doing well. (Not saying this is due to the lack of naked shorting)

https://www.economist.com/finance-and-economics/2020/09/24/w...

The US already did ban naked shorting without much problem, over a decade ago.

> Maybe shorting, in particular naked shorting, is not ideal. But there needs to be a way to reward people for taking shitty companies down.

That's what disclosed shorting is for. Why is naked shorting needed?

> Shitty companies failing is a necessary and important mechanism of a functioning economy.

Are you thinking of Melvin Capital, GameStop, or both?

I am thinking Wirecard

Luckin Coffee

> Shitty companies failing is a necessary and important mechanism of a functioning economy.

What about shitty hedge funds overusing illegal[1] financial mechanisms to their advantage?

[1]: https://www.investopedia.com/terms/n/nakedshorting.asp

> Maybe shorting, in particular naked shorting, is not ideal. But there needs to be a way to reward people for taking shitty companies down.

And there's already a less risky mechanism for that: put options.

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