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Comment by brandmeyer | Hacker News Reader

Hol' up.

While in bankruptcy, some fools ran up the price of Hertz stock. Then, while the price was up in the middle of bankruptcy proceedings, Hertz sold some new shares to the same fools. The final result of the bankruptcy wiped out all of the shareholders.

While the buyers were obviously fools, Hertz should have known that zero shareholder value was a likely outcome. How was selling more stock in that situation legal? I see that the sale was quickly shut down... but it shouldn't have happened in the first place.

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> How was selling more stock in that situation legal?

They asked the bankruptcy court, and the bankruptcy court's job is to maximize value for the bondholders. Turns out that selling worthless stock (for money) is really good for the bankruptcy proceedings (getting maybe 70% of the money back instead of 60%).

Then the SEC came in (whose job is to protect retail investors), and the SEC told them to knock-it-off.

Different jobs for different courts and bureaucracies. Ultimately, the SEC determined it was illegal for them to proceed. But I guess the SEC assumed the bankruptcy courts would do the right thing. When that clearly wasn't the case, the SEC stepped in (a bit late: after $29 million was raised. But better late than never)

That's very well explained.

I think that trips people up, in stories like this, is that the SEC has a pause button but not a reverse button. What's done is done, for the most part.

What I don't understand is that Hertz specifically wanted to sell an amount of shares that wouldn't raise enough money to pay off their debts. Their prospectus noted that shares sold would automatically become worthless unless their debt was paid off, which they didn't anticipate.

But why not try? What if they sold so much stock that the bondholders could just be paid back? Why do the stock sale specifically planning for failure? Why include a limit that guarantees failure even if you would have otherwise succeeded?

Many would suggest that such an action you propose is fundamentally immoral.

Lets say a hypothetical company is overall $-4 Billion in debt (total assets - liabilities). You successfully raise $5 Billion from some means.

Now you're in a position where you sold $5 Billion worth of shares on a company that (by all fair evaluations) is only worth $1 Billion after the capital raise.

The people buying the shares are making the "true" valuation of the company, being the ones buying it.

Do you think the buyers of HTZGQ at $5.50 in June 2020 will be proven correct?

Or do you think, that like most other bankrupt companies, HTZGQ will be worthless once these bankruptcy proceedings are done?

The stock is almost certainly going to go to $0. That's just what happens as bankruptcies play out. If you disagree, you're welcome to toss your money into buying some HTZGQ yourself.

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The issue is that Hertz CEOs / board / CFO have extra information and better ideas into how those bankruptcy proceedings are happening. For them to issue shares in this time is grossly immoral. Especially when they're publicly pointing out that yes, bankruptcy proceedings are carrying on as expected: shareholders are expected to be wiped out and assigned a big fat $0.

It already has gone to zero. The bankruptcy proceedings wrote off all of the old stock and issued an entirely new set of shares, mostly to the debt holders.

(I cannot reply to your response when you edit so often... looks like it resets an anti-spam timer or something)

The proceedings behind a deal at this scale are so private that it is rare to see major salient revisions after a public announcement like this. Nevertheless, I concede the point that it isn't completely final. Presumably they'll be de-listed once that actually happens.

Bankruptcy proceedings are still taking place and are not finalized. HTZGQ will probably go to zero soon, as what you say is almost certainly going to happen.

https://www.prnewswire.com/news-releases/hertz-global-holdin...

As of a few days ago, the PLAN (not yet executed) is to give Knighthead new shares and wipe out the current set of shareholders.

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There is a rival plan to keep HTZGQ shareholders alive. These sorts of plans go back and forth, discussed by the board, the bankruptcy court, and so forth to determine the best course of action.

No plan is ever 100% certain... not until the plan is executed. Still: the current plan is that Knighthead will be the new owners, old shareholders will be wiped out, and old bondholders will get 70%.

If bondholders are only able to get 70% under the current plan, it seems unlikely that any alternatively proposed plan would bring that to 100% somehow (the precondition before old shareholders of HTZGQ to get value out of this...). The plans will change, but the amount of assets that Hertz owns will not change. So I'm not entirely sure where another 500-million buckaroos will come from to make the bondholders whole.

Modern finance is a process of constantly repackaging and reselling risk from people in a better position to evaluate that risk to people in a worse position to evaluate that risk. Finally, after a dozen generations when it arrives at the people least able to evaluate the risk, it crashes to zero, followed by sympathy to the poor suckers (like your local school district) and a bailout.

Hertz just cut out the middle men here and sold directly to suckers, maybe a lot of their executives were also creditors.

Can I interest you in an Iraqi Dinar?

I'll pass on the dinars, unless they are somehow collectible.

May I interest you in some Aaa-rated subprime mortgage backed securities? How about some negative -yield bonds?

Institutions can have conflicts of interest, which individual investors can make up their own mind on. (Whether that's a winning strategy is another question, I admit)

Why especially? Pointing out that the long term value of the stock is $0 while selling it is what makes it moral IMO.

If I sell my broken car while clearly noting that it’s broken, hat makes it ok, not worse than if I’d left it out.

Do you hold this view for sellers of hertz stock that aren’t hertz? What about sellers of stock that bought the stock post bankruptcy?

Yeah, a lot of companies that enter bankruptcy end up with wiped shareholders and new owners in the shape of it's creditors. It's not really news.

Then if some idiots think it's not the case, and there is value, let them bet if they so want, they obviously know better than Hertz. Hertz only decided to issue shares when their share price went over the roof, driven by those same speculators.

As long as things are correctly disclosed ("our stock is worthless, but buy it if you want"), caveat emptor.

People buying shares were acting on what they believed to be the true valuation. A big difference. Imagine two people are "long" on some stock. Person A decides to sell; They believe the true valuation is lower. Person B decided to buy more; They believe the true valuation is higher. One of them is wrong.

In this case, the buyers of Hertz stock were most likely wrong, although things are not yet finalized and another comment here notes that alternate plans are being proposed that would not wipe out share holders.

> Now you're in a position where you sold $5 Billion worth of shares on a company that (by all fair evaluations) is only worth $1 Billion after the capital raise.

That's entirely reasonable if you think that by keeping the company alive you can build it back up until the point that it's worth more than $5B. This is indeed what every CEO thinks -- that they can make the company worth more next year than it's worth this year.

Hertz is going through Chapter 11 bankruptcy. It is reorganization, not liquidation. At the end of it, there would still be a Hertz company, but with new owners.

Hertz agreed to bankruptcy, so that they don't have to pay all of their debts anymore.

That's... literally what's going on. As part of the bankruptcy proceedings, shareholders usually get wiped out. They wouldn't have pushed this button unless they believed that their bonds were hopelessly unpayable.

Filing bankruptcy is not an automatic thing. Should the company, during the course of the bankruptcy, somehow manage to bounce back and obtain enough capital to remain solvent, the court may dismiss the bankruptcy since the company no longer needs legal protection to restructure its debt or gracefully liquidate its holdings.

In addition to the court finding that a bankruptcy is no longer appropriate, either the debtor or the creditor can petition the court to dismiss a bankruptcy. This is not entirely uncommon, even when a company might have more liabilities than assets, when creditors believe their interests are harmed more by bankruptcy than a less drastic measure. This avoids companies declaring bankruptcy out of convenience rather than necessity. Shareholders are themselves creditors, and so they too could petition the court to dismiss a bankruptcy under such circumstances.

Finally, while companies (mostly) won't enter bankruptcy if they see other options, bankruptcies do not automatically wipe out shareholders, though that is probably the more common outcome. It is possible however to retain your shares, which would usually be exchanged (possibly at a discount) for shares in the newly constituted company post-bankruptcy.

Or... Hertz can organize Chapter 11 bankruptcy, wipe out large portions of its debt, and then bounce back.

Bankruptcy protects the company and allows a company to come back stronger. That's the ultimate issue: with debts this large, it makes sense for Hertz to give up on its debt rather than try to pay it off.

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Its not like Chapter 11 is a death-knell for a company. GM went Chapter 11 years ago, and came back much stronger in the past decade. Bankruptcy protects the company, while (usually) wiping out the shareholders... and bondholders only getting a fraction of their promised payments back.

That's the deal: investors get screwed, but the company survives. A bankruptcy court helps decide if the case truly is as terrible as they are pleading.

But ultimately: that's why Hertz's board voluntarily entered Bankruptcy Protection last year. Its to Hertz's advantage to declare bankruptcy.

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If you have a comeback plan for Hertz, it will be an even stronger comeback plan if you wiped out a huge portion of debt. It just makes sense.

Yep, and this is in fact the type of bankruptcy Hertz is pursuing. Re-org, not a chapter 7 liquidation.

But to clarify, not all investors get screwed. (or at least not completely). Stock owners, unless they're of a class with a higher claim than normal common stock, will usually (though not always) lose everything. However, many bondholders will receive some of their money. How much is determined by many factors, including the type of bond and how senior the debt associated with it.

Plenty of companies are valued at more than 5x their assets. Tesla for example is valued at more than 10x their assets. Besides, immorality doesn't really enter into it. The SEC requires public filings to ensure investors can make informed decisions. The rest is up to the investor who presumably would be betting that the company's prospects will increase, at least partly as a result of avoiding bankruptcy an having enough cash on hand to buy some breathing room and recover. Of course, they may be wrong. But immorality only enters into it if there is deliberate deception.

Further, in the case of a company doing what you describe, they would in fact be ensuring their current shareholders, pre-$5b stock sale, don't lose all of their money.

The difference here is that the company was already in the middle of chapter 11. So there is no "avoiding bankruptcy", that part has already happened.

One common scenario for exiting chapter 11 is that you wipe out equity holders so that you can pay off your debts. (That's a major reason why stocks tend to get lower returns than bonds: less risk, less reward.) So, selling common stock like this in order to raise money is effectively robbing - or, more accurately, swindling - the poor to give to the rich, who tend to be the carriers of more senior debt. Which Hertz knew they were doing. Technically, they wrote, "We're selling you lots of $0 for the low low price of $2.50," in the prospectus, but they did that in the full knowledge that Robinhood users don't actually read prospectuses, and that Robinhood users were the only ones who would be buying these shares. So there's your deliberate deception.

The spot where they "buy some breathing room and recover" is the bit where you wipe out your equity holders in order to pay off your lenders as well as you can, restructure whatever remaining debt you have, and carry on. That's more-or-less what chapter 11 (as opposed to, say, chapter 7) is.

I was responding to a comment about a hypothetical, not this particular case. The hypothetical was a company with $4b in debt selling $5b in stock to remain operating. This is not only fine, it is common, especially for private companies where investors are betting on the future success of a company.

Even in bankruptcy, it is not uncommon for investors or banks to give the company bridge loans which the lenders knows full well might be lost if the restructuring doesn't work.

As for this case, it is not robbing shareholders. Chapter 11 is in not an automatic wipe out for shareholders, in fact you'll see other comments here about proposals for alternate plans for Hertz that would not wipe out shareholders. This is, if not common, certainly not unheard of: Restructuring a public corp and keeping it public post chapter 11 means it will still have stock on the market, and in some cases prior shareholders are able to exchanged their old shares for new ones.

It is also not robbing because even retail investors know full well what "bankruptcy" means and no reasonable person would buy this stock without realizing the significant risk for total loss. And in any case, how would Hertz selling stock, knowing the likely risk for a complete loss, be any different than some other institutional investor selling their stock, also knowing the buyer has an excellent chance for a complete loss?

Airlines are in bankruptcy a few times a decade, give or take. Doesn't stop them haha.

A more logical option is to wait for Hertz to inevitably go bankrupt, and THEN invest $5 billion into them.

Under no circumstances is it better for the new investors to pay billions before the bankruptcy.

If you mean waiting until the bankruptcy proceedings are over, then waiting isn't always necessary. Lots of investors make high risk investments to companies in bankruptcy with bridge funds to carry them through the process.

The "under no circumstances" clause is not necessarily the case. If it's a large enough company and investors can get their investments to be senior debt, then it can be a reasonable, if still high risk investment. If the bankruptcy occurs, they'll be first in line to get paid out of the remaining assets, even if they don't get everything back. If it doesn't occur, they've got a nice high yield bond. Basically there are ways for investors to make money investing in a company at any point, if done the right way. And probably equally many, or more, ways to lose money.

In the case of Hertz? Yeah, buying their stock when it went meme doesn't look like a very smart move right now. Of course the bankruptcy plan might be amended to slow redemption of old stock into new stock post-bankruptcy, but I'd say that's success by pure luck rather than anything else.

>slow redemption = "allow redemption"

No, the enterprise value of the company doesn't change. It was owned by 4b of debt before and is now owned by 5b of equity, and has 1b in cash. It also has an intact business.

Under your logic no company would ever raise equity to pay off debt.

I'm going to start by saying that I pretty much agree with you that it's immoral to knowingly screw people over.

Now with that out of the way, I think there's more of a gray area here than you might think. While there are many situations where people enter into a transaction with the belief that it's a win-win for everybody involved, I think there are legitimate situations where you can trade with people ethically while also believing that the other person is making a huge mistake.

Bitcoin is a pretty great example of this. Suppose I'd been gifted a bitcoin in December of 2017. That was right around the peak of a huge rally for Bitcoin. If I'd sold it to someone for $15k I would have thought that the person buying it from me was an idiot. They may have thought the same of me. As long as we were honest with one another, that seems okay to me.

The situation with Hertz was just kind of weird. It's as though I was taking out the trash one day and someone walked up to me and offered me $1000 for my trash. I don't really have any strong moral intuitions about whether taking their money is okay because it's such a goofy and unexpected thing to do.

I'm also reminded of the time Stuart Butterfield explained why he felt compelled to sell shares of Slack at the generous valuations and terms people were offering to him.

> It’s pretty straightforward. I’ve been in this industry for 20 years. This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians. It’s certainly the best time for late-stage start-ups to raise money from venture capitalists since this dynamic has been around.

> And as a board member and a C.E.O., I have a responsibility to our employees, to our customers. And as a fiduciary, I think it would be almost imprudent for me not to accept $160 million bucks for 5-ish percent of the company when it’s offered on favorable terms.

> They asked the bankruptcy court, and the bankruptcy court's job is to maximize value for the bondholders.

Perhaps the court can do this without violating the law? This is fraud.

That's not the bankruptcy court's job. That's the SEC's job.

Ever heard of the phrase "you cannot have two masters" ?? By splitting the job into two organizations, we ensure that both jobs are accomplished. Otherwise, only one job gets done (at the expense of the other).

Zero shareholder value was the overwhelmingly likely outcome, but not completely certain. (If Hertz magically recovered from bankruptcy, however unlikely, the payoff might have been >1000%).

The prospectus clearly stated that there was negligible likelihood of return.

On the flip side, from the creditor's perspective: "We loaned you a bunch of money, you can't pay it back, and there are some people who would like to buy shares in your company today? How can you not sell it to them?"

The unsecured creditors in this situation don't appear to be investment banks, they appear to be auto repair companies, perhaps exposed to counterparty risks from transacting with Hertz[1].

Your question brings to mind part of an exchange from one of my favorite pieces of financial cinema [2]:

SAM ROGERS: And you are selling something you know has no value.

JOHN TULD: (cuts him off cold) We are selling to willing buyers at the current fair market price, so that WE may survive, Sam.

SAM ROGERS: You'll never sell a thing to any one of them again.

JOHN TULD: I understand.

SAM ROGERS: Do you?

JOHN TULD: Do you!!! This is it, Sam, this is it!

[1] https://www.repairerdrivennews.com/2020/05/25/hertz-will-con...

[2] https://www.youtube.com/watch?v=7prnY2FOxns

Even that exchange is not analogous, since Hertz told everyone what they were selling is worthless.

No. No! I reject this rationale. Just because its in the domain of finance and business doesn't make it ethical. For example, you can't just disclose your way into arbitrary medical experiments on people. Regardless of how you rationalize the principles, it will end up exploiting the most vulnerable citizens.

While I readily admit that the law does not forbid all forms of unethical behavior, I do believe that it should forbid blatantly exploitative acts. Like this one.

I understand the sentiment and might have had difficulty approving the sale if I were on the Hertz board of directors, however, there is a chance, however slim, that the dumb money knows something the smart money doesn't.

This is much more-readily seen post-GameStop. The AMC theater chain, mid-hoopla, managed to discharge much of its debt. The gamblers at home literally saved a major US business from dire financial straits. Some of them got paid for it, too. The company is in an undeniably better position today, as are any of the retail investors who bought and held. (The share price is up 10% today, too. The world is a complicated place.)

On the scale of exploitative acts, enabling informed gamblers to play chicken with the Bankruptcy Bus, while it may be exploitative at some level, may not be as egregious as other exploitation (Casinos? State lotteries?) that we tolerate every day.

Then it should also ban gambling.

We largely did in the US. There are exceptions, but generally it’s illegal to bet on the winner of a collage football game etc. https://www.espn.com/chalk/story/_/id/19740480/the-united-st...

However, that’s slowly been changing over time.

> We largely did in the US.

https://www.cnbc.com/2019/12/12/americans-spend-over-1000-do...

Yea, there is a reason gambling was originally banned and we get to learn that lesson all over again.

Is that the case here though?

I like your "disclose your way to arbitrary medical experiments" analogy. Things can't be just black and white. That said... who is buying Hertz stock during bankruptcy proceedings?

I don't see why this exploits vulnerable people in particular. As the op says, it's a real gamblers' trade.

Anyway, I think it's an insider-ish trading question. Selling stock once you already know the price to be zero is a step too far.

Listen, if you guys want to strict-law yourself so people can't talk to other people, I think that's fine. There should be rules that say people who have strict-lawed themselves should be protected from loose-laws and out-laws. And strict-laws can then interact with strict-laws.

In fact, I'm even okay with defaulting to strict-laws and then one takes a test to allow being a loose-law who can interact with other loose-laws.

Then, yes, strict-laws can live a nice safe life better than ever before and spend their time arguing on the Internet about how r > g etc. etc.

But the problem is that strict-laws won't allow loose-laws so until you put that distinction in place, you should know that it is true political war and no loose-law will give any quarter because while we want to let you to be able to occupy your space, you don't want to permit us to occupy ours.

"accredited investor" law is the "loose-law" you are talking about.

I'm an accredited investor and honestly, I'd be way wealthier today if I had just done the right thing and lied about being one a little earlier.

I wish the requirements were intelligence/knowledge-based rather than resource-based but I suppose the real test of intelligence was knowing that you can lie about being an accredited investor and no one can tell so I actually failed it.

I'm curious, what was your best investment as an accredited investor? (No need for a specific company, general info is fine.)

Nothing is liquid yet. Also, practically every Bay Area engineer is an accredited investor because they hit the income requirements. Many are more actively involved than I am.

> the real test of intelligence was knowing that you can lie about being an accredited investor

If the USA is anything like Australia, this is still illegal. So maybe not so much about "intelligence" as it is "willingness to break the law when it's unlikely you'll be found out".

I suspect the latter strongly correlates with financial success more broadly, too.

Nah, no one punishes you over this because it's to protect you. The most high profile case is Chris Sacca. But he's way smarter than me so I'm willing to accept that he'll win games I can't play.

Serious question: what can you do as an accredited investor that you can’t do otherwise? Why would you be way wealthier? PreIPO companies, sure, but where do you even trade that stuff?

They said take a test. "Have a million dollars" is a grossly unfair replacement for that.

>For example, you can't just disclose your way into arbitrary medical experiments on people.

Why not? If the person checks the "medical experiments" box in return for $100k, are we saying they shouldn't get the money? People willingly trade increased risk of death for increased pay all the time. Should it be illegal to be a lumberjack, or to work the overnight shift at a 7/11?

But then we forbit selling yourself into slavery - regardless of the payment you receive. So there _must_ be a line somewhere.

It was an at-the-market offering, and Hertz didn't know anything about its market value that wasn't already a matter of public record. Hertz stock was already being traded. I guess I don't understand the ethical system that says "everybody that holds Hertz stock should be able to benefit from an irrational enthusiasm for Hertz stock except for the issuer."

Margin Call was exactly what I was thinking as I read this. Underappreciated movie - definitely worth a watch for a more realistic take on 2008nthan The Big Short.

1) US securities laws are very focused on disclosure and filling out the correct forms. Hertz did say the stock was (likely) worthless when they filled out the correct form to sell some stock.

2) People were buying (and selling) Hertz stock every day, before, during, and after Hertz's brief offering. If it should be illegal for Hertz to sell the stock, why should it be legal for anyone else to sell the stock? (The obvious reason is "well, what if Hertz had information nobody else did?", but in this case, they didn't. And they were required to disclose that they didn't.) In a pretty real sense, the victims of Hertz selling stock is not the people who bought it (they would have done so regardless), but the other sellers who might have lost out on a sale (or more likely, made the sale, but for a fraction of a penny less than they otherwise would have done) to a sucker who ended up buying from Hertz instead. And it's hard to feel too sorry for people offloading worthless stock to suckers, no?

(Of course, note that nobody who bought the stock from Hertz will have seen those disclosures. It was an at the money offering; the purchasers won't have any idea who they bought their shares from or how old those shares were. But again, US securities law is extremely focused on disclosure to the exclusion of all else...even if the disclosure won't be seen by anyone.)

> If it should be illegal for Hertz to sell the stock, why should it be legal for anyone else to sell the stock?

Hertz wasn't selling existing stock, but were creating new stock. They cannot be equated to an existing shareholder selling his holdings.

Why would it be illegal?

Hertz was in bankruptcy because it couldnt pay its debts, a capital injection might have raised enough cash to pay off its debts and exit the bankruptcy proceedings.

They disclosed the low likelyhood of such a thing happening but its not the law or the SECs job to make everyone take wise financial decisions.

> Hertz was in bankruptcy because it couldnt pay its debts, a capital injection might have raised enough cash to pay off its debts and exit the bankruptcy proceedings.

While I do agree that it shouldn't be illegal, wouldn't they know how much money they would raise, and hence be able to determine if the capital raise would provide sufficient capital?

If they need to raise $1000, and you but $10 - no one knows if your investment is worthless until after no one buys the additional $990

There’s a good moneystuff on this, the sale was also stopped by the SEC even though it wasn’t really illegal (mostly just in poor taste).

Hertz’s job in bankruptcy is to try and pay creditors, if a bunch of dummies want to give you money even though you tell them you’re bankrupt and their investment will likely be worth nothing then how is that Hertz’s fault? Arguably Hertz even has a responsibility to sell shares if they're able to raise money to pay creditors.

The dummies are speculatively buying swings, or more likely just seeing the stock advertised as high traffic in Robinhood.

Under this argument, why should it be legal for anyone to sell Hertz stock? Should trade be halted?

Or if other people can sell the stock, why not Hertz?

Shares were available on the old stock (discounted for pieces of bankruptucy liquidations)

Hertz tried to create and sell new shares that would never be worth anything.

This is incorrect. The new shares were of the same class as the existing publicly traded shares.

If people are choosing to buy the stock, why does it matter if the seller is the company rather than anyone else in the world? The purchasers are getting the same deal. If it's perfectly fine for a purchaser to pay a random investor $2.58 for a share of Hertz, it should be fine for them to purchase the exact same share for $2.58 when the counter party happens to be Hertz.

If Hertz had been dishonest or misleading about the situation then that would be a problem, but they were completely upfront about the risks.

> Hertz should have known that zero shareholder value was a likely outcome. How was selling more stock in that situation legal?

This disclosure helps:

https://www.sec.gov/Archives/edgar/data/1657853/000110465920...

Since it went before the bankruptcy judge, they might have been obligated to bondholders to sell more shares.

As usual, Matt Levine covered this pretty well in his newsletter: https://www.bloomberg.com/news/newsletters/2020-06-12/money-...

The relevant quote:

> Really I can’t decide how to feel about this. On first principles, you should not sell a billion dollars of stock in a bankrupt company to small retail investors who just installed Robinhood on their phones a few months ago. On the other hand, people are definitely doing that anyway [emphasis original]; a notable feature of this weird pandemic market is exactly that hundreds of millions of dollars of stock in Hertz, which is bankrupt, are being sold to small retail investors every day. Hertz just wants permission to do some of that selling itself.

I like his argument. Its pretty reasonable in its principles.

But it doesn't work in this situation. Hertz raised 10^7 dollars this way when they were 10^9 in the hole. Looks to me like the executives saw an opportunity to part some people from their money and took it.

An outside investor is sharing shares they already have, or short-selling shares with the promise to buy them back later. That's wildly different from issuing new shares when you have inside information which prices them at zero.

> Looks to me like the executives saw an opportunity to part some people from their money and took it.

AKA business.

> That's wildly different from issuing new shares when you have inside information which prices them at zero.

That’s wildly different from Hertz’s bankruptcy being public information.

If people want to gamble on unlikely outcomes, that’s their business.

That description also fits straight up robbery. I don't think it's a particularly meaningful statement in this situation.

Yes, that’s my point. It’s a meaningless statement in a discussion about fully informed buyers and sellers engaging in voluntary transactions.

People were buying a lottery ticket. The difference in this case is that there were no jackpot winners.

It's not uncommon for actual lotteries to have no jackpot winners in a given timeperiod. That's why the pot size keeps growing. At some point the hype from how many big the potential but unlikely payout got increases the share of people buying the ticket. The different between the Hertz stock and a lottery ticket is that eventually the Lottery will payout. But with a stock like Hertz there is no such guarantee.

To quote Mark Twain (or someone) "The lottery is a tax on people who are bad at math"

Presumably the math there is expected value, but does that even matter?

Imagine two lotteries that each sell ten million $1 tickets, and will only sell one ticket per person.

One has a jackpot of $7 million. The other has a jackpot of $15 million.

Math would tell you there's a significant difference between the two, wouldn't it?

But I would say the right answer is that the difference in payout doesn't matter. And you probably shouldn't buy either ticket.

Am I reading it wrong, is 'math' supposed to mean something else here?

You overanalysed it. The math is simply that you are statistically unlikely to get your dollar back.

Is that even math? I can accept that but it's not a very satisfying answer.

And almost anyone playing the lottery can tell you the chance of winning a jackpot is very low!

No one chooses to be robbed, people chose to buy garbage.

It's more like an NFT or an ICO.

Why not use Hertz stock as a proof of stake? It's as good as any other made up currency.

Selling something that you know will end up worthless because you know suckers will buy it is wrong.

It's morally and ethically theft. Gross, filthy, self-conscious theft.

The fact that people just laugh and say, "That's business!" is an indication of how morally bankrupt the business world is.

Almost everything ever sold ends up worthless. The colloquial term for someone who buys something is "consumer".

Lots of people sold Hertz stock knowing it was going to be worthless, why should Hertz be singled out?

Let's not talk about Bitcoin again.

> Selling something that you know will end up worthless because you know suckers will buy it is wrong.

This is a discussion about informed buyers who want to gamble on minute probabilities, not suckers.

> That's wildly different from issuing new shares when you have inside information which prices them at zero.

Hertz executives were in possession of no such information. The information was very public.

I mean, they were in bankruptcy court. Those arent secret proceedings.

If someone still wants to buy their stock while they are in court loudly proclaiming their stock is worthless why would you make that illegal?

This is kind of the core principle of capitalism, informed consent. Also the primary objective of the SEC.

Hertz has issued a regulatory filing that basically says "lol this is worthless, but we can sell you some shares" and then sold some shares. Look up the filing, it's kind of hilarious. I've posted it on HN and it got popular, titled it jokingly as "Hertz Initial Bankruptcy Offering", the moderation has changed the title to the official name of the document.

Hertz explicitly stated that shareholders were highly likely to get absolutely nothing. I think it's also highly obvious to even retail investors that this is an incredibly risky bet with potential for a total loss. I don't think there's a strong argument here that buyers didn't know what they were getting in to.

Besides, how is this different than any other shareholder selling their stock, also knowing full well it is entirely likely to be worthless?

One difference is it increases the supply, no? With shareholders selling existing shares it's more of a zero sum game.

I don't know if that's an important difference, but it has a different feel to it.

> How was selling more stock in that situation legal?

“We are selling to willing buyers at the current fair market price.”

- Margin Call, 2011

I think that sale never went through. https://www.marketwatch.com/story/hertz-ends-plan-to-sell-st...

I see zero problems with Hertz being allowed to do that. You either forbid stock markets, or you let people sell what other people want to buy.

But in the hindsight, I don't really understand why Hertz wanted to do that. It's obviously good for bankruptcy court, that's clear. It might be good for WSB, for some independent speculators. But what does Hertz as a company gain from that? How can it benefit any of decision-makers? They are going bankrupt anyway, whatever they raise is not their money anymore. Surely they didn't hope selling stock would save them from bankruptcy? So why even bother doing something so sketchy?

Hertz in official filings: "Hey guys, this stock is most likely totally worthless"

Meme stonk buyers: buys stock

Hertz: "Hey guys, here's some new stock. Remember we disclosed that it's likely totally worthless"

Meme stonk buyers: continues buying worthless stock

Meme stonk buyers: "How could you do this to us?"

> Meme stonk buyers: "How could you do this to us?"

Did this step actually happen? From what I understand, it was the SEC, not meme stock buyers, who disagreed with the sale.

Actual last few lines are actually look like the following.

Meme stonk buyers: Guys, look at this loss porn. I lost $2.5 mil on Hertz LMAO my trust fund is gone.

Other meme stonk buyers: HAHAHA you fucking retard

Third party worrywarts: How could we let this happen?

It was worth it for the internet points

Parting a fool from his money is a socially beneficial activity.

> How was selling more stock in that situation legal?

Why should it not be?

Consider the following situation:

1. Alice owns 5 shares of Hertz.

2. Hertz owns 5 shares of Hertz.

3. Bob is an ape. For some stupid reason, Bob wants to buy 5 shares of Hertz.

Is it immoral or illegal for Alice to sell her 5 shares to Bob?

If not, why should it be immoral or illegal for Hertz to do so? Especially if they are up front about their incredibly bleak financial prospective.

Is the sale defrauding someone? Who is it defrauding? Bob? Bob wants to buy the stock anyways, because it's a meme stock - why does he care if it's Alice, or Hertz selling him that stock?

If allowing Bob to buy stock is such a bad thing that we need to protect Bob from it, then the correct thing to do is for the stock to be delisted.

and: if it is fine for Alice to sell those shares, what if Hertz is willing to sell them for less than Alice? Should Bob have to pay Alice's higher price for a worthless thing, to avoid some immorality happening?

You could use the same argument for snake oil, which I think is pretty universally not accepted as moral.

Nope.

With snake oil, we would way that it is immoral for ANYONE to sell it. As a result, we (mostly) make it illegal too.

With Hertz stock, nobody seems willing to say that all sales of such stock are immoral. And certainly they're not illegal; people have been buying and selling an enormous volume of Hertz stock.

But even if I say -- Hey this is snake oil don't buy it, I'm still not able to say Snake oil. See 'Radioactive weight loss pills! *contains to radioactive materials'

Correct.

Snake oil is intrinsically bad. We all agree it's bad, and thus, nobody is allowed to sell it, even if they disclose that it is snake oil.

But Hertz shares are apparently not bad. We're clearly happy to see people buying and selling them. Before, during, and well after Hetz's abortive at the money offering, thousands and thousands of people were selling Hertz shares, and I haven't seen anyone suggest they should have been prevented from doing so.

In fact, it seems like the only entity we, as a society, seem to feel shouldn't be allowed to sell Hertz shares is Hertz. Which would be really strange if Herz shares were, metaphorically, radioactive, no?

Selling snake oil is illegal and immoral because it misrepresents the product.

Selling stock, when you make it clear that your stock is worthless does not misrepresent the product.

And, again - note that Alice is not even required to make such a disclosure, when selling her stock to Bob. The assumption on the stock exchange is that as long as public companies are up front and honest about their financials, it's Bob's responsibility to not buy stupid, overpriced crap.

1. Alice owns three cartons of unfiltered cigarettes. They are harsh and kids don’t buy them.

2. RJ Reynolds owns many cartons of Camels. Reynolds creates a cartoon camel called Joe Camel, who is as recognizable to 6 year olds as Mickey Mouse.

3. Bob is a 11 year old. For some stupid reason, Bob wants to smoke Camels and be cool like Joe.

Is it immoral for Reynolds to sell to an 11 year old? Is it immoral for Alice to sell her cigarettes to Bob?

It's immoral for Alice to sell cigarettes to a minor, and it is also immoral for Reynolds to do so, so the analogy doesn't work.

Since, uh, nobody has an issue with regular stock holders selling their shares to other stock holders.

If Bob is not 'sophisticated' enough to be allowed to buy shares of Hertz regardless of who is selling them, then sure, prevent him from buying. Delist the stock. Require you to be an accredited investor to buy shares of a company undergoing bankruptcy. These are all reasonable solutions to the problem. Stopping Hertz from selling shares... Is not. Because if Bob is an informed/sophisticated/accredited investor, then Hertz selling him shares isn't actually defrauding him.

Just like RJ Reynolds and Joe Camel, the Hertz management knew that their share offering was targeted at investors ill equipped to make a rational decision.

It is bad faith and fraud.

The prevalence of the “it’s just the market” argument and corresponding ethical gap here is disturbing. Read the Ben Horowitz “why I didn’t go to jail” post that was reposted earlier this week. End of the day, everyone who signed off on the Hertz offering decided to paper over an obvious moral hazard with sophistry and bullshit to enrich themselves (via bonuses) and bondholders by defrauding the public.

So, why is Alice selling her shares to Bob, who is clearly an idiot for paying good money for shares in a bankrupt company not a trade made in bad faith?

In fact, if Hertz sells enough shares, they are no longer bankrupt - which actually makes buying their shares with the intent to hold a rational decision. That's not why Bob is buying them, though, he's buying them because it's a meme stock, and he, I guess, wants to buy meme stocks. He not so unsophisticated that he fails to understand that Hertz is a shitty company.

Why are we protecting him from Hertz, but not from Alice?

The key difference is Hertz created the five shares out of thin air. So Alice now has a diluted position.

A diluted position in a firm that is now more valuable, because it is less likely to be completely eaten by creditors, who will leave the shareholders nothing.

If this were a problem, then companies would not be allowed to dilute shares. They are, though.

Would you rather own all the shares of a worthless company, or some of the shares of a company with a value > 0?

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