In the words of Steve Eisman, “They mistook leverage for genius.”
Any big, overleveraged bet is going to go bad eventually, no matter how well researched.
Any big, overleveraged bet is going to go bad eventually, no matter how well researched.
(This does become problematic at scale when you borrow from the government or taxpayer-backed entities, like when Fannie Mae originates your commercial real-estate venture's mortgage.)
It sounds like you’re describing a way to externalize your losses to the bank or to the public, which is indeed the best way to make money fast, but is parasitic on society as a whole.
Executive - take a massive unjustified risk (in terms of company direction), if it works out, get a huge bonus, if it doesn't work, get fired (by the board)
Hedge fund manager - take a massive unjustified risk (in terms of a trade), if it works out, get a huge bonus, if it doesn't work, get fired (by your clients)
These are both long call options with the premium equal to the opportunity cost of missed salary and the reputational impact.
Individuals can't do it because they're not an agent for another group or another individual.
To be clear: the entity is liable for the debts it incurs but not necessarily its shareholders or agents. If it cannot pay its debts it goes into bankruptcy and is either reorganized with its creditors as its new owners or liquidated and sold.
The limited-liability corporation structure moreover has some majorly useful properties for society. For instance, you probably own some shares of a major pharmaceutical company in your portfolio (through a retirement fund). If the company loses a lawsuit related to, say, the opioid epidemic, and owes billions, and goes totally bankrupt, then you can 100% lose your stake in the company as it is turned over to creditors — but those creditors cannot go after you personally as an owner of the corporation for every dollar that you own; your liability is limited. This has democratized investing a lot, and individual investors benefit quite a bit, as they have lesser risk tolerance than the billionaires.
However, the limitation of liability is a reason prudent lenders ought consider the risks inherent in lending to you. For instance, if you bring an adequate down payment, and you are using the proceeds to purchase an asset that has some reasonable value — the worst case is they're stuck with a building still worth something, plus the down payment. The problem, again, is when taxpayers end up becoming imprudent lenders because of policy or bailouts.
https://en.wikipedia.org/wiki/Piercing_the_corporate_veil#Un...
A single owner running insanely levered stock trades, though, could easily be found grossly undercapitalized, and that's another matter entirely.
But you’re saying that the sole shareholder can also be the management?
I guess in that case it’s really up to the bank or brokerage to have enough sense to not lend your llc money if the business plan is to fly to Vegas and put it all on red..
Yeah, there are plenty of single-owner LLCs. It's the go-to small-company structure.
Congrats on killing it....
I don't know who you think the house is...is it the investment banks? They are holding the bag for $5bn+.
There exist bets that carry little to no risk, and whose returns exceed the cost of leverage.
In Hwang's case, he seemed to be uninterested in risk management, in which case your generalization probably holds true.
Gambler’s Ruin proves any open-ended bet (effectively, a series of bets over time) will, “big” and “overleveraged” don’t actually matter here, except in terms of what the consequences are when failure occurs.
Of course, “eventually” is a slippery thing, no one is actually doing it with an infinite time horizon, and over any finite horizon failure is not guaranteed (though increasingly likely the longer the horizon.)