"A righteous person would say that making money off the back of a global pandemic is at best opportunistic and at worst downright immoral—that the ghoulish deus ex machina that made short-sellers rich included hundreds of thousands of people dying and widespread economic devastation"
That quote makes it seem like the short sellers were betting on economic downturn due to Covid, which they didn't. The trade was made long before in 2018/19 and the economic pressure due to Covid was a lucky coincidence that acted in their favor.
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."
So this was a vehicle to profit off the fraud? Unless you attach any weight to the dramatic writing chronicling their "original research" visits to malls.
I don’t follow. Short sellers didn’t cause the pandemic did they? They worked to discover an information asymmetry and took a bet on it. The counter party was willing to accept their bet. As far as I see no one was coerced to do something they weren’t willing to do.
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?
The Steve Carell character in "the big short" summed things up for me in this space. He hated what he was doing being right. It's complicated stuff, confirming that thousands and thousands of peoples life savings have evaporated.
There's another great scene in that movie which also captures this really well, when Ben Rickert (Brad Pitt) explains to Jamie Shipley and Danny Moses what it means for normal people if the group's big bet against the economy pays out.
The MBS system would collapse regardless of whether the cast decide to bet against it or not. Retirement savings and livelihoods would be wiped out regardless of their involvement, so no Ben Rickert is not a "killer" in any sense. The MBS products were already dead, he was just one of the few who had bothered to check their pulse.
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.
It just feels a bit hypocritical of the character to have such reaction.
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.
In the context of the movie, Rickert had already retired from finance to own an orchard, and was dragged back into it by the two other characters in the clip. I can't remember how they know each other. He's a fairly reluctant player the whole time, but he does help them out.
While the Big Short is a good movie, this scene reeks a little bit of the same type of "eureka-insights" that permeate Hollywood fiction like the West Wing and pop-not-science books like those written by Malcolm Gladwell.
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.
There are two types of truths one is directional and the other is factual/accurate. The 1% unemployment 40k deaths is of the first kind, it gives a sense of direction. Most linear regressions in real life are directional not factual.
> in 2018, the team made a $2 billion bet that a series of shopping malls, including Crystal Mall, would eventually fail. If retail tenants vacated and the malls’ landlords defaulted on their mortgages, MP stood to make a killing.
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?
It’s legal because there someone on the otherwise taking their bet. They’re not making money on the actual foreclosures, just the bonds going bad, which I agree is kinda similar. Some of those trades you could think of as catastrophic insurance policies.
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.
Why does the ownership of a local building need to become a pawn in a big stock-market casino game where people can walk away rich while everything falls apart? It's because these things aren't owned by local institutions that care about the area they are in, at all. They're owned by people who wouldn't even step inside the building if they could avoid it. The crux of the issue is that buildings and facilities that are essentially civic centers have been financialized.
Sorry, I can't cheerlead for a bunch of corporate chains in an expensive real estate storefront marking up conspicuous consumables 500% and paying their employees minimum wage.
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.
The size problem doesn't have much to do with malls - it has to do with parking. Many inner-city malls have no parking and seem very space efficient to me.
Who do you cheer for then, because ain't no mom and pop shop in existence anymore. The mall was the greatest counter to things like Walmart where a single company was profiting and not a conglomerate of businesses. The banks ruined main street not people trying to find and make the best place to sell things.
I split time between a major world city and a small (10k population) town. Both have many independent businesses. Where do you live that this is not the case?
> Fuck malls. They're reaping now what they sowed a long, long time ago when they killed the family-owned business on main street.
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.
> 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.
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.
> 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,
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?
Let me make the argument for short selling, directly from the article:
> "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 $650 billion worth of commercial real estate mortgages issued between 2013 and 2019, including by 5 percent or more for nearly a third of the roughly 40,000 loans. “A well-documented historical pattern is that fraud thrives in boom periods and is revealed in busts,” the university researchers wrote, adding that end investors were unaware of this hidden risk, a deception akin to buying a Ferrari secretly outfitted with a rusted-out Kia engine. It could be argued that CMBS had been a magic trick all along, with big banks one step ahead, luring investors to pick a card from a rigged deck. It took a global pandemic—an act of God—to reveal this financial sleight of hand."
Our (capitalistic) system is rife with fraud, and as the saying goes "fraud creates alpha", i.e. a competitive advantage. Now in a perfect market, the regulator would step in and prevent and punish the fraudsters. However, fraud has positive side effects such as creating employment opportunities (Wirecard employed 2000ee on avg. for 10 years, say), and regulators are underfunded and overwhelmed because less regulation is good for business.
So the economic function of short selling is to help price discovery at the minimum and expose fraud at the maximum.
Also short selling is a stupid and highly risky idea: You take unlimited (!) downside for a limited upside, and any short portfolio will ultimately go to zero due to markets going up on average.
It was the bunch of investors who took the short trade, remember what these guys did was
a) rent some shares for X$ promising to return them after some agreed time
b) sold them for market rates
c) wait a while
d) buy them back for (much lower) market rates
e) give them back as promised
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
Those investors are less screwed than if they'd bought in at higher valuations because of a lack of any downward pressure. It might be bad in the short term for the economy of the local area, but the malls were going to collapse sooner or later, and now capital is freed up for more sustainable investments - such as walkable neighborhood shops.
>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.
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....
> It boggles my mind that people look at speculators helping make markets in risk hedging as the vultures.
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.
You have no idea what you're talking about. The inability to short bad ideas leads to fraudulent horse shit like Theranos or Bernie Madoff. There are entire short-only hedge funds designed to make a profit while leading to more honesty in financial reporting: there needs to be more rather than less of this.
> Why should it be legal to make billions of dollars in profit off of the failure of something?
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?
They used credit default swaps rather than securities lending. It's an instrument that is commonly used for hedging, aka protect your position from downside risk. It can be used for taking a short position as well, though it is not short selling as such since you are not borrowing to sell, just buying a type of insurance
Voting at a company's stockholder meeting is another reason. If an investor needs to control a certain amount of votes to have some proposal approved, he can borrow the shares he is lacking instead of buying them.
Short selling is not speculation if you have hard evidence that securities are overvalued and are working to bring it to light. There is risk involved, of course, but the risk is that the perpetrators and their accomplices will be able to perpetuate the elevated valuation for longer than you can afford to hold your short position.
There's another fun aspect to short selling: it creates extra 'virtual' shares.
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
I forgot most of the details, but there used to be an obscure play in some European countries where the owner of a stock on a specific date gets a cash payment if they live in the country.
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.
Lending stocks involves two sides, the lender and the borrower.
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.
Sounds like they were super lucky rather than prescient. I think the market view about malls could have stayed irrational well past 2022 if CV didn't happen.
Commercial real estate is a giant bubble waiting to pop
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.
Having very briefly traded CDS, but also having had some experience in the wider hedge fund trading space, here's my explanation, along with some clarification.
- 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.
> McNamara immediately called Goldman Sachs and used every penny they had to buy credit default swaps on the CMBX.6 tranches. “They didn’t think I was crazy this time around,” McNamara said. Everyone at MP was confident that the market’s fear of COVID-19 would make these bonds go bust—and fast.
Why would GS sell these if they know the insurance policy is going to go badly for them (GS)?
GS was the intermediary. AllianceBernstein and Putnam Investments were the counterparty. GS makes money by facilitating the transaction whereas the counterparty holds the risk
A very interesting read, and yet... I'm always getting depressed from reading such stories of folks working in finance.
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.
Articles like this glorifying failure and those who profit from it, is exactly why the Glass-Steagall Act needs to come back so people aren't sitting around betting on other people's failures. I hope they lose all their money.
> lending money just so you can profit from its failure is caused by the affiliations between commercial and investment banks
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.
"research suggests similarities between the lax way that home loans were signed in the run-up to the last crisis and the underwriting of many retail mortgages"
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?
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.
Malls were the original Search Engine for local shopping. And in 2020 it has become apparent that people do not want to live online entirely for the rest of their lives and especially around Christmas a lot of Americans want to go to the mall to shop with other people because it's funner than sitting at home clicking on crappy websites.
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[ 3.2 ms ] story [ 20.2 ms ] threadWell, 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.
https://www.youtube.com/watch?v=0k5aVLi_yhM
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.
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?
Is there any other reason one would borrow securities?
1: https://en.wikipedia.org/wiki/Securities_lending
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.
"They had to lay off three people."
Versus how many Toys R Us and Radio Shack employees were laid off?
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.
Usually their loan covenants don't allow rental below a certain amount per month without renegotiating (requiring cash), but they can keep it empty.
- 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.
Why would GS sell these if they know the insurance policy is going to go badly for them (GS)?
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.
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.