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Isn’t the idea that the fed makes it basically free, and if you get in big trouble they’ll just step in and bail you out?

by CSSer 6y ago

valuearb 6y ago
Macro can’t always save micro. If Bezos borrows $70B against $100B in stock, then the market crashes 30% in a week, and the fed pours money in to save it, it’s too late for Bezos, all his shares are already in his brokers hands. The myth of the fed bailing out public stocks is pretty silly when we’ve just suffered through a 30% drop in a week, and a decade ago lost over 50% in under a year.
- CSSer 6y ago
  I'm sorry, I'm still confused. Perhaps the best question to ask you is where does the risk come from him borrowing the money either way? He gets it for virtually free. The fed propping up the market devalues the currency, yes, but it just gives him more time to act and everyone else is in the same boat with him. The way I see it, even if his stock goes down, he still has $70B and a trivial amount of interest to pay. Also, we should probably use a lower number, because I struggle to think of a scenario where a single individual would actually need that much capital at once. If we need to use someone else for a different hypothetical I'm open to that too, because Amazon's stock has risen 46% since it hit its YTD low on March 16th, which is 10% higher than its previous all-time high.
  - valuearb 6y ago
    First, it’s not free money, loans have to be paid back. Ok let’s use a smaller number. Bezos owns 55M shares of Amazon trading at $2,400 a share, worth $132B. He borrows $30B for his rocket company secured by those shares. His borrowing agreement will require the shares backing those loans maintain a minimum equity value, let’s say 50%. Amazon drops over 50% to $1000 per share, dropping his shares value to $55B, breaching that agreement. His broker will immediately sell a few million shares to maintain his agreed equity ratio. What happens to Amazons shares when a few million hit the market in a short period? Amazon plunges below $500, so broker is forced to sell a few million more to try to maintain that equity, driving Amazon into the low hundreds, leading to the sale of more shares, etc, etc. Eventually they dump the remainder of his shares for under $100/each just to try to recoup the last of the $30B. He started with full control of his company, and a $130B net worth, he leaves with no shares, no control, and $30B in cash. This scenario is a little tortured, but it is likely a big reason why Bezos sells shares to raise funds for BO. Borrowing risks giving a disinterested party the right to dump your shares at a fraction of their value due to an entirely short term event.

Isn’t the idea that the fed makes it basically free, and if you get in big trouble they’ll just step in and bail you out?

by CSSer 6y ago

Isn’t the idea that the fed makes it basically free, and if you get in big trouble they’ll just step in and bail you out?

valuearb 6y ago

Macro can’t always save micro. If Bezos borrows $70B against $100B in stock, then the market crashes 30% in a week, and the fed pours money in to save it, it’s too late for Bezos, all his shares are already in his brokers hands. The myth of the fed bailing out public stocks is pretty silly when we’ve just suffered through a 30% drop in a week, and a decade ago lost over 50% in under a year.

CSSer 6y ago
I'm sorry, I'm still confused. Perhaps the best question to ask you is where does the risk come from him borrowing the money either way? He gets it for virtually free. The fed propping up the market devalues the currency, yes, but it just gives him more time to act and everyone else is in the same boat with him. The way I see it, even if his stock goes down, he still has $70B and a trivial amount of interest to pay. Also, we should probably use a lower number, because I struggle to think of a scenario where a single individual would actually need that much capital at once. If we need to use someone else for a different hypothetical I'm open to that too, because Amazon's stock has risen 46% since it hit its YTD low on March 16th, which is 10% higher than its previous all-time high.
- valuearb 6y ago
  First, it’s not free money, loans have to be paid back. Ok let’s use a smaller number. Bezos owns 55M shares of Amazon trading at $2,400 a share, worth $132B. He borrows $30B for his rocket company secured by those shares. His borrowing agreement will require the shares backing those loans maintain a minimum equity value, let’s say 50%. Amazon drops over 50% to $1000 per share, dropping his shares value to $55B, breaching that agreement. His broker will immediately sell a few million shares to maintain his agreed equity ratio. What happens to Amazons shares when a few million hit the market in a short period? Amazon plunges below $500, so broker is forced to sell a few million more to try to maintain that equity, driving Amazon into the low hundreds, leading to the sale of more shares, etc, etc. Eventually they dump the remainder of his shares for under $100/each just to try to recoup the last of the $30B. He started with full control of his company, and a $130B net worth, he leaves with no shares, no control, and $30B in cash. This scenario is a little tortured, but it is likely a big reason why Bezos sells shares to raise funds for BO. Borrowing risks giving a disinterested party the right to dump your shares at a fraction of their value due to an entirely short term event.