10 ms·

The $2B Mall Rats

emmanueloga_ 6y ago
I don't understand, it seems like "securities lending" [1] is designed for the sole purpose of allowing this kind of speculation ("short selling"). Is there any other reason one would borrow securities? 1: https://en.wikipedia.org/wiki/Securities_lending https://en.wikipedia.org/wiki/Securities_lending
- dmitri1981 6y ago
  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
- kratom_sandwich 6y ago
  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.
- scatters 6y ago
  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.
  - eru 6y ago
    And there's nothing wrong with speculation either.
- nmca 6y ago
  Short selling is good for price discovery, and an inability to short contributes to bubble dynamics. So the speculation has value!
  - eru 6y ago
    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.
- bko 6y ago
  A few things: 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
- eru 6y ago
  Is there anything wrong with short selling?
- kangnkodos 6y ago
  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.
- kangnkodos 6y ago
  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.
mrwh 6y ago
"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" Well, indeed.
- Pyramus 6y ago
  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." Isn't that the real scandal?
  - onemiketwelve 6y ago
    Yes I agree. Thanks for pointing that out. I didn't expect cherry picking quotes here tbh
  - stefan_ 6y ago
    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.
- ajsnigrutin 6y ago
ggm 6y ago
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. These failed investments destroyed lives.
- vosper 6y ago
  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. https://www.youtube.com/watch?v=0k5aVLi_yhM https://www.youtube.com/watch?v=0k5aVLi_yhM
  - emmanueloga_ 6y ago
    So Ben Rickert is kind of a killer with a conscience, something like that?
    - michaelscott 6y ago
      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.
      - emmanueloga_ 6y ago
        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.
IronRanger 6y ago
How much money have these kind of speculators shovelled to politicians in order to promote lockdowns and mask mandates?
core-questions 6y ago
> 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?
- xzel 6y ago
  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.
- icelancer 6y ago
  >> Why should it be legal to make billions of dollars in profit off of the failure of something? Should it be OK to have unchecked long pressure on assets? You think prices are inflated now? They'd be insane without short pressure.
dafty4 6y ago
I think it's weird that this article tries really hard to have sympathy for vultures. "They had to lay off three people." Versus how many Toys R Us and Radio Shack employees were laid off?
mattmanser 6y ago
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.
- stanski 6y ago
  Exactly. How many more months of losses could they have taken in 2020 before throwing in the towel? 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.
raverbashing 6y ago
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.
- redis_mlc 6y ago
  > they are not willing to negotiate. Usually their loan covenants don't allow rental below a certain amount per month without renegotiating (requiring cash), but they can keep it empty.
lordnacho 6y ago
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.
- 6y ago
rwmj 6y ago
> 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)?
- dmitri1981 6y ago
  GS was the intermediary. AllianceBernstein and Putnam Investments were the counterparty. GS makes money by facilitating the transaction whereas the counterparty holds the risk
Shacklz 6y ago
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.
- deleted 6y ago
  [deleted]
- eru 6y ago
  Capital allocation and price discovery are quite useful. If you want an example of something in finance that's an unalloyed Good, have a look at Vanguard's rise.
joe_momma 6y ago
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.
- JumpCrisscross 6y ago
  > why the Glass-Steagle Act needs to come back so people aren't sitting around betting on other people's failures 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 https://en.wikipedia.org/wiki/Glass–Steagall_legislation
  - joe_momma 6y ago
    The idea of lending money just so you can profit from its failure is caused by the affiliations between commercial and investment banks.
    - JumpCrisscross 6y ago
      > 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.
      - joe_momma 6y ago
        "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" https://www.nytimes.com/2020/08/24/business/mall-short-hedge-funds.html 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?
specialist 6y ago
Duh? 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.
- rufus_foreman 6y ago
  >> Betting against malls in 2018 sure seems a sure thing. The trends were obvious, much discussed. If it was obvious then why wasn't that already priced in to the cost of shorting the securities?
  - specialist 6y ago
    Why do bubbles occur? That answer will earn you a Nobel. I'm more interested in why some people don't follow the herd.
joe_momma 6y ago
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.

I don't understand, it seems like "securities lending" [1] is designed for the sole purpose of allowing this kind of speculation ("short selling"). Is there any other reason one would borrow securities? 1: https://en.wikipedia.org/wiki/Securities_lending https://en.wikipedia.org/wiki/Securities_lending

dmitri1981 6y ago
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
kratom_sandwich 6y ago
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.
scatters 6y ago
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.
- eru 6y ago
  And there's nothing wrong with speculation either.
nmca 6y ago
Short selling is good for price discovery, and an inability to short contributes to bubble dynamics. So the speculation has value!
- eru 6y ago
  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.
bko 6y ago
A few things: 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
eru 6y ago
Is there anything wrong with short selling?
kangnkodos 6y ago
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.
kangnkodos 6y ago
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.

mrwh 6y ago

"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" Well, indeed.

Pyramus 6y ago
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." Isn't that the real scandal?
- onemiketwelve 6y ago
  Yes I agree. Thanks for pointing that out. I didn't expect cherry picking quotes here tbh
- stefan_ 6y ago
  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.
ajsnigrutin 6y ago

ggm 6y ago

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. These failed investments destroyed lives.

vosper 6y ago
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. https://www.youtube.com/watch?v=0k5aVLi_yhM https://www.youtube.com/watch?v=0k5aVLi_yhM
- emmanueloga_ 6y ago
  So Ben Rickert is kind of a killer with a conscience, something like that?
  - michaelscott 6y ago
    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.
    - emmanueloga_ 6y ago
      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.

IronRanger 6y ago

How much money have these kind of speculators shovelled to politicians in order to promote lockdowns and mask mandates?

core-questions 6y ago

> 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?

xzel 6y ago
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.
icelancer 6y ago
>> Why should it be legal to make billions of dollars in profit off of the failure of something? Should it be OK to have unchecked long pressure on assets? You think prices are inflated now? They'd be insane without short pressure.

dafty4 6y ago

I think it's weird that this article tries really hard to have sympathy for vultures. "They had to lay off three people." Versus how many Toys R Us and Radio Shack employees were laid off?

mattmanser 6y ago

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.

stanski 6y ago
Exactly. How many more months of losses could they have taken in 2020 before throwing in the towel? 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.

raverbashing 6y ago

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.

redis_mlc 6y ago
> they are not willing to negotiate. Usually their loan covenants don't allow rental below a certain amount per month without renegotiating (requiring cash), but they can keep it empty.

lordnacho 6y ago

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.

6y ago

rwmj 6y ago

> 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)?

dmitri1981 6y ago
GS was the intermediary. AllianceBernstein and Putnam Investments were the counterparty. GS makes money by facilitating the transaction whereas the counterparty holds the risk

Shacklz 6y ago

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.

deleted 6y ago
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eru 6y ago
Capital allocation and price discovery are quite useful. If you want an example of something in finance that's an unalloyed Good, have a look at Vanguard's rise.

joe_momma 6y ago

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.

JumpCrisscross 6y ago
> why the Glass-Steagle Act needs to come back so people aren't sitting around betting on other people's failures 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 https://en.wikipedia.org/wiki/Glass–Steagall_legislation
- joe_momma 6y ago
  The idea of lending money just so you can profit from its failure is caused by the affiliations between commercial and investment banks.
  - JumpCrisscross 6y ago
    > 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.
    - joe_momma 6y ago
      "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" https://www.nytimes.com/2020/08/24/business/mall-short-hedge-funds.html 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?

specialist 6y ago

Duh? 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.

rufus_foreman 6y ago
>> Betting against malls in 2018 sure seems a sure thing. The trends were obvious, much discussed. If it was obvious then why wasn't that already priced in to the cost of shorting the securities?
- specialist 6y ago
  Why do bubbles occur? That answer will earn you a Nobel. I'm more interested in why some people don't follow the herd.

joe_momma 6y ago

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.