Tag Archive for 'Short selling'

The limits of shorting a stock

At the end of a brief post wrapped around this advertisment by the not-strictly-declared-bankrupt-yet-but-certainly-nationalised Kaupthing Bank, John Hempton observes:

I considered shorting Kaupthing several times – but did not (in part because of the cost and difficulty of borrowing the shares). Banks like Kaupthing might be insane criminal organisations – but they were also impossible to short because they might stay solvent longer than you… Three doublings and your short has become very painful – even if you are paid in the end. Add to that a 25 percentage point borrow cost for the shares and there was little chance of making money unless you shorted right at the end. Oh, and your profit (if any) was realised in Icelandic Krona – and they turned out to be worth much less than you would have hoped. It is hard to make money of this stuff – even when the end-outcome is obvious.

I do wonder how those three reasons — the market can stay insane longer than you can stay solvent, the cost of borrowing, and the fact that it was in a minor currency — rank and interact with each other for the market as a whole for short selling stock.  Given the involvement of Icelandic banks in the credit boom and — I assume — similar borrowing costs for shorting across “well developed” financial markets, the case of the Icelandic banks might arguably represent an opportunity to back out the scale of the minor-currency impediment.