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When General Motors entered into Chapter 11 bankruptcy over the summer, its bad assets were moved into a firm called Motors Liquidation Company (MLC). That company was capitalized with more than 600 million shares that were meant to be worthless; however, quite the opposite has happened: with its shares priced at $0.60 per, MLC now has a market cap of $370 million. How did that happen?
Investors engaged in "naked short-selling" is how it happened. Short sellers usually procure an actual 'tangible' stock from a broker or investment house – 'tangible' meaning a share unit comprising the finite number of a company's total shares – as collateral when they take a short position. The naked short seller doesn't borrow any shares, taking a position before it can be determined if there are any shares available. This allows them to essentially create a position that isn't beholden to the ideal of a "structured" market.

Earlier this year the SEC put the kibosh on naked short selling, and required investors who had done it to get the tangible shares they need to hold their position. Since there are fewer shares to be had, and those naked traders are trying to absorb anything available to cover their positions, the price has yet to decline. Quite simply, no one can make money off of it.

Well, except for the holders of new GM shares. The SEC regulations also called on naked short sellers to close out their positions if they couldn't get the tangible stocks to cover. The investors who can't get actual shares to borrow are having to buy stock from "new" GM shareholders – at much higher prices. Eventually MLC shares will be worth zilch. Until then, the wacky world of finance reigns...

[Source: New York Times]

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    • 1 Second Ago
      • 5 Years Ago
      Wow - that was the first article on Autoblog I have read where I have absolutely NO idea what any of it meant. Yikes.
        • 5 Years Ago
        Agreed. While I feel that i'm pretty good at small finances, how people make money in the market is completely beyond me.

        Case-in-point: credit default swaps WTF???
      • 5 Years Ago
      Wow! That is absolute genius!
      • 5 Years Ago
      • 5 Years Ago
      This is the kind of nonsense that got our financial system into this mess. This type of foolishness does a lot of harm to companies and people who invest in our financial system to secure their finances for retirement.
      • 5 Years Ago
      Hopefully they will all be forced to cover their positions in the end. Naked short selling is an abuse of the market and it will be very satisfying to watch the idiots who did it get into bidding wars for worthless assets. They deserve to lose every cent of that $370 million (or even more if the bidding gets fiercer).
        • 5 Years Ago
        It just shows what happens when capitalism and the greed that it can generate are allowed to go unregulated. Its is a microcosm of the US financial system and probably US Business in general.

        I too, hope all these greedy idiots loose there shirts on these deals but the truth is they will probably push the losses onto there clients (those of us with 401k's etc) and still claim huge bonuses at the end of the year. Business as usual
        • 5 Years Ago
        Woohoo, naked shorts are getting SQEEEEZED!! A bunch of too-smart-for-their-own-good hedge fund managers trying to jump on the shorting bandwagon and are getting screwed.

      • 5 Years Ago
      Institutional naked short sellers may be the primary "victims" of this sham stock price, but it is unlikely that they are alone. Inevitably, some misinformed individual investors will be (have been) sucked in as well. Just look at the misleading information on the page where I found the link to this article: http://www.google.com/finance?q=mtlqq
      Nearly all of the information listed for Motors Liquidation (MTLQQ) is false, and is actually information about General Motors Company ("new GM"). This includes the slate of officers (below), and the headlines at upper right as well. In the case of the latter items, many of them explicitly attribute actions and conditions to MTLQQ that are really about new GM (example: "German Union to Protest Motors Liquidation Corporation Move with Work Stoppage") The misrepresentation of such well-established facts on a financial portal page is grossly incompetent at best, and fraudulent at worst.

      • 5 Years Ago
      All I know is my father lost about $10-12,000 when GM nosedived. I told him to own Ford.