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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