Mike, I'm very familiar with so called 'toxic' convertibles. I lost a few dollars to the bandits myself until I realized what the game was, and then joined them when I noticed a new one was filed. In this situation, the bandits could not do their dirty deed without a specific invitation and permission from company management. Again in this situation, the destruction of value, i.e. dilution, occurs inside the company. The bandits are simply working within the terms of their agreement. To blame them and not the company for the subsequent decline in price is a mistake IMO. I'll agree with you that this sort of financing should be regulated more fully. Perhaps a regulation limiting the bandits to hedging their loan on an initial tranche, i.e. if they lend $5 million with a ceiling of 10, the maximum shares they could short would be 500k. Better would be eliminating the naked short sales that many enter into. This would be harder though, as effective oversight of offshore brokerages to enforce the affirmative determination rule is next to impossible. Of course this would mean that some companies would go belly up as they would be unable to obtain financing. But as a financial Darwinist, I wouldn't bat an eye if that happened. I believe there has been some change in Exchange rules that has changed the nature of these floorless instruments. I can't swear that for certain, but it has been some time since I've become aware of newly minted toxics. Perhaps companies are just becoming aware of the hazards of entering into such agreements, although I can't believe that all that entered into them previously were naive.
Still, it is our responsibility as traders to be aware of anything that might affect our trades and investments. I find it counterproductive to blame the short sellers for my losses in the floorless situations which I was long. While it is one of the more arcane situations one might encounter, it is still something one needs to be aware of, at least for trades of more than the shortest duration. Here's a quote from the thread header: "2. Never blame someone else for losing YOUR money, it was solely your decision to "jump in". Keep a record of those that often make bad decisions." of course this is easier said than done.
Regards,
Barb |
