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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: RWS who wrote (19958)	3/10/2003 3:21:25 AM
From: energyplay	Respond to of 206133

More speculation about RRI - At the risk of starting to sound like a conspiracy theorist, I can think of another reason the RRI management would want to push the stock down on Monday - Simplified version - To hedge their loans to RRI after things started looking bad, some of the banks who loaned them money may have shorted RRI as it went lower. They know RRI will be up after the re-fi, and don't want to shoot themselves in the foot. So they need to cover their shorts. Having the stock drop on heavy volume can give the banks an opportunity to do this with out pushing the stock up. The RRI management, certainly the CFO, knows this, and might have set up the dumb looking announcement to give the banks the opportunity to cover thier shorts, WITHOUT talking to the banks about it. Talking to the banks would be a conspiracy to manipulate stock prices - not only is this illegal, but this law is being occasionally enforced these days. Trick to this is how to give the banks enough time to get ready to cover...you might announce it late Friday, and they would a few days to get ready. Often the hedging desk is different from the loan guys, and communication takes time. Non- simplified real world version - Banks ususally don't sell short the stock of companies they loan to, but often buy Credit default insurance. This is a hedge that comes from an insurance company, hedge fund, or another bank. It's basically insurance, and pays of if the loans default or (sometimes) credit rating is cut below a certain grade. When the bank buys the credit default insurance, it moves some of the risk to the seller of the insurance. The entity that sells the credit insurance ususally buys puts on the stock with some of the default insurance premiuim, and invests the rest of the in high quality securities like Treasuries. So much of the risk is moved to the seller of the puts. The seller of the puts, usually a hedge fund or bank like JP Morgan, shorts the stock to hedge the puts. Otherwise, the puts are naked, which has high risk. Shorting the stock generates money. Some of that money will go into high quality securities, like Treasuries. Some might be used to buy the bonds of the same company, or of a bunch of companies in the same industry. Now, the banks will want to buy credit insurance, and not pay too much for it. If the hedge funds at the end of this chain get burned on their shorts, they will charge an arm and a leg for RRI and every other IPP and UTE put. That will make credit insurance more costly. To compensate, the banks will simply charge RRI more interest for the loan. So it's in RRI's best interest to give the shorts time to cover. The CFO most likely knows this, and much of the senior management. So that's my speculation why they wrote the press release to flush the stock. I will also speculate we will see an issue of warrants like the CNP deal. Warrants give the banks some upside. Warrants, being long term calls, make it easy to hedge puts, and thus write credit insurance. Warrants can dilute shareholders, however. I 'll be watching Monday, and may buy if it drops sharply... should be wild. ******************************* Some discussion on Yahoo RRI board that a poster called toxicavenger posted info on 80 million loss Thursday night. Post has since been removed.