Wednesday, March 18, 2009

Financial Companies' Stock Borrow Disappears

Rampant rumors from traders that repo desks are continuing to call in shares used to short financials such as Citi and AIG (look at charts below for lift off). This is causing a forced covering of all financial shorts, and an impossibility to put on new shorts... Interesting how this happens the day before Obama shows up on Leno. This fits in perfectly with Zero Hedge's conspiracy theory of the Volkswagen situation repeating itself in the financial sector in general and Citi in particular .





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14 comments:

Anonymous said...

So as soon as this governemnt sponsored short covering rally in financials ends, watch out below?

Tyler Durden said...

if VOW situation is truly comparable, just look at volkswagen's chart for what happens in a massive short squeeze.

Anonymous said...

Tyler write us up something on how the C arb trade would unwind :)

Anonymous said...

I love the government. Cause a massive short squeeze, which causes market to rise, and many calls for "the bottom is in" especially wrt financials. Dopey retail guys (taxpayers) come in, only to get completely fucked once the squeeze is over.

Ian said...

Why were people short financial stocks under $2, unless as part of a cap structure trade?

JJ said...

Convert Arb guys reversing their trades as they convert their preferreds... simple

Anonymous said...

I doubt it JJ.

Anonymous said...

The note also said in an update from its risk arb desk, the Citi/Citi Preferred trade has been one of the highlight trades. For the past couple of weeks, investors have been buying the preferred line of Citi and shorting the common stock. With the conversion ratio at 7.3077 as of Tuesday, investors have captured some significant upside. But the spread has recently widened out. Part can be due to a S-4 filing that has yet to be released. 'The main cause is that
the borrow in Citi common has simply dried up.'

aviat72 said...

Common stock holders do have the right to call in their shares and hold them in their cash accounts. I bet the the Treasury and other large sovereign funds are doing that right now. If the Treasury owns 40% of Citi equity then that 40% of the float will now be off the market. This MIGHT cause the mother of all short squeezes especially during the time between the preferred is tendered for conversion and the common shares obtained in return. Imagine repo calls with NO shared available to short and very few real sellers.

Alex said...

check out the put/call (non) parity on the Citi April $3 strike.

With the stock at 3.07, the $3 put is 90 cents and the $3 call is 56 cents!

goulzc said...

how will we know when the restrictions are reversed in order to test your hypothesis?

The reasoning is sound as VW is strategically significant to the German Industry and thus economy, as is the Financial Industry to the US.

However, with Roubini's analysis as well as the specter of nationalization, I would argue this financial rally is simply a delay of the inevitable...

Teich said...

To Alex regarind put-call (non) parity:

Good observation. I guess the trade of short C + write puts + buy calls will be a good arb trade?

babar ganesh said...

i guess that we are moving back from JAVA to C

Home Loans said...

Very nice observation and presentation style with graphics that's absolutely very informative...