Panic of 1907/2022 | Hacker News Reader

Panic of 1907/2022

matt-rickard.com

18 pointszaik8 comments

Otto had realized that United Copper had 105% short interest – i.e., 450,000 shares were trading, yet only 425,000 had been issued, the rest borrowed.

But Heinze miscalculated. Every one of the twenty brokers could find the stock from buyers other than Heinze. No one defaulted.

Irritatingly, there is no explanation of the miscalculation, or how the 25,000 share difference was made up.

All I am left with is the knowledge that one group of speculators went bust rather than a different group of speculators, and the conclusion that the crypto market will be regulated because it exhibits some vague similarities to this incident in 1907; no discussion at all of the 2008 financial crisis, which seems highly relevant.

It's actually really simple. The parties short seller sold to can lend their shares out again.

Say I own the only share in Acme Corp. A borrows it and sells it to B. B then lent it to C who then sold it to D. Now you have both A and C with short position, despite only one outstanding share.

Sure, but they can't both cover it, as D can only sell it back to one of them to return to you. It only works if everyone essentially does the trade in reverse, which requires (illegal) coordination.

The key insight is the order of reversal doesn't matter, and that any securities trade/position is eventually reversed (its the only action available). Hence having synthetic positions outstanding via rehypothecation doesnt actually matter as they are fungible with normal float.

is eventually reversed (its the only action available)

But this assumes normal market operation, which a short squeeze is not. Suppose in the example above A buys the share from D and sells back to the original issuer, who then refuses to lend it out again. C can't pay back B and presumably goes bankrupt.

It only makes sense if people are required to lend securities to anyone who wants to borrow them.

Maybe the company quickly issued more shares, and this info got forgotten in the confusion ?

Very possibly, but there's no way to know without further research. It's a failure of the author to just skip over what actually went wrong.

The Panic of 1907 caused a brief but severe recession, and lots of solvent but illiquid businesses collapsed or were on the brink of collapse, saved only by the personal intervention of JP Morgan. People realized it made sense to have a "lender of last resort", who would lend freely against good collateral, albeit at a penalty interest rate. Hence the Fed was born.

In the crypto crash, everything seems so far contained to crypto itself, and a few ancillary businesses like Coinbase. Some diamond-hands hodlers are poorer, but unless this spills into the broader economy I very much doubt we see a Central Bank of Crypto anytime soon.

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