Leveraging Bankruptcy

Suppose I knew a publicly-traded company was going to be bankrupt in the next couple of years. What is the way to make the most money? Shorting the stock is one possibility, but leverage is limited.

I ask this because GE is going to 0 in the next couple of years and I want to make money off it. I've never shorted anything before, but GE might be the first if I can't find any other strategies.

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GE? Really?

GE, really? GE will never see bankruptcy, not with the current cabal in power. They'll get bailed out. Best to buy when they're at the brink, then sell after they receive their govt cash infusion.

GM, FRE, and FNM all got bailed out right?

Yet their stock prices fell to under a $1. That's good enough for me.

You can definitely short GE,

You can definitely short GE, but a better strategy would be to buy out of the money puts. 12 cents will get you Jan 2012 $5 puts, if GE goes bankrupt in the next two years, that's a 4167% return on your investment. Careful though, these are not very liquid, pay attention to the bid ask spread and avoid market orders. More sophisticated would be to buy a CDS on GE, preferably from a European bank. I don't think you have that kind of money though.

GE is massively financed by writing short term commercial paper, they'll be in trouble if short term interest rate rise. I don't see that happening soon. I think we'll see a large steepening of the yield curve but they'll keep the printing press on. In this scenario, GE might very well turn up huge profits simply by lending long. In that case, the put would be much safer than a short stock position.

Collapsing firm? Buy it!

I am (no longer) a tax att’y. That said:

Classical economics says that sunk costs should not influence decisions; what’s past is past. But the tax code feels differently. Thanks to the concept of basis, losses are a bankable commodity.

If GE won’t actually go bankrupt but just lose a lot of money, then you can buy up GE’s stock off the penny stock exchanges. GE can then file amended tax returns looking back [3? 7? 10?] years, and get refunds for any years it paid income tax.

And/or you can have your profitable firm buy up GE’s shares off the penny stock exchanges. Come tax time you can file a consolidated return, offsetting your firm’s gains with GE’s losses, thereby reducing aggregate tax liability.

Note that these strategies only make sense if the liabilities that come from acquiring GE’s stock are less than these benefits. You can sometimes engineer this result. Buy up the debased shares cheap in a separate holding company, then negotiate settlements with all parties holding claims against GE – in essence, do an out-of-court bankruptcy that leaves you with little more than the shell of the corporation, plus the tax attributes.

Of course, sophisticated creditors will know that the tax attributes have value and will insist that you disgorge some or all of those benefits, too. But any strategy you pursue to reap super-normal profits from publicly-available information is premised to some extent on the idea that the market is less sophisticated than you are. Usually that’s a bad bet.

Why are you so convinced of

Why are you so convinced of this? I can definitely see GE dropping to its 52-week lows if the markets turn sour but then some government action will be taken to help it. Haven't you heard? 200 billion market cap companies are considered too big to fail nowadays...

Better buy De La Rue stock (http://www.delarue.com/)
world's biggest banknote printer for governments, trades at London stock exchange.


GE is no longer a company that makes stuff. They're basically a large bank with a huge amount of debt. During the next cyclical bear, I think they'll go under.

Jonathan, it's not going to

Jonathan, it's not going to happen. If and when I see that as being remotely possible, I'll let you know.

You have piqued my interest though.

Onwards and upwards...


Long term shorts are very hard. Options is one way to do it. The other way is CDO's, for someone who isn't a qualified investor (rich people's investing rights are protected by the government), your only hope of using CDO's is to get a bunch of friends together to do it.