Just imagine how successful the former American energy, commodities, and services company Enron — an exposed accounting fraud — could become if it existed in our modern-day society of zero interest rate insanity.
In the most extraordinary week in stock market history, Luckin Coffee, a known Chinese fraud, has remained on U.S exchanges with a valuation exceeding $1 billion, and Nikola, an EV truck company with zero revenue, has seen its market cap rise to $30 billion — that’s more than the market cap of both General Motors and Ford combined.
Remarkably, though, a more ludicrous situation occurred in markets: stock prices of various bankrupt companies exploded higher: Chesapeake, a bankrupt energy company, saw its stock price surge 432%, Whiting Petroleum Corp, a broke hydrocarbon exploration company, saw its stock price surge 301%, and JCPenney, the iconic but insolvent American department store chain, saw its stock price surge 162%.
Both the Federal Reserve and the U.S Government have created the ultimate moral hazard, buying up toxic debt to try and rescue insolvent companies from bankruptcy. This “bailout fund” is the only reason why novice investors, who’ve entered the market solely on the promise of “commission-free” trading via platforms like Robinhood, continue to gamble their stimulus cheques on ultra-risky penny stocks.
Plowing your newfound “rainy day fund” into worthless shares is the hip new trend.
Hertz — another bankrupt company — is the poster child of this madness. The rental car company’s stock price has risen over 400% despite shares potentially going to zero on completing its Chapter 11 filing.
Market analysts, spectators, and realists thought they had seen it all, but the situation grew even more bizarre when Hertz issued a further stock offering. The company’s stock price soared 68% on the news, even though the newly-issued shares could also become worthless.
The drama surrounding Hertz’s stock price has become the latest meme within the ZIRP skeptic community on Twitter. Well-known jokester Mr. Skilling has turned his parody account into a temporary Hertz Investor Relations feed.
Hertz has claimed they will use the stock issuance to raise cash to fund the company’s reorganization. This, however, is corporate speak. The company plans to capitalize on novice investor’s poor financial education and use the $1 billion dollars worth of stock to ease bondholders’ pain: the greater beneficiaries of the bankruptcy process.
In the case of Hertz’s insolvency, bondholders are next in line to receive any kind of payout before common stockholders, but the bankruptcy court overlooked this obvious attempt to fleece Robinhood traders and allowed Hertz to proceed with the 255 million share offering.
Elon Musk, whether you love him or hate him, gets one thing right: The SEC cannot be trusted sometimes. After all, their website’s “what we do” page states that “their mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.” It doesn’t take a genius to recognize that allowing bankrupt companies to issue worthless stock to vulnerable investors is a policy violation, but the SEC representative attending the hearing simply ignored the blatant conflict of interest between the company and potential stockholders.
Why would a government body overlook such an obvious miscarriage of justice? Apparently, the SEC favors Hertz’s bondholders. Guess who: The Federal Reserve. The U.S central bank owns $80 million dollars of Hertz’s bonds: $50 million via the $HYG ETF and $30 million via the $JNK ETF.
Ironically, this means that the Fed is now a major stakeholder in Hertz’s bankruptcy process, and the Robinhood investors who continue to load up on potentially worthless shares will happily buy into the latest issuance, ultimately bailing out the Fed’s failed junk bond purchases. A completely bizarre scenario, but also an absolute disgrace. How could the authorities let this happen in a society based on excessive regulation?
Yes, it’s up to retail investors to perform a ten-minute Google search to find out that their shares will presumably go to zero, but, clearly, no warning from authorities within a big brother society indicates some degree of foul play here.
We can complain, protest, and raise awareness all we like, but this kind of behavior will continue, possibly for decades, until we stand up against crony capitalism and the blatant malinvestment and misallocation of capital it creates.
Hopefully, the Hertz drama will be the spark to ignite change, but in the broader scheme of things, it’s likely to just be a fart in the wind.