Reborn in America, I am a legendary short seller on Wall Street.

Chapter 259: General Electric's stock price will plummet after its IPO (5k words per chapter today)
On Tuesday evening, after visiting Tesla, Larry and Matthew returned to the Astor Hotel.

Larry was very surprised to hear that Mr. Dunbar had rushed to Logan's place, but he didn't ask any further questions.

Larry had no interest in thinking about other trivial things.

Tomorrow is Wednesday, which is the most important day of the month because it's the day General Electric goes public.

General Electric's IPO was a major event not only for Larry and Wallace, who also invested in the stock, but also for the entire Wall Street.

This is because it's the first time a new type of technology company has directly faced the choices of the stock market.

However, this special opportunity has different meanings for different people.

For Larry, General Electric was a landmark company of the Second Industrial Revolution.

The application of electricity dramatically changed the achievements of the First Industrial Revolution that people had taken for granted, and it would rapidly overturn the newly formed steam age.

Therefore, the importance of this company going public cannot be overstated.

For Wall Street investors, General Electric was just another "novel industrial stock" that JPMorgan was preparing to consolidate after numerous railroad stocks.

The market will naturally give a higher premium to the consolidation assets favored by Mr. Morgan. This is not only a sign of respect for the Morgan family, but also an acknowledgment of Morgan's decades of experience on Wall Street.

However, before the stock went public, there were many dissenting voices in the market: some Wall Street players insisted that Edison Electric Light Company, or General Electric in a different guise, had no potential for stock price appreciation, because electricity would only replace gas lamps.

Moreover, the construction of electric lighting lines, power distribution equipment, power plants, and other related renovation projects all require a large amount of money to build.

Therefore, the process of electric lights replacing gas lamps will inevitably be very long and expensive.

Therefore, they maintain that the stock will face a period of decline after its listing, possibly lasting for several years.

When Larry first read this view in the newspaper, his immediate reaction was that the idea that "General Electric was just trying to replace gaslights" was hilarious and absurd.

However, when Larry put himself in the shoes of many investors on Wall Street, he felt that their views were actually quite in line with the orthodox views of the time.

Because Edison's killer application at present is still just the light bulb.

In the previous construction of the gas network, the municipality and related companies have invested a lot of money in gas lighting infrastructure. This sunk cost has made gas lighting a relatively common and inexpensive lighting facility.

Electric lights are simply brighter gas lamps. The initial installation cost is incredibly high. Only when electric lights become as widespread as gas lamps are today will it truly enter the period of capital return.

This is similar to the various "black technologies" Larry encountered in his previous life; their growth and widespread adoption inevitably take time. Before the scale effect becomes apparent, these "black technologies" will inevitably be regarded as witchcraft or an even more sophisticated scam.

Therefore, in this sense, Wall Street's concerns are not without merit.

Last week, Mr. Wallace, who was in Boston, scheduled a phone call with Larry for this Tuesday. On Tuesday morning, he even called Larry in person to ask about the next steps for General Electric after its IPO.

Larry's advice is definitely to hold long-term and make a strategic investment.

But Mr. Wallace brought him another surprising piece of news—someone was secretly "borrowing" a large number of GE's original shares.

This is not just "not optimistic about General Electric for the time being", but a plan to short the stock!

At this time, there are two types of short selling on the NYSE: one is naked short selling, where short sellers directly sell shares on the exchange, significantly driving down the target stock price, and then close out their positions before the T+5 settlement date to exit with a profit, thus avoiding the need to actually hold the shares.

Naked short selling is certainly a very convenient way to operate in the stock market, but it is also very risky.

Ultimately, short selling is about selling stocks first and then buying them back at a lower price to make a profit; but naked short selling involves selling stocks that you don't actually own.

If the stock price is not suppressed, or if insiders push up the stock price after it falls, then the short sellers are "trapped" because of the settlement date restriction, and the short sellers can only hold the stock for five days.

Even if the stock is bound to fall in the future, the bulls can take advantage of the restriction that the short sellers do not hold shares to force the short sellers to cut their losses and exit the market first.

Of course, short sellers can also choose to buy shares of the stock on the exchange or off-exchange and choose real settlement on the settlement date.

However, since the stock price has already been driven up, the short sellers have already incurred losses from buying the stock. It would be better to simply close out their short positions on the market.

Therefore, naked short selling is subject to too many restrictions. It may be okay for small funds to play around with in the short term, but large funds can easily be wiped out by a coalition of bulls if they short sell.

Another way to short sell is to be prepared – first collect stocks in the market that you want to short, and then sell them in large quantities in the market.

In this way, these short sellers avoid the T+5 settlement date restriction, can hold short positions for a long time, and can relatively calmly and continuously suppress stock prices.

This is called "short selling".

Now, Larry is facing the second type: short selling.

Now, there are indeed large funds in the market that are starting to collect "original shares" that shareholders do not intend to sell for the time being, agreeing to borrow these shares at a relatively high interest rate, and then short selling them in the market to make money.

Therefore, identifying these players as "large funds" is actually quite simple. To short sell a company like General Electric, one would need at least 20% of the total share capital. Currently, each share of General Electric has a face value of $50 (Larry and Wallace's original share cost was $35), and the share price after listing can only be higher.

Those who can afford to spend so much money to acquire General Electric stock at this time must have very strong financial resources.

On the other hand, it would be impossible to find the original shareholders' register unless one had access to a large amount of capital with extensive connections.

Mr. Wallace only held 3500 shares, yet he was already being targeted; Larry felt that his 8000 shares were even less likely to be spared.

Sure enough, after Larry finished his call with Mr. Wallace, he asked Mr. Porter if anyone had "borrowed" securities from him.
Mr. Porter nodded and replied, “Of course! Last week, a money broker suggested this deal to our branch, with a three-month annualized lending rate of 28%.”

Larry raised an eyebrow upon hearing the news. "7% interest for three months? That's quite a lot."

Mr. Porter nodded and said, “Of course, after all, the short-term lending rate is already 17.8%. The interest rate for short selling can only be higher. But I told him that you plan to hold the shares for the long term... and you don’t plan to lend out your own shares.”

Larry thought for a moment, then suddenly smiled and said,
“Don’t refuse, Mr. Porter! Because I plan to hold these shares for the long term, I can confidently lend them out. Even at the par value of $50 per share, that’s 7% of $400,000, which is $28,000! Besides, this kind of short selling is usually calculated based on the issue price, which can only be higher than the par value.”

Mr. Porter looked at Larry in surprise and frowned, saying, "You should know that they borrowed shares from you to short General Electric."

“Of course I know! That’s why I’m lending them the stock!” Larry’s smile returned.

Mr. Potter looked at him, then suddenly remembered something, smiled at Larry, and continued, "Alright then—I'll call them."

Mr. Potter called the man, spoke a few more words, and then hung up and said to Larry,

"They need it very urgently. The annualized interest rate for short selling has already risen to 32%, but it must be lent out by tomorrow morning..."

Larry nodded and said, "No problem, I'll be there early Wednesday morning!"

·
Because Larry was preoccupied with the important matter of lending out his own shares, he had no interest in finding out what was going on with Logan.

Around 6 a.m. on Wednesday, Larry got out of bed, checked his gold-cased pocket watch, and, unable to sleep, went to the bathroom to take a shower and then called the waiter to bring him breakfast to enjoy.

At 7 a.m., Larry went to Dunbar’s room next door and knocked on the door, asking him to come with him to the New York branch of Paine Weber Securities.

Larry knocked for a long time but Dunbar didn't open the door. After waiting for a while, Matthew came out of the opposite room, and Larry realized that Mr. Dunbar hadn't come back all night.

At this point, Larry began to wonder what could have kept Mr. Dunbar occupied for an entire night… However, Larry didn’t dwell on it. He simply sent Matthew with two young men to find out what was going on, and had Matthew accompany him to the New York branch of Paine Webber Securities.

The two rode in the hotel's horse-drawn carriage, arriving at the business office under the spring sunshine. It was already 7:45 a.m.

The two went straight to Mr. Potter's office.

Mr. Potter glanced at Larry and Matthew, then lowered his voice and said to Larry, "...that man arrived at 8:15."

Larry nodded, then turned to Matthew and said, "Brother, you have to do me a favor. I need to borrow some stocks from Wall Street brokers, but I can't do it myself. You have to pretend to be me and help me borrow those stocks from them!"

Matthew paused for a moment, but nodded and said, "That's no problem! But I know nothing about stocks, so you'll have to tell me what to do."

"No problem, it's actually very simple. When you meet him later, you should say this..."

Larry smiled and explained to Matthew everything he might encounter later.

……

After a while, a carriage stopped in front of the New York branch of the Paine Weber Securities Company. A well-dressed gentleman stepped down from the carriage, accompanied by a tall, burly man who was smiling obsequiously beside him.

Undoubtedly, these two were the ones who planned to lend Larry 8000 shares of General Electric.

Larry was on the second floor of the sales office, watching the two men through the glass. The tall, burly man surprised Larry slightly; it was none other than Mr. Gore, who had previously discussed the share transfer with Henry Ford.

Later, Larry hired him instead, having Gore and Mr. Wallace work together to transfer the stock to his own fund.

However, since they had never interacted directly, Larry knew Gore, but Gore did not know Larry.

Larry turned to Matthew and said, "That tall guy is a money broker, and the other one is his client. You'll be discussing things with him in a bit. Don't be nervous, just do as I told you, and go with whatever comes to mind!"

Matthew nodded in agreement, but still asked nervously, "You just said... a 32% interest rate, plus a 150% deposit, will they agree to that? What should I say if they don't?"

Larry watched Mr. Potter downstairs exchanging pleasantries with the two men, a smirk playing on his lips. "Don't worry, they'll agree!"

Half a minute later, accompanied by Mr. Potter, the gentleman and Gore, who was acting as a financial broker, came up to the second floor.

“Please!” Mr. Potter led the two to a private box, where Matthew and Larry, who was pretending to be his secretary, were sitting.

Mr. Potter glanced at Matthew and Larry, then turned to introduce them before leaving the private room and closing the door behind him.

The door to the private box shut out the noise from outside. Samuel, the elegantly dressed gentleman, smiled and greeted Matthew.

“Hello, Mr. Livingston, we want your shares. We'll offer a 32% margin lending rate. Do you have any other requirements? I'd like to clarify that short-term margin lending is currently only 18%, so offering you 32% is already very generous. Therefore… please don't bring up the interest rate issue again.”

“Mr. Samuel,” Matthew replied calmly, “18% is the cost of borrowing money. What you’re borrowing is the tool to drive down the price. This extra 14% is a premium for ‘possibility,’ an insurance policy that ensures you have a stable supply of shares and avoids being ‘recalled’ at a critical moment. I believe this price is fair compared to the potential profits from short selling.”

Gore scoffed dismissively: "Insurance? We're more concerned with the 'quality' of your stocks. We need to see the certificates."

It's clear that Mr. Gore is playing the bad cop today.

“Of course,” Matthew nodded to Larry. Larry took a small leather case from under the table and opened it. Inside was a thick stack of beautifully printed General Electric stock certificates, each worth $50, totaling 8000 shares.

The paper is thick and the print is clear, exuding a real sense of wealth in the morning sunlight.

Gore put on his glasses, stepped forward, and carefully checked several sheets, focusing on verifying the seals, serial numbers, and shareholder names. The air was so quiet that only the rustling of turning pages could be heard. After a long while, he nodded slightly to Samuel.

“The documents are fine.” A glint of light flashed in Samuel’s eyes. “150% deposit, alright…we’re in a hurry, so it’s acceptable.”

“Okay,” Matthew nodded in agreement, “but the stock can only be delivered after my assistant has verified the deposit at the same time and place.”

Samuel nodded, then turned to Gore, who produced a thick "Stock Lending Agreement" that was more than ten pages long.

“Gentlemen, this is the standard text drafted according to New York State commercial law, but supplemented for this transaction.” Gore’s voice became as stern as a legal document. “Please pay particular attention to the following points:”

"Article 1, Subject Matter and Term. 8000 shares of General Electric stock are lent for a period of three months from the date of settlement. On the due date, the borrower must return the same number of shares of the same company."

"Article Two, Fees and Guarantees. The annualized interest rate for securities lending is set at 32%. Interest will be settled together with the return of the shares. The margin is 150% of the total value of the borrowed shares calculated based on yesterday's closing price, payable in the form of United States government bonds or New York National Bank promissory notes."

"Get to the point!" Samuel glanced at his pocket watch and urged, then turned to Matthew, smiling, "They're all standard contracts anyway!"

Larry stood up, smiling as he took the contract from Gore's hand. As he looked at it, he said, "Let me take a look on Mr. Livingston's behalf and highlight the key points..."

Larry glanced at it carefully, then calmly turned to the next page. "The key point is here: Article Seven, Breach of Contract Handling."

Larry's tone hardened, "If the borrower fails to return the stocks by the due date, we have the right to purchase them on the market to close the position. All losses from price differences and handling fees will be offset by the margin. For any shortfall, we reserve the right to pursue further action. At the same time, we have the right to confiscate the remaining margin."

Samuel nodded. "Right, it's a bit harsh, but I agree with this one."

“Fair trade, risk at your own risk,” Matthew said slowly. “You use my stock to bet on a price drop, so naturally you have to bear the risk that the price might rise instead. Otherwise, you make a fortune while I only get a pitiful amount of interest. Is that fair?”

Samuel nodded and said, “Okay. But we’re asking for an arbitration clause so that any disputes will be submitted to the New York Chamber of Commerce’s arbitration tribunal, rather than going directly to court, which is too much trouble.”

“Agreed.” Matthew nodded in agreement.

Over the next few days, Larry and Gore reviewed all the documents. Finally, all the arguments subsided. Two identical contracts lay on the mahogany table.

“Then, sign it.” Samuel picked up the quill pen.

Matthew also picked up the pen.

Both of them wrote their names.

After exchanging contracts, Mr. Samuel took out a bank draft from the National City Bank of New York, totaling $120 million, from his briefcase.

This is the offering price given at one time the face value. The current offering price is $100 per share, and the total cost of 8000 shares is $80. With a margin of 150%, that's $120 million.

As the heavy box of stock certificates was locked into their briefcase, Larry carefully packed away bank drafts of equal value into his suitcase.

Mr. Samuel stood up, hurriedly took his leave, and then left with Gore.

After they left the private room, Matthew looked at Larry and said, "Aren't you worried? If they succeed in suppressing the price and it plummets, the value of your 8,000 shares will shrink significantly. The interest might not even cover the loss of your principal."

Larry watched the bustling street and the two men board the carriage, and said softly, "My brother, you've only seen the first layer. They're using bonds to suppress the stock price. But what if... the stock price not only doesn't go down, but instead skyrockets due to some 'unexpected' factor?"

Matthew paused, and Larry continued, "In the end, they'll be the ones begging me for an extension on the repayment period, or being forced to buy shares at a higher price to repay me, thus further driving up the stock price."

Matthew looked at Larry and nodded.

Larry laughed and said, "The market is about to open; the real show is just beginning!"

(End of this chapter)