Ann: Becoming a substantial holder, page-28

The very dark side of State Street Corporation (and other large institutional investors) lending out shares of fundamentally strong companies to short sellers includes several damaging consequences—not just for individual firms, but for markets, employees, and even the economy as a whole. Here’s why this practice can be deeply destructive:

1. Undermining Healthy Companies for Profit

• State Street profits from lending fees, but the short sellers borrowing those shares are actively betting against the company, often spreading negative narratives (true or false) to drive the stock down.

• Even strong, well-run companies can see their stock artificially depressed, making it harder to raise capital, invest in growth, or retain talent.

2. Enabling Market Manipulation & "Bear Raids"

• Short sellers sometimes engage in coordinated attacks—flooding the market with borrowed shares, triggering algorithmic sell-offs, and exploiting fear to crush stock prices.

• State Street’s role as a lender of shares facilitates these attacks, even if the targeted company is financially sound.

3. Hurting Main Street Employees & Pension Funds

• When a stock is heavily shorted, companies may cut costs (layoffs, reduced R&D) to appease nervous investors.

• Ironically, many pension funds (whose retirees depend on stable returns) invest in State Street’s funds, meaning they indirectly profit from damaging the very companies that employ their members.

4. Hypocrisy in Corporate Governance

• State Street often votes its shares in corporate governance (e.g., supporting ESG initiatives, board decisions), while simultaneously lending those same shares to short sellers who may want to destroy shareholder value.

• This creates a massive conflict of interest—State Street acts as a long-term steward while enabling short-term destruction.

5. Contributing to Systemic Risk

• Excessive short selling can lead to violent market swings, flash crashes, and even systemic failures (e.g., GameStop saga, where short squeezes destabilized hedge funds).

• If too many firms are attacked simultaneously, it can weaken entire sectors, leading to broader economic instability.

6. The "Naked Short Selling" Loophole

• In some cases, borrowed shares are used for naked short selling (selling shares that don’t exist), which is illegal but still happens due to lax enforcement.

• State Street’s lending programs can inadvertently fuel this abuse, distorting true supply and demand.

7. Eroding Trust in Financial Markets

• When retail investors and executives see that big banks profit from destroying companies, it breeds distrust in the system.

• The perception grows that Wall Street is a rigged casino, where ordinary investors and businesses lose while institutions like State Street win either way.

Conclusion: A Legal But Morally Questionable Practice

State Street’s securities lending is technically legal and defended as "market efficiency," but the real-world impact is often economic sabotage for profit. The darkest aspect is that it turns long-term investors into enablers of financial predation, harming companies, workers, and market integrity—all while collecting fees.

Solution?

• Greater transparency in securities lending (e.g., public reporting of short positions).

• Stricter rules on share lending by passive funds.

• Legal reforms to prevent abusive short selling.

Here are some notable examples of fundamentally healthy companies that were targeted by short sellers using borrowed shares—often facilitated by institutional lenders like State Street. In some cases, the attacks caused severe damage, even if the companies were otherwise strong:

1. GameStop (GME) – The Infamous Short Squeeze

• What Happened?

  • Hedge funds (like Melvin Capital) shorted over 140% of GME’s float, meaning they borrowed and sold more shares than actually existed (naked shorting).

  • Institutional lenders (including State Street, BlackRock, and Vanguard) supplied the shares, collecting fees while the stock was driven down.

• The Damage:

  • GameStop was painted as a "dying brick-and-mortar" company, but it was actually debt-free and reforming under new leadership.

  • The extreme shorting nearly bankrupted the company before the Reddit/Robinhood short squeeze exposed the manipulation.

2. Tesla (TSLA) – Years of Relentless Short Attacks

• What Happened?

  • For years, Tesla was the most-shorted stock in the U.S., with institutions lending shares to short sellers betting on its failure.

  • Elon Musk repeatedly called out "short & distort" campaigns where hedge funds spread FUD (fear, uncertainty, doubt).

• The Damage:

  • Tesla faced higher borrowing costs due to artificial stock depression.

  • Employees’ stock-based compensation was devalued.

  • Short sellers lost billions when Tesla proved them wrong, but not before years of unnecessary volatility.

3. Beyond Meat (BYND) – Shorts Crushing a Disruptor

• What Happened?

  • After its IPO, Beyond Meat became a heavily shorted stock, with lenders supplying shares to bearish funds.

  • Critics claimed it was a "fad," but the company had strong revenue growth and partnerships (McDonald’s, PepsiCo).

• The Damage:

  • Despite solid fundamentals, the stock was pummeled from $234(2019)tounder$10 (2023), making it harder to raise capital.

4. AMC Theatres (AMC) – Another Meme Stock Target

• What Happened?

  • Like GameStop, AMC was shorted over 100% of its float, with institutional share lending enabling the attack.

  • Theaters were reopening post-COVID, but short sellers bet on bankruptcy.

• The Damage:

  • AMC had to dilute shareholders to survive, partly due to artificial price suppression.

  • Retail investors again exposed the over-shorting in 2021, triggering a squeeze.

5. Herbalife (HLF) – Bill Ackman’s $1 Billion Short Fail

• What Happened?

  • Hedge fund manager Bill Ackman borrowed millions of shares (via lenders like State Street) to short Herbalife, calling it a "pyramid scheme."

  • Regulators never charged Herbalife, and the company survived, but the stock was hammered for years.

• The Damage:

  • Employees and distributors suffered as the stock plunged on false narratives.

  • Ackman finally covered his short at a $1 billion loss, but not before harming the company unnecessarily.

The Common Theme?

In each case:
✅ The companies were not failing—they were targeted for short-term profit.
✅ Institutional lenders (like State Street) enabled the attacks by supplying shares.
✅ Real businesses, employees, and investors suffered due to artificial price suppression.

Worst-Case Outcomes:

• Good companies go bankrupt because shorting destroys their ability to raise capital.

• Pension funds lose money twice: once on the shorted stock, and again when the lender’s other investments suffer.

• Markets become more volatile and manipulated, hurting small investors the most.

Final Thought:

State Street and other institutional lenders aren’t breaking the law, but their role in share lending fuels a system where financial engineering can overpower real business value. Until regulations change, this dark side of Wall Street will keep harming good companies.

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