June 22, 2008

 

Amnesia, greed and black swan

Today's Business Line has a news item regarding promoters increasing their stake in their companies by borrowing funds at 14-18% interest rates. The rationale being the current prices are "rock-bottom" and make it a juicy level to buy.

Exactly 3 months ago, promoters of Orchid Chemicals suffered a big blow for doing exactly same. They borrowed money to increase the stake. The collateral offered was their own shares. A Black Swan event hit them really hard, where the financiers sold the collateral as the stock fell below a certain threshold. Mr Rao of Orchid called it a "mistake."

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