No. of Recommendations: 3
The hedge funds cannot possibly deliver because they do not have the shares, and furthermore, they cannot buy in because Berkshire has only about 1,500,000 shares outstanding.

That's where your scenario is incorrect. After the hedge funds execute their naked short sales, Berkshire has 3.5 million shares outstanding on the market, only 1.5 million with voting rights. Following a massive failure to deliver, the hedge funds will sooner or later have to buy back 2 million shares, but they aren't restricted to buying back real shares. They can simply buy back the naked shares they sold, which then cease to exist. Any real shares they happen to buy can be delivered to the buyers of naked shares to settle their trades. Eventually all the trades are cleared, the hedge funds are flat, Berkshire drops off the threshold list, there are once again 1.5 million actual shares of BRK-A on the market, and all is right in the world.

This is why I don't worry too much about naked shorting. Even just starting to think about the horrible situation these hypothetical hedge funds put themselves into gives me the creeps. It makes my skin crawl. To be sitting on a vast short position that you have to cover in 3 days, and every day after that everyone from your prime broker to the clearing firms to the exchanges to the SEC is on the horn yelling at you, while the entire world can look at the SHO threshold list and knows that someone is f**ked, the entire market can smell the blood in the water and it happens to be yours... boy that is a tough spot to be in. You need big, brass balls to pull a scam like that which can so easily go so wrong.

Martin
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