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The definition of moral hazard:
lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance.
The hottest roulette table in the world seems be the stock market. After the Fed pumped trillions into the markets over the past decade, the latest rebound, purely driven by more Fed stimulus, has completely ruined price discovery and incentivized moral hazard. It seems that “don’t fight the Fed” is the name of the game. Nothing quite encapsulates market mania quite like the story of Hertz. It was just announced that Hertz, while the midst of Chapter 11 bankruptcy and threat of NYSE delisting, was awarded the ability to issue nearly 250 million new shares.
“The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity for the debtors to raise capital on terms that are far superior to any debtor-in-possession financing,” the company said in the filing, which the court is yet to make a decision regarding.”
Hertz Management should be operating with shareholders best interest in mind. How could issuing 250 million fresh shares of stock possibly be guarding shareholders from risk? Whether it happens in a day or be it months, Hertz equity holders are going to be left sucking air. Hertz is saying that it will use the equity issuance for general working capital. Maybe I will be proven wrong, and this whole thing will reverse, Hertz will honor equity investments and those who speculated will prove to be sage in tactic.
What a story to follow nonetheless.
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