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Everyone knows that Toys "R" Us went bankrupt. Very sad. And largely preventable. But that's not the story I'm interested in.
I don't care that Toys "R" Us went bankrupt - I care
how they went bankrupt.
One day the bonds were trading at 96. Then they filed, and a few days later, the bonds were trading at 20. Bam. Just like that.
That is not usually how things work in
credit markets.
Usually, smart analysts study a company and figure out well in advance that bankruptcy is a possibility. Sometimes these analysts know the company better than even management does.
The analysts tell their traders that the company is doomed. The traders short the bonds and knock down the price.
Then word starts to spread that there might be a problem. Then
other analysts will study the company and
other traders will short the bonds. And by the time the actual bankruptcy happens, it is a foregone conclusion.
That is what happens with
efficient markets.
Comment: Putin speaks German to ask Austrian journalist stop interrupting him