One of the many things that undermine confidence in stocks is that the shares of bankrupt companies continue to trade. Those shares are completely worthless and yet those who are so inclined can trade them, and sometimes make enormous amounts of money in the process.
This comes to mind in considering the behavior of the common shares of the old General Motors (MTLQQ) -- the one that includes businesses that GM is trying to sell, such as Pontiac, Saab and Saturn. The shares should have no value because there is no cash expected to remain for the common shareholders after the sales.
And yet those shares traded at 52 cents, up one cent on volume of 32.8 million shares on July 21.
They opened Friday, July 17 at 33 cents, after a sharp fall prompted by a name change made so that traders would not mistakenly assume that they are related to General Motors, which emerged from bankruptcy protection on July 10. If you had bought shares on the 17th and sold them on the 21st, you would have earned a quick 58 percent profit in less than a week.
There may be people seeking to buy those shares because they mistakenly think that they will be able to influence the bankruptcy or they want to cover short positions. (The latter reason just might make sense -- since there may well be people who borrowed shares of the old GM and sold them at, say, $10 a share who must repay those stock loans by buying back the shares in the open market.)
But the simple fact remains that these shares and other bankrupt company shares are worthless and the fact that those shares have a price above $0 is just another reason why investors ought to be wary of the honesty of our securities markets.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.