What happens in the case of an "infinite squeeze" where the party who owes stock to another cannot pay it back?

Is this a risk the lender has to deal with, that they may not ever see the stock they lent out again because the party they lent it to squandered it? Seems to me in the "short squeeze" situation the value of the stock cannot be infinite -- it is bound by the terms of the contract to which the shares were lent out.

You will forfeit whatever you posted for collateral. For a retailer investor, that might mean a margin call causing you to liquidate what you held with your brokerage. There are safety requirements (imposed by the government and your brokerage) to make sure you cover the liability.

But when you're talking about billion dollar bets, you probably didn't fully secure it. Nope, you put your reputation up for collateral instead -- "You can trust us to say this billion dollar chunk of stock will be returned on time to the very minute because we have NEVER FAILED TO DO SO, EVER".

You really need that capital bit to be true because, if not, you'll never be permitted to do this again by your counterparties. If that happens, say goodbye to your hedge fund -- actually securing the size of bets you are making is murderously expensive.

Do you understand why this means you're willing to pay literally any price to satisfy the short according to schedule? If you don't, your firm is finished as a going concern.

This is the same reason why no fund family will allow their money market funds to break the buck. They'll invariably kick in their own money to keep it solvent because the alternative means ruin. (The Reserve, which broke the buck earlier in the financial crisis and was not able to kick in funds from other sources, is probably finished, even though the FDIC is now insuring money market funds.)

Very informative. It comes down to reputation.

Probably similar to a bankruptcy case though the ins and outs of securities regulations would likely muddy the waters considerably.

And since (theoretically) there's no upper bound on the price of a stock, then (theoretically) there's no upper bound on the losses one can incur when engaging in short-selling practises either.

Porsche is an evil genius of Finance. Their predatory trading practises have become legendary. Some more links on this:

http://www.nuclearphynance.com/Show%20Post.aspx?PostIDKey=12...

http://ftalphaville.ft.com/blog/2008/10/27/17465/the-disrepu...

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAe7...

Amusing quote from the first link:

"Porsche exhibiting their excellent cornering ability"