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A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing
Location: Blogs Bob O'Brien's Sanity Check Blog
Posted by: bobo 7/12/2006 4:17 AM
The SEC was created in 1934, after Ferdinand Pecora held hundreds of days of Congressional hearings - which proved conclusively that Wall Street had been robbing America blind, and was composed of some of the most sociopathic miscreants ever imagined; a snake pit of larcenous crooks and flim-flam men for whom no act was too base or vile.
The SEC was chartered with policing these thieves, who had just admitted to a catalog of misdeeds that would make the most debauched dictator or demagogue blush.
Fast forward to 2006, where the SEC's job is now to protect the thieves from any harm or scrutiny, and to coddle them at all costs. Essentially to make their business as profitable and easy as possible, with only token lip-service paid to investor protection - it's Wall Street that gets protected now, not America.
Sound insane? Follow along.
I listened with rapt attention to the SEC hearing on the proposed amendments to Reg SHO.
First, there was a lot of self-congratulatory back-slapping as to how refreshing it is that after a year and a half of monitoring SHO, that the SEC has got some proposed rule changes, specifically to the grandfathering clause, and to the market-maker exemption.
Given that the last comment period for SHO resulted in thousands of erudite, on-point warnings that there would have to be a borrow prior to a sale, and almost universal agreement that there had to be transparency in the system, as well as meaningful penalties, and given that the SEC chose to completely disregard those, and instead grandfathered in all prior fails while creating countless exceptions to any borrow (via sleight of hand like “locate” language), I guess you could say I am not exactly overwhelmed.
I heard the SEC say that they were dedicated to protecting investors, but also admit point blank that the reason they grandfathered was to avoid short squeezes – again, indicating clearly that protecting Wall Street miscreants who had abusively failed to deliver was a priority over protecting shareholders and issuers who had been victimized by the process – you wouldn’t want those miscreants to have to buy in their undelivered sales, now would you – causing a market-delivered penalty for selling what they never had? Tut tut, we can’t have the market punishing larcenous participants financially – better to shield them from the ONLY disincentive that exists for their behavior, and allow them to profit from their illegitimate acts.
That's your regulator hard at work.
And now, after 18 months of allowing those that failed to deliver the chance to cover at depressed prices, the SEC is considering doing away with grandfathering, and implementing a reasonable closeout requirement for market makers.
How nice.
By the time the comment period is over, and the rules are adopted, those who fail to deliver as a trading strategy will have had two full years to abuse shareholders, depress prices, and use investor money for shares they never delivered, and continually REFUSE to deliver – by which time, almost all shareholders in the damaged issues have probably sold their stock in disgust, and moved on. The good news for those who failed is they can cover the fails at low costs, benefiting from their abusive and illegal practice, with no fear that the market would punish them – or anyone else would, for that matter. They were protected from the natural market consequence of violating the rules – the SEC grandfathering insured that.
Now, the grandfathering provision having done its important work, the SEC will look at repealing it.
These are the cops? They turned a blind eye to flagrant robbery of investors, they gave the miscreants a hall pass, they propose to continue doing so for another half a year or so, and congratulate each other for all the hard work, well done?
If I sound a little flabbergasted, it’s genuine.
Particularly disturbing was the sentiment that the SEC should be carefully protecting the market makers from any fairness in the markets that not having a carte blanche exemption might bring. As if business risk while making billions from options market making is unacceptable. Have any of these people ever had a real job in the private sector? Did I miss where those whose job is to speculate in the secondary market, for massive profit, are some sort of protected species who require special exemptions from rules the rest of us must follow? Huh? WTF?
Through all this, one thing that came through loud and clear, aside from the smarmy, bureaucratic smugness of the speakers, was the continued insistence that this is a small problem, that the SEC is doing a stand-up job, and that ensuring that the participants have maximum leeway to deliver “liquidity” is the overarching priority.
What wasn’t articulated were some simple, obvious requirements for a fair market system:
1) Transparency.
2) Timely reporting.
3) Mandatory borrow prior to sale.
4) Compliance with Congressional mandate to settle promptly.
5) Meaningful penalties for violation of the rules.
Isn’t that a little weird? Because we already have rules that dictate prompt settlement of trades – Congress recognized in 1934 that allowing trades to go undelivered was a recipe for disaster.
So why have we had to wait two years, in addition to the 71 years since the creation of the SEC, for that body to cobble together yet more rules that still fail to meaningfully require prompt delivery?
Am I on the crazy bus here?
Congress: "Deliver the F#cking shares promptly."
SEC: "We are all doing a great job. Billions of dollars of shares don’t get delivered promptly. Our rule created 80-something exemptions from delivering shares promptly. We pardoned all who didn’t deliver from any pain or damage for violating that 71 year old mandate. And shares still aren’t getting delivered promptly. Let’s have a big hand for us!"
Are we in OZ now?
Of note is that none of these august personages asked the single question that matters:
“What happens, if these new amendments are passed, if a participant decides not to comply?”
Right now, basically nothing happens. There is no meaningful penalty.
There also is no transparency, or timely reporting, or effort to report information in concrete, comprehensible fashion. Or ironclad requirement to deliver anything but excuses.
But worst of all, there are no consequences of note for failure to obey the rules.
Guess what? For years, the speed limit on the freeway was 55. Average speed was 70. I almost never saw a traffic cop, and when I did, he had busted someone who had been doing 90.
There was simply no reason to drive 55. So nobody did. The new feeling was that you didn’t want to go much over 70 or so, or you might run a risk. That feeling was accurate.
We have a securities rule (to clamp down on taking investor money, and failing to deliver the product), which both lacks meaningful requirements that the seller have shares to sell, as well as any meaningful penalties for refusing to deliver the shares to the buyer.
Does anyone wonder why participants could sort of care less about it? Is it lost on the talking heads in Washington that the “solution” they are congratulating themselves on is nothing more than correcting a massive blow to investors – the pardoning of years of failing to deliver, apparently for at least two full years – while still keeping the same structural deficiencies intact?
I will write up comments for the commission, along with the suggested cures, but I fully expect they will be ignored.
They ignored the NASD, NASAA, academics, experts, etc. last time. Why would we believe that this time would be any different?
The imperative from the SEC’s perspective was clear – repeat over and over how SHO has “worked”, congratulate one and all on a job well done, and propose some amendments that, absent real penalties, will amount to nothing.
But the good news is we will get another bureaucratic group grope - a "round table" - to assess how difficult it would be for the industry making tens of billions per year, to actually comply with 17A - deliver the shares promptly.
How nice.
And at the close, we were treated to Commissioner Nazareth, who indicated that they were open to understanding industry practices in the area of failing to deliver.
Again, how nice. Isn't that her job?
So much for the business of protecting investors.
So much for Congressional mandates.
So much for our market system.
Any questions?
Copyright ©2006 Bob O'Brien
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Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By MarionPolk on 7/12/2006 8:54 AM
The SEC unanimously voted to propose the Reg.SHO change, which does NOTHING to limit the time or duration of share counterfeiting by options market-makers.
Options market-makers will now have a monopoly on the right to manufacture an unlimited number of shares, for an unlimited time, at a guaranteed profit. As these "manufactured" shares become "long" shares when held by Big Dumb Short, Big Dumb Short can dump them at any time to crash the market price of a security.
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By KirbyJf on 7/12/2006 8:59 AM
Its better than nothing
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By Little Bo peep on 7/12/2006 9:02 AM
business.timesonline.co.uk
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By Ben on 7/12/2006 9:02 AM
You are right.Check FAIRFAX FINANCIAL (FFH-NYSE). This company is on the Threashold List since the beginning January 2005 and short selling continue.The whole system is broken and defrauding retail investors.The SEC = BULL SHIT.
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By CHRIS "PORKY" COX on 7/12/2006 9:06 AM
And you thought we were going to do something meaningful for the the masses? HAHAHAHAHAHA! I even changed the SEC's mission without CONgressional approval and removed the " maintain the integrity of the securities market" part.
I can do anything I want to assist my crooked friends.
Oh -By the way, Annette Nazareth says "Hi Losers! Stop your whining about losing money".
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By bobo on 7/12/2006 9:06 AM
KirbyJF: A glass of water when your family has been killed by criminals is also better than nothing - barely. I suppose cops that would have stopped them from being killed, or who would go arrest the criminals, is more in line with what I was expecting.
This is not better than nothing. It is still nothing, packaged differently.
Now drink your water.
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By bobo on 7/12/2006 9:18 AM
A friend of mine pointed out, correctly, that the SEC espouses a warped world view wherein the markets and the SEC are there to serve the interests of Wall Street - the broker dealers. I have argued for years that this view is precisely how the SEC views things - as in the 1920s, the mindset is that the markets are there for the professionals to make their money, and that investors are gamblers - speculators - who deserve what they get. I have been shouted down on this, assured that my take is incompatible with reality, and that the SEC COULDN'T share the Wall Street perspective that we are all sheep to be fleeced.
Here's his comment:
"Milton Friedman once wrote of JFK's line about, "Ask not what your country can do for you, but what you can do for your country." MF said that it was a disgraceful thing to say. A proper enlightenment view is that man is at the top, and we form a compact, government, to do those things that we cannot do well on our own. We hire the government like we hire a plumber: now imagine if a plumber came to your hose, did a lousy job, charged a lot for it, and when you complained, said, "Hey don;t ask what I can do for you, ask what you can do for me!" Presumably we would have the sense to see that he had inverted things in his head. Yet modern government has done this and we accept it.
By warning that the "dealers would complain," they are extending this warped and inverted worldview to the BD's who have captured them. The American market does not exist to serve the BD's: the BD's exist to serve the market."
Wrong. The market exists to enrichen the BDs that own it, and the SEC views its mandate as reassuring the public that all is well, while interfering with the BD fleecing of America as little as possible. That was clear from their statements today.
How much clearer does it have to be?
Bring in the DOJ, get rid of the SEC, and get some honest people enforcing the basic congressional mandates from 1934 - settle the trades, protect investors, make the markets transparent and safe.
This isn't hard...
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By Wonder Boy on 7/12/2006 9:21 AM
Yep. The toothless old dog barked today after someone woke him up.
It sounded to me like before he does anything, he wants to check with 'the Street' to be sure it will not cause them any problems.
The concept seems so simple. No one gets paid until what is sold is DELIVERED. Now, if this creates 'liquidity problems', so be it. I would rather have an 'honest' system than a 'liquid' one.
Simple concept, but the toothless old dog will never understand.
Re: A Window Into The Soul Of The SEC - The Reg SHO Amendment Hearing By Pinkice on 7/12/2006 9:22 AM
Bobo - keep moving forward - one step at a time. Now the DOJ needs to do the work since it appears the SEC won't enforce the law to protect shareholders/companies. The SEC has chosen not to take the moral high road and do the right thing. They have had their opportunity to correct matters and passed on it. Seems like one step forward three steps back, but look where you were at a year ago. A year ago, it was a laughing matter, today not so. The only ones backslapping and highfiving themselves are the broker dealers, hedgies, and SEC. IMHO this too shall come to pass.
Keep the army moving forward Bobo.
Main Street American wants, no demands Wall Street be brought to justice. The SEC and the hedgies/broker dealers fool no one. Main Street sees what is going on- we are no fools. All IMHO.
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