Remember How Naked Short Selling Wasn't a Big Deal?
Bob O'Brien's Sanity Check Blog
Posted by bobo
1/28/2009 7:16 AM
Bernie Madoff's brokerage owed $600 million in stock to its clients ( tinyurl.com ), that it, well, didn't actually have on hand, as in the shares were either never delivered to the brokerage, or far more likely, it just, "Desked the trades" - meaning that it took the client cash, represented the securities as having been bought in the market and delivered (via the brokerage statement the client got every month), but never bothered with buying the shares.
Also known as one type of naked short selling.
$600 million in stock at the purchase price of the stock - not at the price the shares would cost today in the market.
A good gig for a firm that wants to skip the step of having a cost of goods sold - buying stuff to deliver can really eat into your margins.
You can quickly see how this sort of massive naked short selling would alter pricing in terms of supply and demand of the stocks in question. Madoff's firm didn't need to actually go into the market to buy shares, so that buying pressure never was indicated in "price discovery" - meaning the market price of the stock.
So the question then becomes, how was this missed by the SEC and FINRA - or was it? Wasn't Madoff instrumental in designing loopholes in the regs so that he and those like him (market makers) could naked short to their heart's content?
You don't really hear the media covering that angle, now do you? The largest criminal enterprise yet discovered (note the yet) on Wall Street during our lifetime was helping to draft the exceptions to federal securities laws.
Huh.
This is one of the reasons I'm sickened when I hear these talking heads and politicians discussing how the SEC couldn't discover the largest fraud in market history, well, because it was under-funded and under-staffed - or because regulation is "balkanized."
Wrong.
They had the case handed to them with enough granularity and details so a rookie traffic cop could figure it out. Just as they had the Pequot case dead to rights before they booted the only honest investigator on the job. These cases weren't investigated, not because of a lack of staff or money, but because the SEC is bent, and allows those with, "Juice" to violate the laws, or to draft their own laws, with impunity.
Witness that Goldman Sachs paid a whopping $2 million fine for TWO YEARS of naked short selling. Imagine the amount of trading volume that took place in two years, and the likely profits had by naked shorting for that time, and then consider the laughably small fine. It's worse than a farce.
The SEC is essentially claiming that it can't do its essential job, like discovering the largest frauds in the world, because of a lack of funding or staff. Hey, I know, maybe if you didn't fire guys like Aguirre when they tried to peel the onion on Mack, you'd have adequate informed staff? Just a thought.
Consider that the SEC has discovered exactly none of the largest frauds and scandals of the last 20 years in the markets, and that will tell you how honest those markets are, or how effective the agency is. They typically step in after the states or whistleblowers have blown the cases wide open, or when the scammers turn themselves in.
So what would be the difference, then, between the SEC's effectiveness, and say, that of a bag of rocks?
Answer: None. Or worse yet, the SEC has a negative impact on the market, because its presence is intended to lull investors into believing that there is a cop on the beat keeping the markets honest, whereas the bag of rocks is clearly just a sack of sedimentary inertia. And frankly, the bag of rocks could always tip over and land on the foot of a bad guy - admittedly a wildly improbable occurrence - whereas the SEC has a 100% track record of not landing on the feet of any bad guys with real money.
Consider that Chanos and Cohodes and the gang are now on record, scheming with journalists to impact stock prices, frontrunning analyst reports, and generally doing things that aren't even a gray area - they are, "Jail sentence, jail sentence, jail sentence." This stuff is in black and white, and has been published on the Web - their e-mails are enough to put them away for life. And yet, the SEC does nothing, the DOJ is silent, and the media is studiously pretending that there is no story there.
A bag of rocks wouldn't be capable of going out of its way to ignore malfeasance and felonious behavior. It's just a bag of rocks. The SEC, on the other hand, is a group of attorneys, more than capable of taking action to whitewash, cover-up, and otherwise hinder the rule of law. They are on record as doing so in the Pequot matter. They have done so on many others - Madoff being a classic example, or any of the other frauds surfacing being other ready examples.
The excuses are beyond pathetic: "If someone is going to be hell bent on committing fraud, there's no way we could catch them." Oh. OK then, so the top cop can't actually catch those engaging in deliberate criminal activity, they can only catch those......who are violating rules either carelessly, or as unconscious infractions.
Well isn't that swell.
Pumps one full of confidence, nyet?
Now Mark Mitchell has a breaking article over at DeepCapture.com that describes the involvement of the mob and some of the largest hedge funds in NY ( tinyurl.com ), and yet again, we hear nothing about it in the press, or from the regulators or cops. So it isn't that the truth and the facts aren't knowable - it is that the truth is being deliberately suppressed so that international criminal cartels and career criminals can loot the American market system, and bring it to the brink of collapse.
Not enough funding indeed. What a crock.
On a different and yet related note, I saw a headline today about Roubini estimating that the worldwide number for the losses in the financial sector would come to $3.6 trillion or so. I also watched an interview with one of his colleagues, who bemoaned our likelihood of behaving like Japan did with their banking crisis in the late 80's, creating a lost decade due to failure to take the write-offs and call the losses what they were.
That got me thinking. The plan may be to try to continue to inject liquidity into our zombie banks so they can earn their way out of the hole - stall recognition of the losses as long as possible, put a happy face on the sector and keep pouring money into the banks, and maybe the same idiots and crooks who got us here can earn enough to lessen the hit. Bad, bad idea, but the only one that will be palatable to the financial sector and its bought-and-paid-for politicians. Remember, these are the same bankers accustomed to behaving and being compensated like royalty, so the last thing they'll want is to have to acknowledge that a high school dropout could have run their businesses better. Instead, they'll want endless taxpayer money to fund their ongoing lifestyles while they pretend that the damage isn't as great as it clearly is.
That would be a recipe for disaster for the nation, however my guess is that's exactly the road that we will go down, as it isn't about what's good for the nation, it's about what's good for 300 rich white guys. Which is why you will continue to read endless articles about how disastrous it will be for the banks to be allowed to go under. In the Socialist States of America, taxpayers MUST support failed and poorly run businesses, so that the few at the top of the pyramid can continue to rule the serfs. Perish the thought that the big for-profit banks who lost all the money should go under, to be replaced by better run and more responsible competitors. That's unthinkable. Better that the next two generations' earnings go to propping them up.
Think of all the jobs that would be lost if the banks were allowed to tunnel. You'd have fleets of Gulfstreams going unflown, so pilots, mechanics, fuel delivery personnel, aviation interior designers, and flight attendants would be out of a job. You'd have all the private cars parked and unused, so all the chauffeurs and auto detailers would be out of jobs. Endless domestic help and servants would be laid off, as the palatial grounds of the management's estates went unattended to. Nannies, tutors, cricket and fencing coaches, caterers, personal shoppers, stable hands, pool boys, private chefs, personal trainers, nutritionists, wine storage staff, beach bungalow maintenance crews, valets and butlers, flower arrangement artists, gardeners and landscaping design firms, therapists, diction trainers, cosmotologists and masseuses, aromatherapists, life coaches, interior designers, art counselors, all would be out on the street. It would be a bloodbath.
I think it's only fair that the nation's welders, truck drivers, office workers, teachers, waiters, construction workers, small business owners, etc. pick up the slack and cinch their belts to avoid this sort of disastrous fallout. It's only money, after all. Just consider the suffering that allowing the poorly-run banks to meet their maker would cause, you selfish bastards. How dare you. How frigging dare you all for even questioning this. It's always about "Me" and never about what you can do for your bankers...er, I mean, your country, isn't it? You disgust me for your shallowness and lack of vision. Just get the second job at Domino's and shut the F up. You live in the greatest nation in the world, where food can be had 24 hours a day - so now maybe you become part of the delivery system, that's all. It could be worse. You could be a helicopter pilot grounded in Conneticut, with no job options now that the company chopper has been put out to pasture, or a movement coach whose job with your private clients' preschoolers went south on you. Do you really want that to happen?
How dare you.
thesanitycheck.com |
