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  • Round up the usual suspects

    Round up the usual suspects

    Naked short selling has dogged many firms for years but only became an urgent issue for the SEC to act on when the practice hit financial firms.
    Securities covered by SEC short sale order
    July 16, 2008 (Reuters)

    The U.S. Securities and Exchange Commission issued an emergency order on Tuesday placing restrictions on the short selling of shares of certain major financial firms.

    The SEC's order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement.

    The order takes effect Monday, July 21, and will terminate at the end of July 29. The SEC said the order may be extended, but for no more than 30 calendar days in total duration.

    The agency identified the following securities affected by its order:

    BNP Paribas Securities Corp
    Bank of America Corp
    Barclays PLC
    Citigroup Inc
    Credit Suisse Group
    What did the stock market do in response?
    Stocks soar on drop in oil, Wells Fargo report
    July 17, 2008 (AP)

    Wall Street at least temporarily shrugged off some of its many concerns Wednesday and bounded higher thanks to a drop in oil prices. The Dow Jones industrial average rose 276 points, or 2.5 percent, posting its best daily gain in three months.
    AntiSpin: The market did not rally yesterday because of a drop in the price of oil. Sometimes history does repeat. The text quoted from 1930 rebound from the Great Depression Crash of '29 refers to events in 1930 following the Stock Market Crash of 1929, the graphics and comments refer to similar events in 2008 following the Securitized Debt Market Crash of 2007.
    "There had been much talk about eliminating short selling. The NYSE now requested lists of all holders of borrowed stock (short sellers). The rush to cover to stay off the list and to realize profits assisted in ending the decline.

    "The discount rate was reduced again, to 4 1/2%. Congress rushed a tax cut. Rockefeller ordered 1 million shares of Standard Oil at 50. An order for 50,000 shares of U.S. Steel at 150 "pegged" that speculative leader. Its drop from 261 3/4 to 165 had been the bellwether of the crash."


    1930 following the stock market crash vs 2008 following the securitized debt market crash

    "The gyrations quieted. The stock market rallied in quiet trading for the rest of November 1929.

    "The new year, 1930, dawned bright, cheery and confident. A parade of business, financial, labor, academic and government leaders made page one news with reviews of promising business conditions and future growth. December retail sales reports were quite good. The stock market had edged steadily upwards during the last half of December despite year end cash selling and the continued unloading of the distress stock held by banks and brokers."


    DJIA recovers December 2007 before heading into the Debt Deflation Bear Market in 2008.

    "Auto production, which hit a high of 621,910 units in April fell steadily thereafter to just 119,950 in December - the smallest monthly total since February, 1922. However, auto sales did not actually decline below the good levels of 1928 until the end of May, 1930. Some of the problem was in declining auto exports."


    Auto sales started to decline late 2007.

    "Business inventories were reportedly small and retail trade was holding up well. But business buying plans were cautious, and major cities like St. Louis and Chicago reported the cutting back of building plans and the laying off of workers. Manufacturing unemployment was up 500,000 since September, 1929."


    Unemployment rate in California, the 8th largest nation in the world in GDP, is rising rapidly.

    "Depressed conditions continued unabated in Germany, Central Europe and England. Banks and brokers remained heavily burdened with distress stock. A large, confident short interest, well healed with recent profits, was reportedly operating in the stock market."
    Europe, which held the world’s economic storms at bay for the last year, has finally succumbed. - New York Times, July 16, 2008
    "There were great expectations of a quick business revival in the spring of 1930. Credit was ample and available at low rates. Bank rates had been cut sharply by the Federal Reserve Bank and all the major European national banks. Private interest rates had been cut even faster and sharper as people with money found it increasingly difficult to profitably employ it. Not only were business risks rising, the profit inducement to borrow was clearly declining, making the availability of money at sharply declining interest rates increasingly irrelevant.

    "Auto manufacturers increased steel orders, as auto inventories were at last worked down. Railroads, responding to a plea from Pres. Hoover, accelerated steel rail buying and other planned maintenance and capital projects. Many other public utilities and major industries responded similarly.

    "However, primary interest rates continued declining all around the world. The Federal Reserve's discount rate was lowered to 3 1/2% in March. Textiles declined sharply, but retail trade otherwise remained fairly good. Banks reported an end to the decline in bank savings. Dividend payments, from 1929 earnings, were at record levels. Competitive pressures caused a boom in advertising, and farm implement purchases were running above 1929 levels."



    Retails trade has in 2008 otherwise remained fairly good.

    "The higher wheat prices, a rise in steel production to about 80% of capacity, revived auto production and sales, and the general revival of domestic economic activity, pushed stock market prices higher. April auto production of 467,000 units was better than any April save April, 1929 - but the revival in auto production would probably have been about 40,000 units higher that month but for the collapse of its export market.

    "Total NYSE stocks reached just under $80 billion by April 10, 1930, making up about 73% of its losses since its September, 19, 1929 highs. The Big Board had surged about $30 billion in five months, a gain of about 65%. Its loss from its September, 19, 1929 highs, was just about 12%. Bond prices were running above 1929 levels.

    "Federal taxes were cut substantially and public works projects were accelerated. Steel production rebounded to 69% of capacity and continued climbing towards its usual March-April peak."
    Many economists have concluded that a second dose of government stimulus spending is required to prevent a broad economic unraveling and provide relief to millions of Americans grappling with joblessness, plunging home prices and tight credit. - New York Times, July 16, 2008
    "Business failures were up sharply - the most since 1922. Failures in men's wear rose spectacularly - as usual during depressions. Textile inventories rose 25% for the quarter despite a 12% reduction in production. Construction was depressed. New York cement mills were operating at only half of capacity. By the end of April, employment had dropped 8.5% since the Crash."
    Business failures up 17.5pc in six months. - Telegraph UK, July 15, 2008
    "There were 124 bank failures - mostly small rural banks - with $51.5 million in liabilities, in the first quarter of 1930. Real estate losses were heavier than the losses in the stock markets, and second mortgages took a beating. Small rural banks with large holdings of land mortgages were badly hurt. However, the figures were as yet no worse than for the previous economic downturns in 1924, 1925, and 1927, from which recovery had always quickly followed."

    After the failure of $18 billion IndyMac, nervous investors mull more potential bank failures. - Marketwatch, July 14, 2008
    iTulip says: History is the language in which the dead speak to the deaf.

    iTulip Select: The Investment Thesis for the Next Cycle™
    __________________________________________________

    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List


    Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved


    All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
    Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Last edited by FRED; 07-17-08, 06:21 PM.
    Ed.

  • #2
    Re: Round up the usual suspects

    Originally posted by FRED View Post
    Round up the usual suspects

    Naked short selling has dogged many firms for years but only became an urgent issue for the SEC to act on when the practice hit financial firms.
    Securities covered by SEC short sale order
    July 16, 2008 (Reuters)

    The U.S. Securities and Exchange Commission issued an emergency order on Tuesday placing restrictions on the short selling of shares of certain major financial firms.

    The SEC's order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement.

    The order takes effect Monday, July 21, and will terminate at the end of July 29. The SEC said the order may be extended, but for no more than 30 calendar days in total duration.

    The agency identified the following securities affected by its order:

    BNP Paribas Securities Corp
    Bank of America Corp
    Barclays PLC
    Citigroup Inc
    Credit Suisse Group
    What did the stock market do in response?
    Stocks soar on drop in oil, Wells Fargo report
    July 17, 2008 (AP)

    Wall Street at least temporarily shrugged off some of its many concerns Wednesday and bounded higher thanks to a drop in oil prices. The Dow Jones industrial average rose 276 points, or 2.5 percent, posting its best daily gain in three months.
    AntiSpin: That's not why the market rallied. Sometimes history does repeat.
    There had been much talk about eliminating short selling. The NYSE now requested lists of all holders of borrowed stock (short sellers). The rush to cover to stay off the list and to realize profits assisted in ending the decline.

    The discount rate was reduced again, to 4 1/2%. Congress rushed a tax cut. Rockefeller ordered 1 million shares of Standard Oil at 50. An order for 50,000 shares of U.S. Steel at 150 "pegged" that speculative leader. Its drop from 261 3/4 to 165 had been the bellwether of the crash.

    The gyrations quieted. The stock market rallied in quiet trading for the rest of November 1929.

    The new year, 1930, dawned bright, cheery and confident. A parade of business, financial, labor, academic and government leaders made page one news with reviews of promising business conditions and future growth. December retail sales reports were quite good. The stock market had edged steadily upwards during the last half of December despite year end cash selling and the continued unloading of the distress stock held by banks and brokers.

    Auto production, which hit a high of 621,910 units in April fell steadily thereafter to just 119,950 in December - the smallest monthly total since February, 1922. However, auto sales did not actually decline below the good levels of 1928 until the end of May, 1930. Some of the problem was in declining auto exports.

    Business inventories were reportedly small and retail trade was holding up well. But business buying plans were cautious, and major cities like St. Louis and Chicago reported the cutting back of building plans and the laying off of workers. Manufacturing unemployment was up 500,000 since September, 1929.

    Depressed conditions continued unabated in Germany, Central Europe and England. Banks and brokers remained heavily burdened with distress stock. A large, confident short interest, well healed with recent profits, was reportedly operating in the stock market.

    There were great expectations of a quick business revival in the spring of 1930. Credit was ample and available at low rates. Bank rates had been cut sharply by the Federal Reserve Bank and all the major European national banks. Private interest rates had been cut even faster and sharper as people with money found it increasingly difficult to profitably employ it. Not only were business risks rising, the profit inducement to borrow was clearly declining, making the availability of money at sharply declining interest rates increasingly irrelevant.

    Auto manufacturers increased steel orders, as auto inventories were at last worked down. Railroads, responding to a plea from Pres. Hoover, accelerated steel rail buying and other planned maintenance and capital projects. Many other public utilities and major industries responded similarly.

    However, primary interest rates continued declining all around the world. The Federal Reserve's discount rate was lowered to 3 1/2% in March. Textiles declined sharply, but retail trade otherwise remained fairly good. Banks reported an end to the decline in bank savings. Dividend payments, from 1929 earnings, were at record levels. Competitive pressures caused a boom in advertising, and farm implement purchases were running above 1929 levels.

    The higher wheat prices, a rise in steel production to about 80% of capacity, revived auto production and sales, and the general revival of domestic economic activity, pushed stock market prices higher. April auto production of 467,000 units was better than any April save April, 1929 - but the revival in auto production would probably have been about 40,000 units higher that month but for the collapse of its export market.

    Total NYSE stocks reached just under $80 billion by April 10, 1930, making up about 73% of its losses since its September, 19, 1929 highs. The Big Board had surged about $30 billion in five months, a gain of about 65%. Its loss from its September, 19, 1929 highs, was just about 12%. Bond prices were running above 1929 levels, and bond financing was now running at 10

    Federal taxes were cut substantially and public works projects were accelerated. Steel production rebounded to 69% of capacity and continued climbing towards its usual March-April peak.

    Business failures were up sharply - the most since 1922. Failures in men's wear rose spectacularly - as usual during depressions. Textile inventories rose 25% for the quarter despite a 12% reduction in production. Construction was depressed. New York cement mills were operating at only half of capacity. By the end of April, employment had dropped 8.5% since the Crash.

    There were 124 bank failures - mostly small rural banks - with $51.5 million in liabilities, in the first quarter of 1930. Real estate losses were heavier than the losses in the stock markets, and second mortgages took a beating. Small rural banks with large holdings of land mortgages were badly hurt. However, the figures were as yet no worse than for the previous economic downturns in 1924, 1925, and 1927, from which recovery had always quickly followed.

    Rebound from the Great Depression Crash of '29
    iTulip says: History is the language in which the dead speak to the deaf.

    iTulip Select: The Investment Thesis for the Next Cycle™
    __________________________________________________

    To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List


    Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved


    All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
    Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
    Same game, different players, eh, Fred? Someone said that history does not repeat, but it certainly rhymes.

    Comment


    • #3
      Re: Round up the usual suspects

      Originally posted by FRED View Post
      Round up the usual suspects



      The rush to cover to stay off the list and to realize profits assisted in ending the decline.[/I]
      What happens if you make the list?

      Comment


      • #4
        Re: Round up the usual suspects

        Originally posted by rockyoyster View Post
        What happens if you make the list?
        if you're caught shorting paulson's firm?

        Comment


        • #5
          Re: Round up the usual suspects

          Originally posted by rockyoyster View Post
          What happens if you make the list?
          By definition you become a terrorist...

          ...and you know where they end up...:eek:

          Comment


          • #6
            Re: Round up the usual suspects

            Also relevant is this article - How Naked Short Sellers and CNBC Bamboozled the SEC

            You can bet that the hedge fund talking points were rolling off the CNBC fax machine last week, and really, the network did a stellar job – right on par with the high-powered lobbyists in Washington. Yes, the folks at CNBC should join hands with those lobbyists, and take a deep bow. It was a heck of a show – a real extravaganza.

            I doubt the American people even know what hit them.

            It is hard to believe, given that the news has so quickly disappeared from the front pages, but the SEC last Tuesday issued an historic “emergency order” to head off financial apocalypse by preventing criminals from “naked short selling” the stock of 19 big finance companies.

            The SEC’s move was kind of weird (Why only 19 companies?) but it was gratifying to Deep Capture and a band of crusaders who have long been hollering that crooked hedge funds use naked short selling (selling stock that has not been purchased or borrowed, and usually does not exist – i.e., phantom stock) to drive down prices and destroy public companies for profit.
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            The day after the SEC’s declaration, the circus was already well under way, with the hedge funds spinning furiously and their media marionettes singing the party line: short sellers are “vital” to free markets; everybody loves free markets; only bad companies and bad CEOs complain about short sellers – go investigate the CEOs, hands off the “vital” hedge fund managers.

            As for billions of dollars of phantom stock threatening to topple the American financial system – don’t even mention it. If somebody does, repeat, over and over, “Only bad companies complain about shorts…shorts are vital”

            I sketch out the hedge fund party line only for those who are new to the so-called “debate” over naked short-selling.
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            Meanwhile, Chairman Cox suggested, preposterously, that it’s somehow more acceptable to naked short smaller companies because their shares are harder to locate and borrow. This is something only a hedge fund contortionist would say. There are always shares to borrow at some price, and a tough borrowing environment hardly justifies selling millions of non-existent shares to drive down prices.

            But we sympathize with Mr. Cox. While the CNBC lady suggested that the SEC should investigate bad companies instead of shorts, and questioned whether the SEC had initiated some kind of “witch hunt” against short-sellers generally, the chairman labored valiantly to point out the obvious (though apparently not to CNBC) distinction between legal short-selling and the blatantly illegal practice of spreading maliciously false information while selling non-existent stock to create panic and drive down prices.
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            Participating in this interview was Paul Roth, another hedge fund manager who was mentored by Steinhardt. When asked whether it would be a problem if, say, a hedge fund were to sell ten times as many shares as actually exist in a company, Roth said, “That’s not illegal…the problem is sometimes you located the shares [and sold them] but somebody scooped them up [before you could deliver them to their rightful owners].”

            CNBC’s Joe Kernen, who conducted the interview, characteristically let this statement go unchallenged. So let us state, for the record, that it would be a crime of monumental proportions to sell, say, 1,000 shares in a company that had only 100 shares outstanding. It is a crime because you cannot possibly “locate” or “scoop up” 900 shares that do not exist. It is a crime because there is only one possible reason why a hedge fund would sell ten-times a company’s public float, and that’s to manipulate the stock price.

            But understand how these people think: If you can get away with it, it’s not illegal.
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            The “market maker exception” is one of several loopholes that hedge funds have been using for years to create billions of dollars worth of phantom stock. Market makers are, in fact, required to eventually deliver the stock they sell. But the name “market maker” imbues magic powers. If the SEC asks why you haven’t delivered the shares you sold, stick the words “market maker” on your forehead, mutter something about keeping things “liquid”, and the SEC goes away — even when you’ve sold ten times the float and even when the phantom stock goes undelivered for months or years at a time.
            Also, relevant this article by Patrick Byrne - Did Someone Say, “World-Historic”?

            In the spring of 2006 I met with the very bright editor of the editorial page of a major American newspaper (I do not name the paper only because I do not wish to embarrass the individual involved). After several hours of discussion, he said gently, “I know my paper has not been so fair to you.” He proceed to invite me to submit an editorial on the subject of naked short selling, suggesting a length of 1,200 words. I predicted that he would not be permitted to publish it. He replied, “I run the editorial page. I determine what gets published on it.”

            Some time thereafter I sent him the editorial that appears below. The next day he called and said, “I’m terribly embarrassed to have to say this, but it appears I will not be able to publish this or anything by you.
            .
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            the following is an editorial prepared for a major US newspaper which ostensibly is concerned with the operation of our capital market. The months referred to are 2006 months. Since then, the numbers involved have increased 30-100%.

            ================================================== ========

            A stock transaction is an exchange of stock for money. In our country the mechanisms by which stock and money change hands (”settlement”) have become divorced. Commissions are paid when money is delivered, not stock. Since follow-through incentives are weak, sometimes no stock changes hands, in which case the system creates markers of various kinds. These can be failed-to-deliver short sales (the famed “naked shorts”), the (perhaps more numerous) failed-to-deliver long sales, failures to receive from overseas exchanges, share entitlements (i.e., what is left behind in your brokerage account when your broker loans your stock to someone else), “open positions,” and “desked” trades (whereby your broker buries your order in his desk but takes your money and sends you monthly brokerage statements reflecting a trade that never actually occurred). Because our system does not adequately distinguish these markers from real shares, the markers take on lives of their own, multiplying, and creating three problems as they do.

            First, these phantom shares turn proxy voting and corporate governance into a hoax. The April issue of Bloomberg magazine reports, “A robust market for stock loans puts into circulation billions of borrowed shares that can create multiple votes that corrupt corporate elections.” The effect is that, “In close contests with little room for error, the results of high-stakes company decisions may hinge on the invisible influence of millions of votes that shouldn’t be counted.” According to Thomas Montrone, CEO of Registrar & Transfer Co., “It is an abomination…. A lot of the time we have no idea who’s entitled to vote and who isn’t. It’s nothing short of criminal.” A securities consultant notes, “There are votes cast twice on almost every matter of substance… It definitely can and does, in my experience, affect the outcome of corporate elections and proposals.”

            How deep is this problem? Bloomberg writes that the “Securities Transfer Association, a trade group for stock transfer agents, reviewed 341 shareholder votes in corporate contests in 2005. It found evidence of overvoting-the submission of too many ballots-in all 341 cases.” Bloomberg suggests that that this is not innocent, but that arbitrageurs have discovered and are exploiting this crack. As one source notes, “It appears to be the case where there are opportunities to game the system.” Bloomberg concludes that until these problems are fixed, “double and triple voting on one share will continue to make a mockery of shareholder democracy.”

            It’s one thing if a “Should HP buy Compaq?” decision gets gamed by arbitrageurs who understand the back office better than anyone else, but there is a second way this crack is exploited to harm investors. In a normal market supply and demand balance in equilibrium. If, however, some market participants can produce phantom goods, and thus shift the supply curve to the right, they can shift the equilibrium price as well (that’s why it is “illegal”). In some companies the supply of phantom shares has become a significant fraction of (or perhaps multiple of) the shares issued and outstanding. Evidence of this comes from detailed analysis of proxy over-voting such as appears in the Bloomberg article cited above, the persistence of firms on the Reg SHO threshold list, and examination of records from transfer agents, the Depository Trust and Clearing Corporation, and Freedom of Information Act responses from the SEC. A recent SEC FOIA response regarding the 2004 FTD’s of one company reveals days where over 40% of the volume were phantom shares, but I believe it may reach more than that in some companies. While the SEC could settle this question in a heartbeat, the Commission refuses to release relevant data on the following grounds: “The fails statistics of individual firms and customers is proprietary information and may reflect firms’ trading strategies.” That those strategies are “illegal” is apparently of little moment to our regulator.

            Phantom shares can be used to game proxy voting and warp market prices, but the third effect is the one that haunts me: what risk do they create for the system? Robert Shapiro, Harvard Ph.D. economist and former Undersecretary of Commerce under President Clinton, has written, “There is considerable evidence that market manipulation through the use of naked short sales has been much more common than almost anyone has suspected, and certainly more widespread than most investors believe.” His research into death-spiral converts (a type of financing that generally is accompanied by naked shorting) turned up at least 200 companies that appear to have been largely destroyed, posting “a combined market loss of more than $105 billion.” Considering the more general topic of “massive naked short sales” he writes, “we believe that this type of stock manipulation has occurred in many hundreds and perhaps thousands of cases over the last decade…. Illicit short sales on such a scale or anything approaching it point to grave inadequacies in the current regulatory regime.” It would also imply damages in the low trillions of dollars (hence, the circling by plaintiff’s attorneys that has been reported in recent months).

            Again, the SEC and DTCC have sought to assuage nascent public concerns while releasing as little data as possible. The SEC’s FOIA responses, however, reveal that on any given day, 500 million shares remain unsettled (N.B. this does not include share entitlements, desked trades, open positions, overseas delivery failures, or, as far as anyone can tell, ex-clearing). SEC economist Leslie Boni analyzed the FTD problem, and her report describes FTD’s as “pervasive,” calculates that the average persistence of failures is 56 trading days, that some go on for much longer, and that these failures are not random but strategic. Bradley Abelow, a former DTCC director questioned under oath for confirmation as New Jersey Treasurer, reluctantly described settlement failures within our system as “occur[ing] as a matter of course with great regularity,” adding “fails to deliver of securities is endemic.” The SEC’s own website, in a section on Regulation SHO explaining why in January 2005 they grandfathered all failed deliveries, reads, “The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions” (those would be the same “large pre-existing open positions” they elsewhere assure us do not exist).

            A tremendous amount of quibbling occurs over whether or not such evidence is decisive. What is overlooked is that we are not debating the properties of sub-atomic particles beyond the sensitivities of modern equipment. The question of how many unsettled long and short sale, open position, desked trades, offshore failures and share entitlements exist for any firm is a knowable fact. Each element is, in fact, known by someone. They aren’t saying. Instead, those who know these elements struggle to assure the public that there is no problem, and suggest that anyone trying to bring attention to this issue is a malcontent.

            We are far down a financial rabbit-hole, one in which the SEC’s Red Queen is downplaying the problem while grandfathering it on the grounds that it is “concerned about creating volatility where there were large pre-existing open positions,” and refuses to disclose the size of these “large pre-existing open positions” on the grounds that it “is proprietary information and may reflect firms’ [illegal] trading strategies.” We catch disquieting glimpses of hundreds of millions of persistent unsettled trades, and a market warped by “pervasive” and “endemic” failures-to-deliver destroying “many hundreds and perhaps thousands” of companies, and hundreds of billions of dollars (maybe trillions) of American wealth. While the perfidy of the financial actors involved should be unsurprising, the failure of America’s institutions (both federal government and the press) risks, I fear, becoming world-historic.

            Comment

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