• Guest, The rules for the P & N subforum have been updated to prohibit "ad hominem" or personal attacks against other posters. See the full details in the post "Politics and News Rules & Guidelines."

Wall Street's Naked Swindle

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/1

I read this recently, and found it incredibly interesting and informative. It's provactively written for sure.

I have no degrees or job-related experience that would lead me to say that I am an educated person on the more complex dealings of Wall Street investment houses, but figured I'd post it here to get some feedback on the piece.

Thoughts? :)
As always they kinda get things wrong (like mentioning that Bear's 33:1 leverage was from RMBS. It wasn't, RMBS structures are almost always off balance sheet and not included in leverage ratios).

I do abhor the naked short selling issue in the market. One thing people should read up on is the Dendreon story, especially the "bullets" method.
 

mumedina

Member
Nov 5, 2009
42
0
0
Very interesting read. The article just proves once again that laissez faire economics just doesn't work where unchecked greed is concerned. Seems like those with the most power abused it the most.

I also found this Frontline segment interesting http://www.pbs.org/wgbh/pages/frontline/warning/view/?utm_campaign=homepage&utm_medium=proglist&utm_source=proglist . Shows how Rubin, Summers, and Greenspan deliberately chose to ignore the warning signs. I don't think they did it intentionally for greed... I just think they were misguided in their beliefs (the current economic climate proved just how wrong they were.)
 

Arkaign

Lifer
Oct 27, 2006
20,623
1,107
126
Very interesting read. The article just proves once again that laissez faire economics just doesn't work where unchecked greed is concerned. Seems like those with the most power abused it the most.

I also found this Frontline segment interesting http://www.pbs.org/wgbh/pages/frontline/warning/view/?utm_campaign=homepage&utm_medium=proglist&utm_source=proglist . Shows how Rubin, Summers, and Greenspan deliberately chose to ignore the warning signs. I don't think they did it intentionally for greed... I just think they were misguided in their beliefs (the current economic climate proved just how wrong they were.)
Thanks for the comment and the link, I'm gonna check that out now.

I really did enjoy this article by Matt, I'm no finance guy, so it was refreshing to have things broken down in a layman's form of understanding.
 

Bowfinger

Lifer
Nov 17, 2002
15,776
392
126
As always they kinda get things wrong (like mentioning that Bear's 33:1 leverage was from RMBS. It wasn't, RMBS structures are almost always off balance sheet and not included in leverage ratios).

I do abhor the naked short selling issue in the market. One thing people should read up on is the Dendreon story, especially the "bullets" method.
Any other insights to add about the article? I found it to be an excellent -- and disturbing -- read. It makes me inclined to avoid investing in any companies in the financial sector, and it certainly hasn't helped my opinion of Wall Street or Obama. On the other hand, I'd love to hear well-informed rebuttals for any of the information presented that is inaccurate or notably slanted.
 

Arkaign

Lifer
Oct 27, 2006
20,623
1,107
126
Any other insights to add about the article? I found it to be an excellent -- and disturbing -- read. It makes me inclined to avoid investing in any companies in the financial sector, and it certainly hasn't helped my opinion of Wall Street or Obama. On the other hand, I'd love to hear well-informed rebuttals for any of the information presented that is inaccurate or notably slanted.
I thought that interesting as well. I thought the article somewhat of a condemnation of Obama's economic appointments, but that was balanced by the similar negativity expressed towards the previous administration's dealings with these issues. I didn't get a partisan 'Let's get Obama' attitude out of this article, more of a 'this system is waaaay fucked up, and here are some reasons why'.

I too would love to hear some more from those in the know on this, both in this forum and otherwise. Preferably without partisan bickering, considering the screw-ups from all sides on this catastrophe.
 

Arkaign

Lifer
Oct 27, 2006
20,623
1,107
126
Bow, just finished watching that Frontline doc you posted. Wow, amazing stuff. Makes me sad, as having common-sense regulatory infrastructure to prevent fraud and flagrantly risky investments would certainly lead to a healthier economic atmosphere. As it stands, secret dealings and reckless behavior by a handful of power players can bring our entire global economy to the brink of collapse, which is patently ridiculous.
 

Acanthus

Lifer
Aug 28, 2001
19,915
2
76
ostif.org
I'm a finance major and economics minor and recently did a case study on the stearns shorts.

It definitely happened.

However, the SEC investigation is still pending.
 

glenn1

Lifer
Sep 6, 2000
25,383
1,013
126
http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/1

I read this recently, and found it incredibly interesting and informative. It's provactively written for sure.

I have no degrees or job-related experience that would lead me to say that I am an educated person on the more complex dealings of Wall Street investment houses, but figured I'd post it here to get some feedback on the piece.

Thoughts? :)
Unfortunately, this article was written by someone who is not especially well-versed in the securites rules around short selling, or the Bear Stearns meltdown for that matter.

1. As far as someone taking a big position in put options on Bear Stearns (BSC hereafter), likened to $1.7MM in lottery tickets, there were plenty of folks back then who thought that Bear was insolvent. It's no surprising that someone would be willing to make a speculative trade on that. It's similar to many other similar trades made on GM and Chrysler - pretty much everyone knew they were goners, the only question was when. Also, the amount is hardly a smoking gun - that's not by any means a huge bet for a big institutional client to make, especially with that much potential upside. Here's another big bet of the same type that paid off big:
http://online.wsj.com/article/SB10001424052748703574604574499740849179448.html

2. The noise made about "naked short selling" is typical of someone who knows just enough about the subject to be dangerous. The vast majority of what the author would call "failures to deliver" are nothing of the sort - they are normal, run-of-the mill sells. For various and sundry reasons (client has a paper certificate that needs to be processed, client is exercising an options position and is thus deemed to "own" the shares but is waiting for delivery, sales of restricted shares where the transfer agent will need to remove the restricted legend from the certificates, etc) are all examples of why a trade may not settle on T+3 and thus be a techical "failure to deliver."

3. The author seems to have a particular issue with the Depository Trust Company (DTC), where in fact if not for the DTC almost all trades would be delivery failures at T+3 - it's only because the vast majority of shares being in book entry that more failures-to-deliver don't occur. I wouldn't be surprised if the author also has an issue with fractional reserve banking and that we're no longer on the gold standard.

4. Similiar to the above, the author does not understand how the DTC works when short selling is involved, how Net Continuous Settlement works, or the difference between a "firm locate" or "firm borrow" for a short sale. Essentially, he seems to think that every share should be able to be individually tracked in order to grant a locate. It's similar to saying that when you deposit money in bank, that the bank should have to keep track of the physical bills you deposited, and give you the same bill back when you make your withdrawal.

5. The author's anger about "payment in lieu" just means he has no idea of what a hypothecation agreement is. If you have signed up for a margin account, you've signed a form giving the broker/dealer the right to do exactly what he's angry about. If you don't read what you're signing (or don't understand it), then that's your problem.

6. The author cites the Designated Options Market Maker exception as being a problem - that just shows he thinks that markets just magically appear from nowhere, or that he has no fvcking clue what a market maker is or why they're important.

7. That the author cites Patrick Byrne (CEO of Overstock.com, who has said that short selling against his firm is controlled by an "evil Sith Lord" - honestly, look it up) with approval shows that the author is a complete dumbass.

There's plenty more that can be said about this article, but in short, it's crap.
 
Last edited:

StageLeft

No Lifer
Sep 29, 2000
70,150
2
0
There was another great rollingstones article a few months back, I think it went over CDS or something.
 

Ozoned

Diamond Member
Mar 22, 2004
5,578
0
0
As it stands, secret dealings and reckless behavior by a handful of power players can bring our entire global economy to the brink of collapse, which is patently ridiculous.
With the wild run up going on now on wall street, I imagine anybody with money left after the last raping is jumping back in now.

It's not just the power players, it's the junkee's also.
 

First

Lifer
Jun 3, 2002
10,518
271
136
Naked short selling was even more of an issue than previous believed. Makes you wonder how free-market tards still believe in their dogma.
 

LegendKiller

Lifer
Mar 5, 2001
18,256
68
86
Unfortunately, this article was written by someone who is not especially well-versed in the securites rules around short selling, or the Bear Stearns meltdown for that matter.

1. As far as someone taking a big position in put options on Bear Stearns (BSC hereafter), likened to $1.7MM in lottery tickets, there were plenty of folks back then who thought that Bear was insolvent. It's no surprising that someone would be willing to make a speculative trade on that. It's similar to many other similar trades made on GM and Chrysler - pretty much everyone knew they were goners, the only question was when. Also, the amount is hardly a smoking gun - that's not by any means a huge bet for a big institutional client to make, especially with that much potential upside. Here's another big bet of the same type that paid off big:
http://online.wsj.com/article/SB10001424052748703574604574499740849179448.html
The problem isn't the short selling, naked short selling have had several issues whereby there were more shares short than float. Furthermore, the negative feedback loop of short selling helps in market dislocation and inefficiency.

2. The noise made about "naked short selling" is typical of someone who knows just enough about the subject to be dangerous. The vast majority of what the author would call "failures to deliver" are nothing of the sort - they are normal, run-of-the mill sells. For various and sundry reasons (client has a paper certificate that needs to be processed, client is exercising an options position and is thus deemed to "own" the shares but is waiting for delivery, sales of restricted shares where the transfer agent will need to remove the restricted legend from the certificates, etc) are all examples of why a trade may not settle on T+3 and thus be a techical "failure to deliver."
Other articles have pointed out that there is often massive overhang well past T+3, some even going out years. Why? Because the dealer or market maker won't bother calling the "seller" since they know the "seller" will lose money on the shares, since they are buddies, they don't ask for delivery.

3. The author seems to have a particular issue with the Depository Trust Company (DTC), where in fact if not for the DTC almost all trades would be delivery failures at T+3 - it's only because the vast majority of shares being in book entry that more failures-to-deliver don't occur. I wouldn't be surprised if the author also has an issue with fractional reserve banking and that we're no longer on the gold standard.

4. Similiar to the above, the author does not understand how the DTC works when short selling is involved, how Net Continuous Settlement works, or the difference between a "firm locate" or "firm borrow" for a short sale. Essentially, he seems to think that every share should be able to be individually tracked in order to grant a locate. It's similar to saying that when you deposit money in bank, that the bank should have to keep track of the physical bills you deposited, and give you the same bill back when you make your withdrawal.

5. The author's anger about "payment in lieu" just means he has no idea of what a hypothecation agreement is. If you have signed up for a margin account, you've signed a form giving the broker/dealer the right to do exactly what he's angry about. If you don't read what you're signing (or don't understand it), then that's your problem.

6. The author cites the Designated Options Market Maker exception as being a problem - that just shows he thinks that markets just magically appear from nowhere, or that he has no fvcking clue what a market maker is or why they're important.

7. That the author cites Patrick Byrne (CEO of Overstock.com, who has said that short selling against his firm is controlled by an "evil Sith Lord" - honestly, look it up) with approval shows that the author is a complete dumbass.

There's plenty more that can be said about this article, but in short, it's crap.
I'm sure Byrne was joking as far as who was doing it but the point remains, there are plenty of people who wish that companies would do poorly. They do so because they want the shares to go down to make more money.

I'm not some journalist and I do work for an i-bank, I have my CFA charter and an MBA and I think naked short selling regulations should be enforced strictly and penalized harshly. I would slap a $100 per share fine on naked short interest, per transaction with prison times of at least a year for any infraction.

I would love to see this shit stop soon.
 

glenn1

Lifer
Sep 6, 2000
25,383
1,013
126
The problem isn't the short selling, naked short selling have had several issues whereby there were more shares short than float. Furthermore, the negative feedback loop of short selling helps in market dislocation and inefficiency.



Other articles have pointed out that there is often massive overhang well past T+3, some even going out years. Why? Because the dealer or market maker won't bother calling the "seller" since they know the "seller" will lose money on the shares, since they are buddies, they don't ask for delivery.
Once upon a time, these "overhangs" you speak of were positions remaining on the threshold list for extended periods. And the reason why is how an item could get off the threshold list - it wasn't calculated as FIFO (first in, first out), once it was on, the security had to remain under the specified level of fails for five consecutive settlement days. The fail could be addressed in the first day after it went on the securities list, and if it didn't stay off for 5 days more it wouldn't get off the list. Any new fails would start the clock ticking again, and thus it could essentially remain on the list forever.

Nowadays, however, this situation is basically impossible. Rule 204(t) has been passed and mandates close-out/buy-out of positions by the close of business of T+4.

http://www.sec.gov/rules/final/2009/34-60388.pdf
[/QUOTE]

I'm sure Byrne was joking as far as who was doing it but the point remains, there are plenty of people who wish that companies would do poorly. They do so because they want the shares to go down to make more money.
If Byrne ran his company worth a sh!t, the stock price would go up on its own. The problem with Overstock.com isn't short sellers, it is that the company and its CEO sucks ass.

I'm not some journalist and I do work for an i-bank, I have my CFA charter and an MBA and I think naked short selling regulations should be enforced strictly and penalized harshly. I would slap a $100 per share fine on naked short interest, per transaction with prison times of at least a year for any infraction.

I would love to see this shit stop soon.
Be careful what you wish for. In your world, a typical fail-to-deliver (say, grandma not signing the paper stock certificate properly, thus causing it to not be in good delivery form) would be fined $100/share. Your well-intentioned wish will simply make securities trading that much more of a PITA for many Mom-and-Pop investors. The amount of "naked short" sales done for nefarious purposes is almost vanishingly small.
 

ASK THE COMMUNITY