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.