A Financial Crime Explained, With Two Hurdles & Two Promises
I will explain to you a financial crime that is occurring on Wall Street. It will not be difficult to understand. In fact, the crime’s simplicity will probably amaze you.
From three years of experience explaining this crime to many people, however, I know that there are two hurdles people face in understanding it. The first seems big but is, in fact, easy to surmount. The second is small, but is the one that trips people up. I have an easy way to get you over both hurdles, but to do so, I will ask you, esteemed reader, to make two promises to me. If you keep these promises you will overcome both hurdles.
Hurdle #1: Because it is a financial crime, people who are not too conversant with financial issues may shrink from technical-sounding jargon. The way over that hurdle is this:
1) I will start by giving a super-simplified explanation that any high school kid could follow. It will be accurate, but only metaphorically accurate.
2) Then I will give an explanation that is literally accurate, but is still somewhat simplified, and uses just a little jargon.
3) Next I will give an explanation that is literally accurate, and includes technical jargon.
4) Last, I will provide links to numerous articles, news reports, interviews, and explanations that have appeared in academic papers and the financial media, for those who want to bury themselves in the technical details.
In sum, I will start with simplified explanation, then move through the explanation again and again, getting more accurate with each pass, but also, more technical.
Promise #1: Please make the first promise to yourself that you will not plough through this material until it defeats you. Instead, start by reading the first, metaphorical explanation and, if you understand to your own satisfaction, stop. If you are not sure you understand or remain unconvinced, read through the second, literal-but-simple explanation. If you get it then, stop. If you still are not sure you get it or remain unconvinced, read on through the fuller literal explanation, etc. etc. That is, promise that you will not wade through this material until it leaves you defeated and unconvinced. Instead, just read as far as you need to before you feel you get it, then feel free to bail out.
Hurdle #2: I have discovered that, given the right explanation, anyone can understand this crime. The second hurdle, however, is that when people start to understand it, their minds react as follows: “No way. No way. There’s no way that could be happening in our country. No way.”
Promise #2: Please make a second promise to yourself. That is, when you reach the point where your mind is reacting this way, you’ll go back and read Promise #1.
Posted in 4) The Crime: "Naked Shorts" & Other Insincere IOUs |
March 7th, 2008 at 7:42 pm
Won’t the number of shares being sold and held exceed the number of shares outstanding? If more shares are sold in a day than are issued won’t that blow this whole scheme?
March 18th, 2008 at 3:24 am
The following is a mail to a friend whose company is a victim of naked short selling.
Steve,
Now that you have suffered so much in the stock market for your own stock - naked shorts, sharks, other regulator mafia manipulations etc.
Do you regret having listed your stock on the stock exchange?
I guess, these are the perils of any small company that goes public. The danger of sharks only in the business of eating up the wealth that has been painfully raised from parents and aunts from the countryside, to back the one bright idea of the smart kid in the family.
If you were to be given another chance at it, would you still choose to go public or stay privately held.
But small companies need to stay in this ecosystem. We need millions of small companies. And small companies too must benefit from the public participation for raising their capital.
The existing model is simply killing all small companies. At this rate, we are to see lesser and lesser of small companies in the future.
The current dangerous trend is that already very large companies are merging to form even larger behemoths.
All of this is to ensure that the sum total of human endeavour on earth is bound to go the dinosaur way.
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I was thinking of a concept of a Private Stock Exchange.
Googled the word - didnt find any reference.
Wikipedia doesnt mention any such thing in the footnotes.
I wonder - am I the first chap to think about such a thing? Highly Unlikely though.
May be they already exist and they are just called by another name.
What is my Private Stock Exchange.
Its not Private - its open to the Public - its only implemented and run Privately.
It deals with stock and its an exchange.
Its a virtual stock exchange - it runs on the web - and its for only one stock - the stock for that particular company. And there is a link to it on your website. The Stock is publicly traded but with far higher information. It shows the list of all current holders of stock (or at least of those who have no privacy issues in disclosing it). And it has to tally with the sum total of outstanding stocks of that company at any time. You can see the highest and lowest quotes from real buyers and sellers at any time. You can instantly buy and sell. The company issues certificates, cancels certificates. But it exists outside the jurisdiction of the conventional “Stock Exchanges”.
There are no fake certificates, because if you bought them, it should show your name on the website.
Individuals who actually end up buying are given a username, so people who you see bidding to sell are real holders of shares and you (might be permitted to see how many they are holding and when they bought them)
Your product (the smart rat trap) displays the link to your virtual stock exchange - and if users would like to invest in that smart company, they can directly do so at the website.
What could be the advantage.
The rules are played according to what is acceptable to this particular company. They MAY NOT allow naked short selling and it would be impossible for anyone to do so. They MAY allow options, MAY NOT. They may offer many other types of securities - like preferential shares, bonds, mixed or whatever. First right of liquidity.
Sure, it was not possible to have this in the past. There was no mechanism that every potential buyer or seller can be offered perfect information at any point of time. But today in the times of the Internet, it is possible.
This exchange will not close on weekend or christmas - it will run 24×7x365.
Historically too, bourses have been just meeting places of interested traders. The house where they met was marked with a special symbol of 3 bags.
Nothing more rocket science than that.
Today, the house with the 3 bags can be a website.
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We just have to build the software to do it.
I dont think we are breaking any rules or doing anything unethical. Except the protests of indignation from the Stock Exchanges. And their accomplices in government.
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Trust issues.
It could be concievable that a Ombudsman like company deploys that software which runs on its servers for each of its client companies.
The software is displayed in the client website but its actually running from a certified installation - ISO 9000 certified. Audited, secure, certified.
These server companies dont have any discretionary or regulatory rights or abilities except for running the software as per agreed upon rules. They cant even look at your data, by secure design. And there are usecases designed to verify its veracity at any time by anyone.
How do you like the idea?
How about sharing this with Patrick Byrne. May be he can do something about it. He has been after this naked short thing. He has stamina. He has the money and even knows Warren Buffet.
Abhijit