The Society of American Business Editors and Writers (SABEW) met in Denver this week. Some months ago I had applied for membership on the grounds that the “Join SABEW” page on their website encourages application from those “writing, reporting, editing or overseeing business, financial or economic news for … online publications”. Given that DeepCapture had won the 2008 Weblogs Award for Best Business Blog, and that I have spent considerable time “writing, reporting, editing [and] overseeing business, financial, and economic news” on this website, I was curious to see if I would qualify within this rubric. Of course my application was denied, and while I considered crashing the party in Denver anyway, I decided against it, already confident that my experience would match George Orwell’s in a conference of British writers, described in his fine 1946 essay, “The Prevention of Literature”:

“About a year ago I attended a meeting of the P.E.N. Club, the occasion being the tercentenary of Milton’s Aeropagitica — a pamphlet, it may be remembered, in defense of freedom of the press. Milton’s famous phrase about the sin of ‘killing’ a book was printed on the leaflets advertising the meeting which had been circulated beforehand.

“There were four speakers on the platform. One of them delivered a speech which did deal with the freedom of the press, but only in relation to India; another said, hesitantly, and in very general terms, that liberty was a good thing; a third delivered an attack on the laws relating to obscenity in literature. The fourth devoted most of his speech to a defense of the Russian purges. Of the speeches from the body of the hall, some reverted to the question of obscenity and the laws that deal with it, others were simply eulogies of Soviet Russia… political liberty was not mentioned… Significantly, no speaker quoted from the pamphlet which was ostensibly being commemorated…

“There was nothing particularly surprising in this. In our age, the idea of intellectual liberty is under attack from two directions. On the one side are its theoretical enemies, the apologists of totalitarianism, and on the other its immediate, practical enemies, monopoly and bureaucracy. Any writer or journalist who wants to retain his integrity finds himself thwarted by the general drift of society rather than by active persecution. The sort of things that are working against him are the concentration of the press in the hands of a few rich men, the grip of monopoly on radio and the films…Everything in our age conspires to turn the writer, and every other kind of artist as well, into a minor official, working on themes handed down from above and never telling what seems to him the whole of the truth… In the past, at any rate throughout the Protestant centuries, the idea of rebellion and the idea of intellectual integrity were mixed up. A heretic — political, moral, religious, or aesthetic — was one who refused to outrage his own conscience. His outlook was summed up in the words of the Revivalist hymn:

Dare to be a Daniel
Dare to stand alone
Dare to have a purpose firm
Dare to make it known

“To bring this hymn up to date one would have to add a “Don’t” at the beginning of each line.”

Orwell’s disappointment in the meek conformity of the writers of his day mirrors DeepCapture’s in the business journalists of our own. A close reading of much of what has passed for business journalism in recent years reminds one of nothing so much as Soviet-era artists dutifully churning out dozens of murals of square-jawed workers striding boldly into the future, or hack reporters extolling the virtues of this or that ball-bearing plant, perhaps criticizing the occasional apparatchik who has fallen from favor with the masters, but entirely incapable of independent thought which questions the system itself, a system in whose benefits those reporters derive modest share.

As will be remembered by anyone who experienced that totalitarian era first-hand (as I did, living in mainland China for 12 months in 1983-1984), this ideological correctness generally expresses itself in a eagerness to confront with pronouncements, coupled with an incapacity to engage in even the mildest form of real debate.  I will illustrate this point by publishing an exchange I had some months back with the SABEW Pooh-Bahs, after I had submitted my application to SABEW wearing my DeepCapture.com (“2008 Weblogs Award for Best Business Blog”) journalist’s hat.

———————————————————————————————-

From: Dare, Donna D. [mailto:DareD@missouri.edu]
Sent: Saturday, January 24, 2009 11:49 AM
To: Patrick Byrne
Subject: Regarding Your Application for SABEW Membership

January 24, 2009

Patrick Byrne, Journalist

Deepcapture, LLC

I regret to inform you that your application for membership in the Society of American Business Editors and Writers Inc. has been denied.

The Membership Committee could not ascertain that your primary career responsibilities fit the criteria for membership.  You may submit evidence to support your application, such as story clippings or audio- or videotape.

Criteria for membership in SABEW (as stated in the organization’s bylaws) is as follows:

Membership in the Society shall be restricted to persons for whom a significant part of their occupation involves writing, reporting, editing or overseeing business, financial or economic news for newspapers, magazines, newsletters, journals, books, press or syndicate services, radio or television, online publications, or other media approved by the board and to teachers and students of business journalism or business media subjects at recognized colleges or universities or other organizations approved by the Society’s Board of Governors.  Members may retain full membership status, after being assigned to another news position at news organizations, even if the new position is not directly involved in business news.

If, in the future, you meet the criteria, we would be happy to reconsider your application for membership in SABEW.

If you wish to appeal this decision, please contact the SABEW office at sabew@missouri.edu.

SABEW did not process (and has destroyed) your credit card information submitted with the membership application on 1-18-09.

Thank you for your interest in SABEW.

Sincerely,

Donna Dare

SABEW Membership Coordinator

Ph:  573-882-7862

Email: dared@missouri.edu

www.sabew.org

———————————————————————————————-

From: Patrick Byrne [mailto:PByrne@overstock.com]
Sent: Saturday, January 24, 2009 8:00 PM
To: SABEW; Dare, Donna D.
Subject: RE: Regarding Your Application for SABEW Membership

Donna Dare

SABEW Membership Coordinator

Dear Ms. Dare (& SABEW Membership Appellate Court),

I thank you for the courtesy of your response denying my application for membership in SABEW. Respectfully, however, and per your letter, I am writing to appeal this decision on the grounds that the reason you gave in your letter is not, in fact, supported by the bylaws from which you have quoted. The inconsistency can be seen in these two points:

*    In denying my application you wrote, “The Membership Committee could not ascertain that your primary career responsibilities fit the criteria for membership.”

* The paragraph from your organization’s bylaws you have cited in support of this position reads: “Membership in the Society shall be restricted to persons for whom a significant part of their occupation involves writing, reporting, editing or overseeing business, financial or economic news for newspapers, magazines, newsletters, journals, books, press or syndicate services, radio or television, online publications, or other media approved by the board and to teachers and students of business journalism or business media subjects at recognized colleges or universities or other organizations approved by the Society’s Board of Governors.  Members may retain full membership status, after being assigned to another news position at news organizations, even if the new position is not directly involved in business news.”

As one can plainly see, in denying my application your membership committee has referred to “primary career responsibilities” as the standard. This position is not supported by the bylaws you have cited, which instead state that membership will be restricted “to persons for whom a significant part of their occupation involves…” These are clearly two quite different standards.

You have also written, “You may submit evidence to support your application, such as story clippings or audio- or videotape.” Towards that end, I submit the following:

1.      “The Darkside of the Looking Glass” – This online lecture and PowerPoint explanation of settlement failures in our equity system has been downloaded well over 1 million times, including over ten thousand times from IP’s associated with news organizations, and over 30,000 times from IP’s associated with the federal government.

2.      “Deep Capture: The Movie” – This presentation, performed in October, 2007 in front of 800 hedge funds and members of the press, has been viewed over 50,000 times.

3.      The website I founded, DeepCapture.com , has recently received the 2008 Weblog Award for the #1 Business Blog on the Internet (this is, in fact, the largest blog poll in existence).

4.      My individual writings are organized there as, “Deep Capture: The Explanation”, to which your committee may refer.

5.      Here you will find a selection of over two dozen appearances I have made on CNBC, Bloomberg, and Fox Business.  Some of these relate to my corporate duties, but many of these appearances make little to no reference to those duties, and instead seek my opinions on matters of business and economics.

6.      As you are perhaps not aware, my investigation and exposure of deep systemic problems in our nation’s stock settlement system became the subject of a Bloomberg Special Report that was itself nominated for an Emmy, Long Form Investigative Journalism.

In sum, it is clearly correct to say that “a significant part of [my] occupation involves writing, reporting, editing or overseeing business, financial or economic news for … newsletters, … radio or television, online publications…” For this reason, I respectfully challenge the membership committee’s decision and reasoning, as elaborated upon above.

Of course, I am not blind to the possibility that the content of my reporting (much of which is critical of other members of SABEW) is what discomfits the members of the Membership Committee. However, I have reviewed the bylaws of your organization and find no evidence of an ideological standard which applicants must meet. Please inform me if I am in error on this point.

Until then, I remain,

Your humble servant,

Patrick M. Byrne, PhD

Journalist, DeepCapture.com

———————————————————————————————-

From: Kevin Noblet [mailto:kevin_noblet@hotmail.com]
Sent: Monday, January 26, 2009 9:01 AM
To: Patrick Byrne
Cc: Donna Dare
Subject: RE: Regarding Your Application for SABEW Membership

Patrick:

Donna forwarded your message to me. In SABEW’s view, not all business blogs qualify as news publications just as all writing and editing doesn’t qualify as journalism. From its standpoint your activities and those of DeepCapture seem closer to corporate public relations, and SABEW isn’t open to PR professionals _ or of course to retail business executives.

I hope this makes the decision clearer.

Donna also had forwarded me Judson Bagley’s message and I responded to him along similar lines.

Regards,

Kevin Noblet

Secretary and Membership Committee Deputy Chair
SABEW

From: Patrick Byrne
Sent: Monday, January 26, 2009 4:36 PM
To: knoblet@pobox.com
Cc: Donna Dare
Subject: RE: Regarding Your Application for SABEW Membership

Kevin,

Respectfully, could you explain how DeepCapture is “corporate public relations”? We are performing analyses on data that no one else has obtained; these analyses are requested by national news organizations and numerous congressional reps, senators, and various other federal bodies; our  analyses of flaws in the nation’s settlement system have become fodder for numerous congressional demands of the SEC; our publication of secretly-recorded tapes of journalists planning a cover-up, and our unearthing of emails documenting the relationships among hedge funds and journalists, are apparently of strong interest to many others in this profession (judging from the volume of traffic we get from news organizations).  Clearly, the vast majority of DeepCapture’s activities have precisely 0 to do with my corporate day job as a “retail business executive.”

Is this truly the fig leaf behind which your organization is going to hide? Why not write into the bylaws a rule which demands ideological purity? It would save all this back-and-forth at least.

Regards,

Patrick

———————————————————————————————-

Then, as no answer was forthcoming (or ever came), I then sent this:

———————————————————————————————-

From: Patrick Byrne
Sent: Wednesday, January 28, 2009 1:23 PM
To: ‘knoblet@pobox.com’
Cc: ‘Donna Dare’
Subject: RE: Regarding Your Application for SABEW Membership

Dear Kevin,

Here is some more of that “corporate public relations” you don’t want to miss. This one is from Mark Mitchell.

Strange Occurrences, and a Story about Naked Short Selling

Regards,

Patrick

———————————————————————————————-

Now the truth is, I did not really have a burning desire to join SABEW. To steal a page from Groucho Marx, I wouldn’t want to join any club that would have SABEW members as members.  That said, I thought it would be interesting to find out if a profession which professes a commitment to toleration and pluralism would display the same commitment it asks of society, or would it respond, as SABEW ultimately did, like apparatchiks threatened by the possibility of criticism? I confess that my interest was pretty negligible, so confident was I in the likely result, but I did think it a box worth checking off.

As I mentioned, this past week the SABEW conference in Denver went on without me. Something occurred there, apparently unscripted, which reminds me of the aftermath of Jim Cramer’s appearance on Jon Stewart’s The Daily Show. In any earlier age Cramer’s exposure there would have meant his disappearance from public life and, possibly, the tarnishing of his network beyond recovery, but ours is an age in which shame and accountability are wholly absent (as P. J. O’Rourke wrote, “If you say a modern celebrity is an adulterer, a pervert and a drug addict, all it means is that you’ve read his autobiography.”) Since that night, Cramer has publicly spun his appearance along the lines of, They say we could have done more to see this coming, and in the future we’ll try harder, apparently banking on the fact that many people did not see, or will not remember, what really happened: Jon Stewart dismembered Cramer not for “not trying hard enough”, but instead, for taking part in crimes such as stock manipulation, and for relying upon shill journalists in his schemes to cheat the public. Those are two quite different things, and in any sane world, Cramer would not be permitted to rewrite history so effortlessly.

By press accounts, this past week’s SABEW Denver conference saw the apparatchiks employing the same kabuki dance, the same confessions and self-criticisms directed to the wrong issues. On April 27, this Reuters story appeared (“Did the Watchdog Forget to Bark?” ) describing the scene:

“The opening panel at the Society of American Business Editors and Writers annual meet in Denver addressed an interesting question: Did 9,000 business journalists blow it when it came to ringing the alarm bells on the financial meltdown?

The five SABEW panelists — The New York Times’ business editor Larry Ingrassia, Columbia Journalism Review critic and former Wall Street Journal reporter Dean Starkman, personal finance columnist Jane Bryant Quinn, Emmy-winning former ABC News investigative reporter Allan Dodds Frank and Greg Miller, a professor at the University of Michigan — agreed that the financial press could have done more. Newspapers, wire services, magazines and television stations could have been more aggressive…”

On that same day The Colorado Independent (“A Center for Independent Media”) wrote, “Business Reporters Confess News Sins While the US Economy Collapsed“.

“In a windowless room at the Westin Hotel in downtown Denver, leading business journalists and editors explained how the media “blew it” in covering the economic meltdown. They admitted, on one hand, to falling under the sway of free-market ideology and celebrating risk-taking financial leaders and, on the other, to missing the complex story of the rupturing system by only reporting it in parts and to almost no effect for the past decade.

Although not planned as confession, the discussion, which kicked off the annual conference of the Society of American Business Editors and Writers (SABEW), quickly descended into an unburdening, with the panelists taking turns voicing their own explanations and excuses for the failure. Former Wall Street Journal managing editor and current ProPublica.org chief Paul Steiger moderated the impromptu journalistic penitence.

‘We drank the Kool-Aid,’ said Jane Bryant Quinn, personal finance columnist for Bloomberg and Newsweek. ‘We believed that free markets were the best kind [of markets].’ She said it had become ‘unfashionable’ over the last three decades to write about regulation, so they didn’t.”

Apparently, as far as SABEW’s membership is concerned, the events of recent months reflect only a lack of being suitably “aggressive”, of not “hav[ing] done more”, and, as always, of having been taken in by “free-market ideology.” Those are the issues over which SABEW members now wring their hands, it being apparently unthinkable (just as it is with Jim Cramer) that some of their membership deeply transgressed all notions of journalistic ethics by growing so close to favored hedge fund sources that they became shills (e.g., Bethany McLean), and when their sources committed crimes, those journalists threw the credibility of their publications into denying, downplaying, masking, and apologizing for that crime (and now, on the basis of little evidence and no investigation, prematurely declare it resolved, as Floyd Norris did yesterday).

In Capitalism, Socialism, and Democracy, Joseph Schumpeter wrote, “Capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever defense they may hear.” Schumpeter neglected to mention that to this same jury, the possibility that the enforcement of regulation has been compromised due to the subversion of the mechanisms of enforcement, from the exchanges to the regulators to the politicians to, most disturbingly, the intellectual class itself (in particular, those who count themselves members of SABEW), is a possibility which that jury finds unthinkable, quite literally, and in the purest Orwellian sense.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) write SABEW’s Donna Dare and Kevin Noblet (DareD@missouri.edu and knoblet@pobox.com) asking them to make explicit the ideological policies to which SABEW demands its members conform (and please post as a copy of your email to them in the comment section below);

3) go here for additional suggestions: “So You Say You Want a Revolution?“

(draft only)

“I am really going to enjoy watching Goldman Sachs try to justify its nefarious schemes to a jury box with 12 Americans in it,’ he said.”

That was Fortune Magazine quoting me on January 28, 2011, regarding the escalation of Overstock’s claims against Goldman Sachs, in an article entitled, “Nastiest CEO lashes out at Goldman”. The title underscores their sympathies and journalistic objectivity.  Displaying identical logic and equanimity there were, perhaps, similar “Nasty Belgians Lash Out at Fatherland” articles in the Nazi press of May, 1940.

Expecting Fortune Magazine to provide critical reporting of Wall Street in this first decade of the 21st century would be like expecting  Sports Illustrated to provide critical reporting on Michael Jordan in the last decade of the 20th century. They cannot: it’s a fan-mag. But Fortune‘s choice of title betrays its orientation more clearly than a dozen deconstructions of my own could accomplish.

One should note, however, that beneath its hysteria there are two facts on which Fortune Magazine is reporting. Those facts are:

1.       As my Overstock colleague Jonathan Johnson, Esq., put it, “Recently discovered revelations of concerted action among certain market makers and these two brokerages necessitate that we amend our complaint to include additional claims. We expect that this conduct of Goldman Sachs and Merrill Lynch is fully actionable under anti-racketeering laws.”

2.       I wish to make Goldman Sachs explain its actions not to a White House to which Goldman is the largest donor (“Goldman Sachs was top Obama donor“, CNN, April 2010); not to FINRA, its own industry’s self-regulating body in which Goldman is the dominant member (“Goldman Action Highlights FINRA Facade“);  not to an SEC which has been hopelessly captured beyond repair (“Why Isn’t Wall Street in Jail?“, Matt Taibbi, Rolling Stone); not to members of the Senate Banking Committee from both sides of the aisle (“Goldman Sachs Congressional Inquisitors Also Beneficiaries of Firm’s Financial Largesse“). I simply want to see Goldman to explain itself to 12 Americans whom they don’t own.

Because Fortune Magazine is allergic to both of these facts, this is how they treat them:

1.       Regarding the escalation of our lawsuit to RICO, Fortune provides this anodyne description: “Overstock said it made a filing with a New Jersey court allowing it to seek triple damages in its 2007 suit against the brokers.” In comparison, note how the same fact was treated by various news organizations whose business model is not tied to  regular and profound supplication before Wall Street:

a.       Reuters:  ”Overstock accuses Goldman. Merrill of racketeering. Overstock says RICO charges apply in case” (December 16, 2010).

b.      Associated Press: “Overstock adds RICO claim to short-sale suit: Overstock.com Inc. said Thursday that it sought to add racketeering charges against Goldman Sachs and Merrill Lynch….” (December 16, 2010)

c.       Benzinga:  “Overstock Adds RICO Claim To Goldman Sachs/Merrill Lynch Suit: As a result of evidence gathered through discovery in its prime brokerage lawsuit, Overstock.com, Inc. has filed a motion in California State Court to amend the suit to include claims under New Jersey’s Racketeer Influenced and Corrupt Organizations (RICO) Act.” (December 16, 2010).

d.      TechRockies: “Overstock Sues Goldman Sachs, Merrill Lynch Over Racketeering” (December 17, 2010).

e.      Benzinga: “Goldman Sachs Engaged In Interstate Racketeering, Says Overstock’s Patrick Byrne” (February 15, 2011).

2.      Regarding my insistence that Goldman answer for itself within the one system it cannot rig, Fortune’s title and subtitle say it all: “Nastiest CEO lashes out at Goldman: It is hard to know who (sic)to root for in this one”. Overstock conducted four years of discovery,  obtained documents to support a RICO action, and filed that RICO action, which in the eyes of Fortune Magazine makes me a “nasty CEO” who is “lash[ing] out” against Goldman Sachs. The thought of poor, defenseless Goldman Sachs having to answer to 12 Americans whom they don’t own and cannot buy clearly gives Fortune Magazine’s staff the vapors.

It is the thesis of DeepCapture that the banksters have hijacked not just the regulators and  industry self-regulators, but the politicians who oversee them, the academics who serve them, and much of the New York-based financial press. Of this observation Fortune once again provides fine confirmation. I am sure that Soviet apparatchiks could have wished for no more supine and obedient press coverage from their own state media services as Goldman Sachs (and by extension, Merrill Lynch) have received here from Fortune Magazine.

You may remember Peter Weir’s 1998 film, The Truman Show, in which the protagonist (Jim Carrey) is enjoying what he perceives as a picture-perfect life in the idyllic town of Seahaven, but which is in fact a 24/7  TV show being broadcast globally from an enormous Hollywood sound stage.  The process by which he comes to recognize that he lives within a constructed and ersatz reality provides the narrative arc of the story. One seminal moment in his awakening occurs in this scene:

My long crusade (or Mitzvah, or Jihad, depending upon what side you’re on) against Wall Street corruption has seen similar  Truman Show moments. As is described in Mark Mitchell’s The Story of Deep Capture, in November, 2004 a fellow calling himself “Bob O’Brien” called me to explain some wild-sounding theories about Wall Street criminality. I did not pay  much attention to him, because he opened the conversation candidly letting me know that “Bob O’Brien” was not his real name, and that he was living out of a backpack in foreign lands for fear of getting whacked by Organized Crime. He sensed my disbelief, so before he signed off he told me he was going to make four long-shot predictions, and when they came true, to get back in touch with him. His predictions were as follows: a specific set of journalists (from whom, incidentally, I had never previously heard) would all be calling to do hatchet jobs on me; that Overstock stock would be getting listed on numerous obscure foreign exchanges; that I would become the target of a federal investigation; and that the SEC had recently adopted a regulation, Reg SHO, mandating that starting in January 2005 (two months hence), US exchanges would have to start listing stocks which were seeing excessive failures to deliver (a sign of market manipulation), and Overstock would be one of them. I thanked him and hung up, chuckling to myself.

A day or so after “O’Brien” called I received a call from the first of the journalists he named, and over the following two weeks, all of them called me. Our stock became listed on exchanges in Stuttgart, Munich, Berlin, Bavaria, Hamburg, Bahamas, and Australia. I went under the first of numerous federal investigations (when one ends another immediately starts in its place, and through litigation discovery and FOIA requests we have confirmed the existence of a minor industry of hedge funds and hedge fund choagies who perpetually lobby various government agencies to investigate me on trivial, obscure, and even Kafkaesque matters: remarkably, those government employees compliantly obey, in some cases shortly before taking jobs with the hedge funds who requested such concierge service). And in January, 2005, NASDAQ stared publishing its Reg SHO list of manipulated stocks: there are almost 3,000 firms listed on NASDAQ, a few dozen of which were on the Reg SHO list, and OSTK was one of them.

It was a minor Truman Show moment: if the world is organized as it appears on the surface, it should not be possible for a spotlight to fall out of the blue sky onto the street. And it should not be possible for a guy to make four wild predictions and have them all come true. The philosophers of science tell us that the power of any theory is its ability to make predictions. This guy made some far-out predictions, they all came true, and it would have been intellectually dishonest of me to dismiss him just because he said he was calling from a payphone at a Guatemalan bus stop to keep the Mob from whacking him, and was laying down a rather heavy rap about market manipulation, Organized Crime, and some of the major players on Wall Street.

So I began studying the issue he had been describing to me, that is, our capital market’s stock settlement system and its various loopholes.  Over time, I came to understand that it was not just sloppy, it was sloppy to an almosst inconceivable degree. I could not imagine how it had been designed to tolerate that much slop, unless someone wanted it to be sloppy.

But the real Truman Show moment came in April, 2005, from the SEC itself, which never lets me down. It came in the form of a memo they posted on their sec.gov website. It has been taken down, but thanks to the wonders of the WayBack Machine we can still visit it in archived form. In it, they described their purpose in implementing Reg SHO, what it did and did not mean, and crucially, why they decided to “grandfather” (that is, forgive) all the failed trades that were in the system at the time of the passing of Reg SHO. If you are paying attention, you will have the same reaction to this as Jim Carrey did when the spotlight fell from the sky onto the street in front of his home:

Division of Market Regulation:

Key Points About Regulation SHO

Date: April 11, 2005

…

F. Grandfathering Under Regulation SHO

The requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to positions that were established prior to the security becoming a threshold security. This is known as “grandfathering.” For example, open fail positions in securities that existed prior to the effective date of Regulation SHO on January 3, 2005 are not required to be closed out under Regulation SHO.

The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions.

Why that explanation struck me as so bizarre is because the SEC passed Reg SHO only under intense and unprecedented public pressure, insisting the whole time that it was not needed because naked shorting was not going on and there were no significant failed positions in the market. Then, they passed it with a loophole saying that it “does not apply to positions that were established prior to the security becoming a threshold security”, justifying this “grandfathering” on the grounds that: ” the Commission was concerned about creating volatility where there were large pre-existing open positions.”

If you are following along, the preceding statement by the SEC should seem Truman-Show-strange to you.  Think of it this way: The SEC was simultaneously arguing that there were no large open failed positions and even if there were they would not affect the market; but, they had to forgive all of them already in the system because if those non-existent large open positions were forced to cover it would create volatility. In sum: The large open failed positions do not exist, and if they existed they would not be affecting prices, but reversing those non-existent, non-price-affecting large open positions would crack the market.

To me, seeing that posted on the SEC website was like seeing a spotlight crash into the street out of a blue sky.

I am going to expand this story a bit, in a way that it will become even stranger.

Again, the SEC passed Reg SHO only under intense public pressure in 2003-2004. My source from inside the SEC has told me that never in his career had there been an issue that Wall Street’s lobby fought with such intensity, and that throughout that battle, the upper echelons of the SEC (e.g., Annette Nazareth, Linda Thomsen, James Bragagliano, Eric Sirri)  were carrying water for Wall Street. During that period, the SEC’s push-back to the public was that Reg SHO was not needed because there naked short selling was not going on, and hence, there were no significant delivery failures in the market.

Under the Administrative Procedures Act (APA), before making final decision is reached about the wording of a new regulation, a US regulator has to propose to the public the regulation that is being considered, in order to give the public time to comment.  Following this process, in 2004, under this intense public pressure, the SEC proposed a version of Reg SHO that had tiny teeth in it. After a period of public comment that was overwhelmingly in favor of making Reg SHO tougher, the SEC adopted a version that had no teeth at all.  Even within the SEC this was regarded as a transparent legalistic bait-and-switch, one that let them thwart public pressure yet keep the SEC in technical compliance with the APA.

In early 2005 the exchanges (such as NASDAQ and NYSE) began publishing Reg SHO lists. The persistence of names on these lists demonstrated that failing to deliver stock was, in fact, a regular feature of our capital market, the SEC’s protestations notwithstanding. In response, the SEC began arguing that, while yes, it was occurring after all, it was minor, inadvertent, and random, a result of random human error. Then in June, 2005, a consulting economist they hired, Dr. Lesli Boni, published Strategic Delivery Failures in U.S. Equity Markets, which told just the opposite tale. In her summary she wrote:

“Using a unique dataset of the entire cross-section of U.S. equities, we document the pervasiveness of delivery failures and provide evidence consistent with the hypothesis that market makers strategically fail to deliver shares when borrowing costs are high. We also document that many of the firms that allow others to fail to deliver to them are themselves responsible for fails-to-deliver in other stocks. Our findings suggest that many firms allow others to fail strategically simply because they are unwilling to earn a reputation for forcing delivery and hope to receive quid pro quo for their own strategic fails.”

People who were calling for transparency on this issue found themselves fighting the SEC to obtain even the most basic data. Many resorted to Freedom of Information Act requests, and even then, had to fight for each morsel of data. The SEC stuck to its guns, insisting that this was a non-issue, yet opposing the public release of data that could instantly determine who was right.

In the years following that I became part of a movement that fought skirmishes with the SEC.  I funded the deployment to Washington of entire legal and lobbying teams who tried to convince Congressmen and Senators of the seriousness of this problem, and take even the most obvious, commonsensical steps to address it (not for the company I happen to run, but for the marketplace as a whole). We tried to get Congress to pressure the SEC simply to disclose the data, or better yet, to eliminate the grandfather clause and the option market maker exception, and (our greatest hope) enforce a pre-borrow requirement on all shorting. Throughout this period, I was frequently made aware that lobbying on the other side of the table were the Wall Street banks, and the SEC itself.

Then, in 2008, our financial system began imploding, and the SEC immediately passed an unprecedented emergency order (“SEC Enhances Investor Protections Against Naked Short Selling“) granting the most aggressive form of protection we had been seeking (imposing a pre-borrow requirement on short selling), yet extending it only to the 19 most significant financial firms at the heart of Wall Street. That seemed odd on many levels, not the least of which was that many of those firms were prime brokers who had been enabling hedge funds to do it to other publicly traded companies.

Then, in September, 2008, the SEC rolled out a market-wide reform that was, once again, carefully designed to be toothless. It was around this time that I began publicly describing the SEC as bootlick of Wall Street (“Overstock CEO Comments on SEC’s New Rules Against Naked Short Selling: ‘Nerf penalties for financial rapists’ declares Byrne”).

In October and November of 2008, regulators around the globe began taking emergency measures:

September 21, 2008 Associated Press: “Dutch ban ‘naked’ short selling for 3 months: The Dutch Finance Minister is banning ‘naked’ short selling of financial stocks for the next three months to increase the stability of financial markets…”

October 28, 2008 Wall Street Journal: “Japan Cracks Down on Naked Short Selling: Tokyo: Japan moved Tuesday imposed new restrictions on so-called “naked” short selling of stocks…”

November 14, 2008 “Australia bans naked short-selling: CANBERRA: Australia moved to slap a permanent ban on the most controversial form of short-selling yesterday amid an historic fall in share prices, part of a crackdown that is also targeting hedge funds and credit rating agencies.”

November 21, 2008 – The Financial Times: “Regulators to discuss short selling rules: Global securities regulators will gather on Monday to discuss rules on short selling and disclosure of credit derivatives, the head of the US Securities and Exchange Commission said on Thursday.”

November 24, 2008 Reuters “Global regulators focus on abusive short selling”

Then, in December, while regulators in the rest of the modern world focused on cracks in their respective settlement system, the SEC switched back to dragging its feet:

December 9 – Reuters: “SEC urged to do more to curb naked short selling”

Since then, settlement issues have been at the forefront of discussions of the financial crisis in Europe and the rest of the world.  Germany:  “Merkel sticks to her guns, calls for global market reform: Angela Merkel told a meeting of international financial leaders that the G-20 must work together to reform the finance system. Merkel is pushing for tougher market regulations….” Britain, March 7, 2011: “MEPs vote for ‘naked’ short-selling restrictions”.  European Union: “Merkel, Sarkozy seek EU ban on naked short selling, CDS“. Japan: “Japan to extend naked short selling ban to Oct”. Etc.

Yet in the US, the issue has, once again, disappeared. How utterly odd.

In sum, then,  since 2003 the settlement system which underlies our capital markets has seen problems that disappeared, reappeared, disappeared, reappeared, and disappeared to suit the needs of the Wall Street elite and their handmaidens at the SEC. Initially, in 2003-2004, there were (according to the SEC) no problems in the settlement system worth speaking of. Then in 2004, the SEC passed a rule, Reg SHO, that did nothing of substance beyond drawing draw bull’s-eyes on firms already being manipulated: to do so, they danced within the outer limits of the Administrative Procedures Act, whose purpose is precisely the opposite of the use to which it was put by the SEC. Yet in April, 2005 the SEC explained that the rule they passed had grandfathered the problem “because the Commission was concerned about creating volatility where there were large pre-existing open positions” that until then they had insisted did not exist. Simultaneously, the SEC continued to claim that the problems in the settlement system were negligible and inadvertent, until in June 2005 their own economist, Lesli Boni, showed they were pervasive and deliberate. From 2005-2007 the SEC continued to insist that they were not significant, but fought tooth-and-nail to prevent being released to the public the data that would decide things one way or another. Then in 2008 the SEC suddenly considered it a massive problem requiring an unprecedented emergency regulation to stop it, but just for those Wall Street banks which had for years been enabling it against other publicly traded companies. Then while regulators in the rest of the modern world have spent 2009 -2011 figuring out how to fix holes in their settlement systems, the SEC has switched back to regularly scheduled Muzak on the subject.

The government and Wall Street lawyers who went along for this ride display a mentality best described in this passage from Orwell’s 1984:

“The power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them….To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth.”

But the greatest Truman Show weirdness comes from the rest of us, driving away, listening to the radio.