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    Washington Mutual: Price versus Failures-to-Deliver

    wamu Washington Mutual: Price versus Failures to Deliver

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    52 Responses to “Washington Mutual: Price versus Failures-to-Deliver”

    1. chrisbryan says:

      Withdrawals by customers ultimately sank WaMutu

      http://www.marketwatch.com/news/story/withdrawals-customers-ultimately-sank-wamu/story.aspx?guid={7F09D20B-7B91-48F1-98D6-E92F47C73FA7}&dist=hpts

      Falling shares prices from FTD’s not really mentioned in the story.

      • Andrew J. S. Cols Ohio says:

        If the FDIC insured these people, why would they need to withdrawal their money in the first place??? IMO, the run, if there truly was one, was one coordinated to coincides with the massive naked shorting of WAMUQ. They WERE literally under attack,…financial.

    2. Patchie says:

      You can only wonder whether those withdrawing their funds were also shorting the hell out of the stock as they did so. Clearly there is a pattern we have seen many times before – as a stock starts to fall the shares trading that create the fall don’t seem capable of settling.

    3. lenofus says:

      Ya think? You deepcapture guys are all wackos.

      Don’t you understand that it is the Constitutional right of Short and Distort guys to identify situations, and then use the press, UberCriminal Cox and his lackies, basically any tool at their disposal, legal and otherwise, to profit from their genius?

      Now, watch Wall St. cry as day trading, all shorting, margin, leverage, all get hacked by Pelosi and crew. This is the crime that keeps on giving. How about the city of Seattle? The home of WAMU! The headquarters. How many buisnesses, jobs, homes are gone.

      Tonight, tens of thousands of people have their stomachs in a tizzy, because they’ve lost the WM in their 401K’s, their health insurance (they can get cobra for 90 days for about five times what they’re paying now), and starting next week, they’ll be terminated. then, local restaurants, hardware stores, hair and nail salons, decorators, Bobo the Clown, …….you name it. Gone.

      Great. Just friggin’ great.

    4. PickledShark says:

      All the profits from bear raids soon to be tax free?

      http://time-blog.com/curious_capitalist/2008/09/the_republican_alternatives_to.html

      You’re right Patrick, Richard Shelby is such a gangsta, and apparently has some disciples in the hizzy of representatives.

    5. Carmela Soprano says:

      ……and that chart is only up to 5/2/2008?

      I assume Paulie Walnuts got a FOIA response.

    6. Judd Bagley says:

      Miss Soprano,
      The chart actually runs through Q2 of 2008, which is as far as the SEC’s fails data reaches.

    7. Patchie says:

      The data is through June. The last Date you see is not the last data point.

      Next data available will cover July, August, September and will be available in January.

    8. Stunned says:

      So where does the SEC’s ‘don’t short the financials’ lead us? When are they going to seriously start looking for the miscreants on the inside?

    9. Carmela Soprano says:

      I cannot believe that the SEC had the audacity to actually show you such data.

      Terrorism, nothing short of it!

      I will take AJ and Meadow with me to pray for the sacked souls of the criminal conspirators.

      Thank you Mr Bagley.

    10. Ted says:

      It was about the time this was passed that the DTCC was formed.

      http://www.opensecrets.org/news/2008/09/money-and-votes-aligned-in-con.html

    11. dr. d says:

      I just reviewed an article by a pro-naked short seller describing how a lot of these FTDs are associated with “clerical errors” associated with paper certificates (even though the DTCC tells us that 98% of the trades they clear are dealing with electronic book entries and not paper certificates). After 28 years of studying naked short selling frauds I’ve done a complete 180-degree flip flop in favor of rampant naked short selling abuses because as we can all clearly see in the WAMU chart of PPS vs FTDs WAMU clearly got “clerical errored” to death. I’ve seen the light!

    12. The L1 Ranger! says:

      “They” Seem to Have Their System Down (NSS By The Acquiring Institution of The Target Bank + FDIC/Paulson, Acquisition Deal-In-Hand) & Are Now, Trying To STEAL Wachovia!!!

      Where Does It STOP?

      I See NO END In Sight!

    13. Fred says:

      What’s the currentr status of the short selling rules? I thought they had required a firm pre-borrow and a firm T+3 delivery. No market maker exceptions. (Aside from the short sale ban on those 800+ firms.)

      Then I heard they may have backed away. What’s the story?

    14. Sean says:

      May some thing will become of this…
      I think its getting hot in the Kitchen, someday say FFIIRREEE!!!!

      DTCC gets subpoena

      Official: Cuomo expands short selling probe
      By MICHAEL GORMLEY, Associated Press Writer 13 minutes ago

      New York Attorney General Andrew Cuomo is broadening his investigation of short selling on Wall Street, according to a senior official in his office.

      Cuomo is turning to the massive credit-default swap market, which he believes may have been manipulated in order to give the impression that certain companies were in trouble.

      The official said Friday that Cuomo has subpoenaed information from providers of market data in what could be a huge probe into one of the factors contributing to volatility in the stock and credit markets. The official spoke on the condition of anonymity because the investigation hasn’t been announced.

      Cuomo believes the swap contracts may have been abused by short-sellers who spread negative rumors as a way to drive down a company’s share price.

      Credit default swaps protect an investor in the event a company defaults on their debt. Their price is a measure of a company’s soundness, so a higher price for the swap should be a signal of trouble with a company’s financial standing.

      Cuomo suspects short sellers used credit default contracts to make a company’s position appear worse than it actually was. That could help short-sellers profit from a decline in a company’s shares.

      In a short sale, an investor borrows shares of a company, usually from their broker, and then immediately sells them at their market price. If the share price subsequently falls, the investor buys back the shares at the lower price and pockets the difference.

      The federal government blamed massive short selling by hedge funds for contributing to the collapses of Lehman Brothers Holdings Inc., American International Group Inc. and other troubled companies.

      Big drops in share prices can be particularly damaging to financial companies by making them appear weak to lenders, clients and other participants in financial markets, as well as making it harder for them to raise capital when they need it. The Security and Exchange Commission’s temporary ban on short-selling gave a number of companies time to stabilize.

      The subpoenas this week went to trading information companies Markit Group Ltd., Depository Trust & Clearing Corp. and Bloomberg LP.

      Markit Vice President John Dooley declined comment Friday.

      Spokesmen for Depository Trust & Clearing Crop. and Bloomberg didn’t immediately respond to requests for comment on Friday.

      The senior official said Cuomo is looking at data on the transactions over the last several weeks involving American International Group Inc., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group and Washington Mutual Inc.

      Cuomo’s other Wall Street investigations include his probe this year into complaints about short sellers of stock and whether they engaged in a conspiracy or spread rumors and bad information to influence the stock prices of Lehman Brothers Holdings Inc., American International Group Inc., Goldman Sachs Group Inc., Morgan Stanley and other firms that have been hammered in the ongoing financial crisis.

      http://news.yahoo.com/s/ap/20080926/ap_on_bi_ge/cuomo_short_selling;_ylt=At2PqewhgWVX_VC4FS8RDlSs0NUE

    15. Something about Mary says:

      Re: I Hate To Say I Told You So, But…I Told You So….. By mhelburn on 9/26/2008 11:16 AM
      The securities naked shorts are huge, but the bond naked shorts are larger. This has to be addressed. Eliminating the mark to market accounting would do the equivalent of the bailout making the CDS liability much less. That still doesn’t address the poor quality of the bonds or the multiple CDS liabilities or the potential of the bonds having been counterfeited. Basically,we don’t know how much junk is in the market and how many counterfeit bonds are in the market.

      The unregulated derivatives market has parties in it who bought insurance they didn’t deserve. It was simply a way to drive the bonds down and profit enormously from it. The derivative liabilities were not accounted for properly. The CDS holders want to be paid off. If the writers of the CDS go bk, they are not going to get paid. If the bonds recover, the holders won’t get paid as much as they expected. This is a race between the Treasury (Paulson) and the FBI. The Treasury wants to get the bonds up in price before the FBI recognizes that the sellers have not been accounting for their liabilities.

      The prices could be readjusted up with an accounting change and accomplish similar results as the bailout. So why is Paulson opposed to this? The accounting costs would be similar for both.

      I conclude that this is to allow Wall Street the opportunity to get the cash and put it in hard assets. They will be secure as the bailout is inflationary and makes the ultimate value of the bonds less. The Fed needs to increase interest rates to get things back in line. Unfortunately, the economy will not take that well.

    16. Something about Mary says:

      So, let me get this straight. Bondholders can invest in AAA bonds and the brokerages don’t actually bother putting the money into those bonds?

      What does it mean for a bond to fail to deliver. Think about it. It’s CRIMINAL FRAUD.

      They need to spend more time ARRESTING and less time BAILING.

      “DTCC’s Fixed Income Clearing Corporation (FICC), which
      clears trades of both U.S. government and mortgage-backed
      securities, handled record trading volume during 2007.”

      “If a participant fails to fulfill its settlement obligations to NSCC
      and/or FICC and these subsidiaries cease to act on behalf of the
      participant, that participant’s guaranteed security receive and deliver
      obligations would be liquidated and that defaulting participant’s
      margin and mark-to-market deposits, including participant fund
      deposits, would be applied to satisfy any outstanding obligation
      and/or loss.”

    17. skoov says:

      A human’s greatest pleasure is a sigh of relief

    18. rick says:

      Patrick,
      The Wamu fails (as of July-August) are only 0.5% of the 1.7 billion outstanding shares. Doubling for September and dividing by 0.2 (ex-clearing) brings us to 5%.

      How is that significant?

    19. DiligenceOrWillfulMisconduct says:

      Rick, How about CNS?

    20. Rick,

      You should not compare it with the “outstanding shares”. You should compare it with the volume. When you do that, and recognize that this may well not be the full number (due to ex-clearing or other arrangements), you can see that it does become significant.

      The NSS-denial camp has argued:
      1) It is not going on;
      2) If it is going on, it is too minimal to do any damage;
      3) If we are forced to stop doing the thing that is not happening, the cessation of the thing that is not happening will create too much volatility.

      Patrick

    21. patchie says:

      Rick there is much more than meets the eyes here.

      1. Shares Outstanding is vastly different than shares in float.
      2. These are CNS fails and reflect only short sales that fail after 3-days. This does not included the total short selling taking including, and more specifically, the day trade short sale that never settles.
      3. With institutions holding this stock long and no reported sales of those holdings, what does that imply about the trading market during the collapse? Insiders held 25% and Institutions 65%.

      I agree with Patrick on his Item 3. If this is such a small issue, why is the hedge fund community fighting so hard to not clean it up?

      I have likewise been pounding the pavement on another myth out there – Short-sellers don’t kill companies. Managers do.

      Can the short sellers provide any concrete evidence of this? Jim Chanos uses enron all teh time as his justification in targeting companies. To prove this concept above, Chanos should prove details of all companies he targeted, when, whether he gained an SEC investigation into his allegations, and the resultant outcomes. Afterall, I too can be a genius if all I give you for insight are my successes and bury my failures.

    22. JASON says:

      I feel people in the know lack imagination regarding fractional reserve banking, and how this principle has carried over to financial markets as naked short selling [creating out of nothing].

      Money creation should be transparent and published and taught in school; like every naked short sell, every loan is newly created money, expanding our money supply in an unreported way. Ron Paul says M3 it growing at %18, i say with the nearly 700trillion dollar CDS and futures market, it’s really much more than this.

      SOLUTIONS; If every bank currently creates $12 for every dollar deposited in the Federal Reserve, why not nationalize the federal reserve, cut the 12 in thirds, and give $4 to county government, and $4 to state government=money creation shared utilizing the 8%fractional reserve banking system that we currently have. This could abolish taxes, as now we have taxes and inflation.

    23. Marion Polk says:

      Paulson’s Great Depression:

      It is difficult to believe that Paulson is not intentionally destroying the world economy, since his company, Goldman Sachs has been so intimately involved in setting the stage for this fiasco.

      Goldman Sachs was involved in many sub-prime securitizations, and then was instrumental in setting up the ABX index, which Goldman then shorted to death after selling the index to its clients. By shorting the ABX index, Goldman not only made huge profits, but also eliminated all financing for real estate securities by spreading the notion that they had no resale value, because the value “indicated” by the ABX index was so low. The notion of “toxic securities” was sold to the world by Goldman and their confederates. Once new real estate lending was substantially restricted, a broad decline in real estate prices was a certainty, and recently adopted “mark-to-market” accounting rules forced lenders to report balance sheet losses even for loans that were current.

      Goldman also helped develop and sell complex securities, that have magnified the extent of the damage done. Collateralized debt obligations and credit default swaps can magnify any actual loss, since there are many more credit default swaps sold than actual loans made. A $1 actual loan loss can become $10 or more of losses to one side of the swap transaction, and $10 or more of gain to the other side of the transaction.

      Paulson has made the financial crisis much worse by his publicly stated intention to “punish” some companies. While Bear Stearns was “bailed out”, Lehman was allowed to fail. Fannie and Freddie were “rescued” in a way that arbitrarily removed $10 to $15 billion of capital from banks that had invested in the preferred stock, which then reduced those banks’ lending capacity by $100 billion, making the “credit crisis” much more severe than it was before the “rescue”. Instead of stopping a run on Washington Mutual by providing cash loans, Washington Mutual was unnecessarily liquidated, to demonstrate the urgency to authorize $700 billion to Paulson’s Treasury.

      Of course because of credit default swaps sold around the world, financial institutions’ losses on the Washington Mutual liquidation are vastly larger than the cost of keeping Washington Mutual open as an independent entity.

      Now we come to the $700 billion. If this is used SOLELY to purchase whole loans, then the institutions now holding those loans do not experience losses that get magnified by credit default securities, and the government is in a position to rework the loans with affordable payment terms, so that people keep their homes, and the government recovers its entire investment. If this money is used to purchase “downstream securities”, such as securitization interests, CDOs, and credit default swaps, then vastly more money is required, and homeowners still lose their homes.

      Why would Paulson seek the authority to buy “downstream securities”? Could it be that Goldman and its confederates hold these securities, and make vastly more money at taxpayer expense by selling these securities than by allowing people to remain in their homes, eliminating the defaults that make these credit default swaps so valuable to one side of the contract, and so costly to the other side of the contract, the US taxpayer, if Paulson gets his way.

    24. dr. d says:

      Now that we have the world’s attention I guess it’s time to educate the masses as to who stole their retirement funds for whatever consolation that brings.

      A LITTLE BIT ABOUT CLEARANCE AND SETTLEMENT SYSTEMS AND THE ROLE OF “CENTRAL COUNTERPARTIES” OR “CCPs”

      When many hundreds of brokerage firms are trading securities amongst themselves there is a dire need for the use of a “central counterparty” to intermediate these trades. In the absence of a “CCP” the individual brokerage firms would have to constantly assess the “counterparty risk” of a trading partner’s defaulting on its payment or delivery obligations. The use of a CCP allows the issuance of a “trade guarantee” that implies to the investing world that it is safe to trade securities in this particular clearance and settlement system and that which you purchase will indeed be delivered in a timely manner.

      There is, however, a catch to these greatly enhanced efficiencies. The risks within the entire system are “concentrated” onto the shoulders of this CCP (the U.S.’s NSCC subdivision of the DTCC) such that any conflicts of interests between the corporations whose shares are being traded, the investors taking equity positions in these “issuers” and the intermediaries within the clearance and settlement system must be removed from the system in order for it to function effectively. The CCP has to fulfill its newly acquired fiduciary duties of care to manage these “concentrated risks” which it voluntarily took off of the shoulders of its individual participants and accepted onto its own shoulders. The primary risk to be managed is making sure that the seller of securities delivers that which it sells in a timely manner (due to the incredibly damaging nature of readily sellable but mere “securities entitlements/IOUs/”placeholder securities”) and the buyer of the securities pays for that which it purchased. This is referred to a “Delivery versus payment” and all of the worldwide authorities on clearance and settlement systems from the Bank for International Settlements or “BIS” to the “Committee on Payment and Settlement Systems Technical Committee of the International Organization of Securities Commissions” (IOSCO) agree that “Delivery versus payment” forms the foundation for any clearance and settlement system and that the seller of securities should not gain access to the funds of the buyer until “delivery in good form” is achieved.

      The following quote is from this “Committee on Payment and Settlement Systems Technical Committee of the International Organization of Securities Commissions”:

      “CCPs occupy an important place in securities settlement systems (SSSs). A CCP interposes itself between counterparties to financial transactions, becoming the buyer to the seller and the seller to the
      buyer. A well designed CCP with appropriate risk management arrangements reduces the risks faced by SSS participants and contributes to the goal of financial stability. (Comment: Note that financial stability is the result of implementing “appropriate risk management arrangements” and the inference that the lack of appropriate risk management arrangements regarding delivery and payment obligations might predictably lead to financial instability.) CCPs have long been used by derivatives exchanges and a few securities exchanges. In recent years, they have been introduced into many more securities markets, including cash markets and over-the-counter markets. Although a CCP has the potential to reduce risks to market participants significantly, it also concentrates risks and responsibilities for risk management. (Comment: Onto the shoulders of the CCP). Therefore, the effectiveness of a CCP’s risk control and the adequacy of its financial resources are critical aspects of the infrastructure of the markets it serves.”

      1.2 A CCP has the potential to reduce significantly risks to market participants by imposing more
      robust risk controls on all participants (Comment: regarding delivery and payment obligations) and, in many cases, by achieving multilateral netting of trades. It also tends to enhance the liquidity of the markets it serves, because it tends to reduce risks to participants and, in many cases, because it facilitates anonymous trading. However, a CCP also
      concentrates risks and responsibility for risk management in the CCP. Consequently the effectiveness
      of a CCP’s risk controls and the adequacy of its financial resources are critical aspects of the
      infrastructure of the markets it serves.
      1.3 A risk management failure by a CCP has the potential to disrupt the markets it serves and
      also other components of the settlement systems for instruments traded in those markets. The
      disruptions may spill over to payment systems and to other settlement systems. Because of the
      potential for disruptions to securities and derivatives markets and to payment and settlement systems,
      securities regulators and central banks have a strong interest in CCP risk management.

      SOME QUESTIONS THAT ARISE:

      1) What might occur if the DTCC as the CCP in the U.S. clearance and settlement system chose not to base its system on DVP and chose not to impose “robust risk controls on all participants”?
      2) What might occur if the DTCC acting as the CCP took the risks off of the shoulders of its participants and refused to manage these now “concentrated risks” it assumed on their behalf because it was not in the “financial interests” of its owners/participants/bosses?
      3) What if the “securities regulators” and the central bank cited above did not show “a strong interest in CCP risk management.” How might this affect the aforementioned “financial stability”.
      4) What is the value of the implied “Trade guarantee” advertised to investors when the CCP absolutely refuses to mandate the delivery of that which was sold before the sellers of nonexistent shares are granted access to the investor’s funds?
      5) Has the “Trade guarantee” somehow morphed into a guarantee to “eventually” make sure that what is purchased gets delivered (unless the untimely demise of the corporation whose shares aren’t getting delivered occurs in the meanwhile)?
      6) How does “guaranteeing” that a trade will “eventually” settle align with the DTCC’s mandate to “promptly settle” all trades?
      7) How does the refusal to provide demanded for paper-certificated shares in a timely manner to an investor align with the concept of “prompt settlement” and a “trade guarantee”?
      8) Is not the only modality to provide “risk management” when an abusive DTCC participant accesses the loophole provided by the DTCC management and absolutely refuses to deliver that which he sold in a timely manner to buy-in that delivery failure once it becomes obvious that the seller never intended to deliver that which it sold? Would this not vastly decrease the SYSTEMIC RISK incurred by all U.S. citizens? Would not any untoward side effects like “short squeezes” only selectively affect those that refused to deliver that which they sold? Would this not provide the heretofore missing “meaningful deterrence” necessary to end this crime wave? Shouldn’t the “Risk” taken off of the shoulders of abusive DTCC participants and assumed by the DTCC proper be placed back onto the shoulders of those refusing to deliver that which they sold in an effort to not only mitigate SYSTEMIC RISK incurred by all U.S. citizens but also provide a detectable level of deterrence to the perpetration of these frauds?
      9) Would not facilitating the accumulation of astronomic levels of delivery failures greatly increase the SYSTEMIC RISK implications incurred by all U.S. citizens?
      10) Would not grossly enhancing SYSTEMIC RISK issues be 180-degrees antipodal to the mandate to impose “robust risk controls on all participants especially after the risks were intentionally “concentrated” onto the shoulders of the CCP as per design?

      The DTCC that administers the clearance and settlement system in the U.S. has willfully strayed from this worldwide accepted foundational concept involving “DVP” and created a gigantic loophole for those of its abusive participants that choose to access it by only mandating that the seller of securities collateralize its delivery failures in a daily marked to market manner in order to gain access to the funds of the purchasers of the “phantom shares” they choose to sell. Further the DTCC management has clearly refused to enact the “risk management” protocols after lifting these burdens from its participants.

      Note that the provision of “appropriate risk management arrangements” is but one of 15 (F-I-F-T-E-E-N) mandates and duties assumed by the DTCC that individually empower the DTCC to buy-in the archaic delivery failures of its abusive participants. Yet to this day as our banking system literally crumbles partially from the abusive naked short selling of the shares of banks caught against the ropes the DTCC management stands with their arms folded while proffering that it is “powerless” to buy-in the delivery failures of its abusive participants.

      CCPs are necessary but they can easily become hijacked by the financial interests of the owners and administrators of the CCP with a vastly superior knowledge of , access to and visibility of the clearance and settlement system they have been entrusted to administer.

    25. Fred says:

      Patchie — Please explain the “day trade short sale that never settles”, which you mention above. Do you mean a short sale that is bought back the same day? Is that really a problem?

      Thanks

    26. dr. d says:

      Fred, there’s 2 types of attacks that occur that get very little attention. The first is the “intra-day” attack wherein the naked short selling is done in the morning and covering is done by the close. This is usually done when the crooks see a stop loss order that they want to trigger to induce some knee jerk panic selling. It’s referred to as “shaking the tree” to get the “loose apples” or impressionable investors to panic and sell to circumvent a large loss. The second is the “intra-settlement cycle” attack wherein the attack might be on trade date or T+0, T+1 or T+2 and the cover is done before the close of biz on T+3 perhaps on a “cash” basis wherein the settlement date is the trade date. There is an enormous amount of time within which to induce panic selling between the morning of T+0 and the close of T+3.

    27. jeremy says:

      I think this conversation is fascinating–I work as a computer security manager/analyst, and the notion that the types of attacks you’re describing dr. d are not immediately mitigated (by reg authorities, etc.) makes my head spin. In network security, even in a friendly situation you still assume a hostile situation, and trust no one. The fact that day long attack windows, let alone three day attack windows for manipulation exist astounds me. Is it really as simple as everyone on the inside is on the take? If i designed an application with that level of being gamed, I’d be fired (and a pariah) in a heartbeat.

    28. kd says:

      “Now that we have the world’s attention I guess it’s time to educate the masses”

      dr. d,

      I am a afraid that you don’t have the world’s ear. As the crisis is happening right before an election, everyone is more eager to frame the issue as the fault of their opposition than they are in solving the problem.

      I suspect that the people who are engaged in manipulative trading practices cross the political spectrum. Deep investigative reporting will find these wanks giving donations to both parties.

      The issue doesn’t fit in the shemes of journalists who want to elevate issues that just attack their opponents. This is especially since many journalists are in cahoots with the manipulative traders.

    29. Fred says:

      dr. d

      Thanks for the explanation. I guess an enforceable requirement for a pre-borrow would stop this type of attack. Right?

      But what would stop using the same shares for multiple shorts? That is, S1 borrows 100 shs XYZ and sells to S2, who is on margin. Thes S3 borrows the same 100 shs from S2 and sells them to S4, etc. This seems to be actually within the current rules. You can have many “longs” against the same shares.

    30. Fred says:

      jeremy

      … is absolutely right. This is a gaping hole that anyone can see. I have also worked in IT and networking. Our job is to think like the attacker and close out the possibility.

      It would be simple to devise rules to stop it.

    31. Fred says:

      I heard that Russia lifted their ban on short selling on Friday. I also saw my favorite stock, which has been severely naked shorted on NASDAQ, take a serious dive after 3 straight up days.

      Could this be related to the Russians shorting again? How does that work?

    32. Sean says:

      Goldman …anyone?

      Conflict of interest for Goldman?

      Big story coming in the Sunday NY Times (hmmm). Check out the info that the head of Goldman Sachs was in meetings with bankers, regulators and Paulson when they agreed to dole out $85B to A.I.G. since Goldman was heavily exposed to AIG losses.

      But rest assured. The Goldman head, Lloyd Blankfein, wasn’t there for the benefit of his firm. He was there to look out for the good of the nation. He said so. So trust him.

      How long until our coins are changed to “In Goldman We Trust.”

      September 28, 2008
      Behind Biggest Insurer’s Crisis, a Blind Eye to a Web of Risk
      By GRETCHEN MORGENSON
      “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

      — Joseph J. Cassano, a former A.I.G. executive, August 2007

      Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

      As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

      The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

      Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

      Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

      Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

      A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

      Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

      Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

      Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

      http://www.nytimes.com/2008/09/28/business/28melt.html?_r=1&pagewanted=all

    33. Sean says:

      Patchie could you please finish this sentence for me as it was not completed in the stockgate today article on your website..

      “Charlie clearly is no Mike Wallace. Not sure he is even a ????? ”

      Thanks in advance.

    34. rick says:

      “With institutions holding this stock long and no reported sales of those holdings, what does that imply about the trading market during the collapse? Insiders held 25% and Institutions 65%.”

      The FTD’s would then be not 5% – but 50%.
      Thanks, for the explanation, guys.

    35. Fred says:

      Financial terrorism?

      I am nervous about the mountain of cash that has left the equities markets in the past few weeks. Who has it? I am afraid it is concentrated in the control of a few not-so-nice people. If we don’t close the hole we create by allowing phantom shares to flood the markets, the carnage can just continue. Who would be next? Ford? United Airlines? What about GE?

      It’s as if there is a nuclear weapon aimed at us but we don’t know where it is and we don’t have any defense against it.

      Sort of comparable to leaving our entire navy confined in a small harbor in the Pacific where they can be easily attacked.

    36. Jeremiah 9:24 says:

      Sean,

      May I suggest that Mr. Patch would approve substituting “man” for “?????”. Charlie wears a flowered skirt when his hedge fund masters come calling.

    37. Sean says:

      LOL!!Thanks Jeremiah 9:24 I can’t stop laughing. I would have never guessed but it fits!!

    38. Lawrence says:

      I believe Mr. Byrne is one of the Greatest American Hero’s EVER. I believe very strongly in his efforts of giving all law bidding Americans a Future.
      I have submitted a story to CNN iReports on the matter myself. Pleasr feel free to view and pass it on.

      http://www.ireports.com/docs/DOC-85097

      ps..I am writing in Patrick Byrne & Lou Dobbs as my picks for Pres & Vice Pres in November.

    39. dr. d says:

      Jeremy, the problem is that there are indeed “legitimate” reasons why delivery cannot be made by T+3 and the system needs to accommodate these. The crooks just paint their “illegitimate/intentional” delivery failures as being of a “legitimate” nature. The DTCC holds that all delivery failures are of a “legitimate” nature until proven otherwise and the “proof” is not accessible to the investing public because of theoretical “privacy issues” associated with “proprietary trading methodologies” of hedge funds and market makers. Recall in the IOSCO article cited above how CCP’s provide “anonymity” which is good in one sense but bad in another since it can mask fraudulent behavior. From the DTCC’s now famous 1/27/06 press release:
      ”DTCC subsidiaries clear and settle trades. Short selling and naked short selling are trading strategies regulated by the marketplaces and the SEC. DTCC is involved after a trade is completed at the marketplace. DTCC does not have regulatory powers or regulatory responsibility over trading or to forcing the completion of trades that fail. As the SEC has stated, fails can be the result of a wide range of factors.” Thus the goal of the crooks is to get that “illegitimate/intentional” delivery failure into the DTCC where they can with 100% certainty rely on the DTCC management to proffer that they are “powerless” to do anything about it i.e. “powerless” to buy it in. But a “buy-in” is the only solution available when the selling party absolutely refuses to deliver that which it sold. The crooks will open up the champagne bottles on T+4 because that delivery failure is good to go for perpetuity. There are no monthly or annual reconciliations of delivery failures at the DTCC. Here’s where the smoke and mirrors kicks in. Technically that unfulfilled delivery obligation is owed to the CCP that intermediated the trade i.e. the NSCC. When the “surrogate” creditor of this unfulfilled delivery obligation claims to be “powerless” to force the seller to deliver that which it sold then you’ve got one of the most brilliantly designed frauds imaginable because this “surrogate creditor” (NSCC management)is the employee of the party refusing to deliver that which it sold. The NSCC management’s role is to play the “powerless straw man” that acts as the door man to allow the delivery failure into the safe confines of the NSCC”s “C” sub-account where they are hidden and nurtured. In the DTCC quotation cited above the DTCC claims that they get involved AFTER the trade is completed. That’s not true. The “settlement” of the trade i.e. delivery versus payment represents the completion of a trade. The DTCC’s mandate is to “promptly settle” all trades. These trades don’t legally “settle”. The “trade guarantee” of the DTCC is bogus. The DTCC’s assertion that: “As the SEC has stated, fails can be the result of a wide range of factors” is a red herring. Truly “legitimate” delivery failures are typically of a 2 or 3 day duration and are not the issue. In reality the NSCC has all of the power in the world to buy-in delivery failures once it becomes obvious that their abusive “participant” that sold the shares has no intention whatsoever in delivering that which it sold. In the words of Dr. Rob Shapiro the former Undersecretary of Commerce the DTCC willfully “chooses” not to do these buy-ins because they are not in the financial interests of those that own and administer the DTCC.

    40. Fred says:

      From what you say, it seems difficult to control fails in any pre-emptive way by jiggling the rules on up-tic, pre-borrow, T+3, etc. Maybe the thing to do would be to just install a circuit breaker. Establish a reliable way to count the number of fails, and enforce a limit on that. If the limit is reached, all short selling is banned until the fails are all settled and delivered.

      One possibility is that the number of fails can not exceed x% of the average volume for the trailing 30 trading days.

    41. AMG says:

      The Conspiracy

      . . . once main street realizes that the oversight was nothing more than friends allowing friends to operate as they see fit challenges to other related entities, transaction, clearing and regulatory based will come under fire. The question remains as to how the illegal gains, once expunged, will be returned to those harmed.

      Wall Street is about to be exposed.

    42. Reporter101 says:

      Can almost safely bet we’ll never get to see the hedges short sale records in two weeks.

      Hedge Funds Prepare to Reveal Short Positions
      Topics:Henry Paulson | Banking
      Sectors:Financial Services | Banks
      Companies:Morgan Stanley | JPMorgan Chase and Co | Lehman Brothers Holdings Inc
      By Reuters | 28 Sep 2008 | 05:50 PM ET
      Font size:

      Hedge-fund managers are reluctantly preparing to disclose their short positions to U.S. regulators Monday, a move set to give a rare public glimpse into their secretive trading strategies two weeks later.

      For shareholders who have blamed short sellers for driving down company stocks, it will be a chance to see who is targeting their firm.

      It is also an experiment by U.S. securities regulators, putting short sellers briefly on a similar footing to large investors who accumulate stocks and are required to regularly disclose their positions publicly.

      Under a temporary Securities and Exchange Commission order, big money managers will have to reveal the number and value of securities sold short each day last week.

      The disclosures are part of a series of measures the SEC has undertaken to crack down on market manipulation with an eye to calming markets rocked by a series of bank failures and fears the credit crisis will worsen.
      But hedge funds and short sellers have cried foul and one has likened the disclosures to forcing Coca-Cola Co to reveal its secret formula to its competitors.

      Short sellers fear that once their positions are revealed to the public, other investors will copy their positions or reverse engineer their proprietary trading strategies.

      “Let’s suppose a quant fund, another class of hedge funds has a large short position based on a computer model or algorithm, investors or traders could try to artificially squeeze the quant fund by buying what they are short,” said Doug Kass, a short-seller who is founder and president of hedge fund Seabreeze Partners Management.

      Short sellers, who sell borrowed stock in hopes its price will fall, have been accused of driving down stocks in major financial firms like HBOS, Lehman Brothers and Bear Stearns.

      Lehman filed for bankruptcy protection earlier in September. Bear Stearns was sold to JPMorgan Chase [JPM 48.24 4.78 (+11%) ] in an emergency sale brokered in March by U.S. officials.

      The SEC and other regulators in the United Kingdom, Germany, Canada and Australia has imposed temporary bans on the shorting of financial stocks.

      The U.K.’s Financial Services Authority has also imposed a similar disclosure rule and is requiring investors with an existing short position above 0.25 percent of a financial company’s share capital to declare the size of their holding every day.

      The SEC will keeps its information private for two weeks.
      After that, the information will be disclose to the public on via online Edgar filing system.

      The Washington D.C.-based hedge fund lobby group, the Managed Funds Association, has urged the SEC to amend the order and keep the information private.

      It is unclear whether the SEC will amend the order.

      However, the agency is expected to consider permanent rules requiring short interest disclosure.

      The SEC is requiring money managers to file a comprehensive form that includes their short position at the beginning of the day, the number of securities sold short, the value of the securities sold short and the short position at the end of the day.

      The form also requires money managers to disclose their largest intraday short position and the time of day of the largest intraday short position.

      “The degree of difficulty in completing the new form is related to the degree of short trading activity of each manager and the level of sophistication the manager possesses in capturing the required information,” said David Tittsworth, executive director of the Investment Adviser Association, which represents about 500 firms that collectively manage about $9 trillion in assets.

      Travis Larson, vice president with Wall Street lobby group the Securities Industry and Financial Markets Association, said most firms will be ready by Monday. “Everyone recognizes it will be a lot of work between now and then,” he said late on Friday.

      http://www.cnbc.com/id/26931679

    43. patchie says:

      Agressive day trading short sales: short sellers such as James Chanos wil execute aggressive short sales intent on creating market chaos in a fragile market. They will execute short sales in volume and use the same locate multiple times through multiple brokers to overload the maret with sales. they can not cover the shorts sold with the locates used but never intend to either. The rapid trading moves a market and then, through program trading, close out the trades same day thus cancelling the settlement under CNS. The fraud is that the same share located is used multiple times through the loophole between sale and settlement.

    44. AMG says:

      Patchie,

      That is but one of the techniques used by Chanos and others with respect to their illegal practices of short selling. Any claims against the several potential defendants in forward looking litigation will require a matching of counterparties proving, beyond a shadow of a doubt, a conspiracy which, if illustrated correctly will meet the standards of a RICO claim. The hedge funds conspired together under the watchful eye of the prime brokers who made more money from these clients over the period in question than ever before and hopefully after.

      Case law in this area goes back as far as Ross v. Bolton (1988) which involved our dear departed friend Bear Stearns. The Second Circuit, often a proponent of Wall Street found against the plaintiff in this matter. The only case I remember that trumped the standards held in Ross v. Bolton related to, again, Bear Stearns with respect to their association with A.R. Baron. They had no possible defense and settled the matter for I believe about $37 million if I remember correctly.

      These are the levels that must be reached to garner a decision for those defrauded. With the underlying body of work that Deep Capture and its associated parties have unearthed, it is my opinion that a day of reckoning is on the horizon for Wall Street.

      Main Street needs to take back the street but the information necessary to get the cases to court and to prosecute remains in the hands and control of the very market participants Main Street seeks to catch. They controlled the trades and control the people who are the depositories of the data as well as those who allegedly were responsible for regulating the industry. Talk about letting the wolf into the hen house, these people held the keys yet simultaneously remained blind, deaf and dumb to the harms created therein. The release of the short interest numbers from the biggest hedge funds will make the task a little easier but you can count on Wall Street participants to fight the release of any information that ties together the conspiracy that has controlled the street for years.

    45. Loophole says:

      Dr. D, when the DTCC says they can’t do something, that’s because they are a holding company.

      Their subsidiaries, the NSCC and DTC can definitely buy in rogues – it’s right in their filings with the BIS (google it), but they can still factually say that the DTCC can’t buy in to mislead you.

      These crooks use words very precisely, so you have to pay attention and follow what shell the pea is under.

    46. AMG says:

      House Rejects “Wall Street” Bailout . . .

      In today’s new world, that makes the score:

      Main Street – 1
      Wall Street – 0

      . . . and we’re just in the first inning.

    47. Jim says:

      One easy solution that I still do not understand is why all trades (covering the shorts) do not have to be completed one the bankrupcy is announced. This is a material point that would make it dangerous to short by the MM’s. I still hold my WAMU shares. At this point, I am not even sure if I ever owned them, as no one will ever have to acoount for them.

      • Bill says:

        Jim. Me and you both. It seems the system is set up for the thieving ‘nakeds’ to cheat us long term investors after telling us how great the market is. They should be exposed and the law needs to be crystal as well as the penalties for this crap.

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