Unsettled Trades: Jobs Destroyed, Firms Ruined, Pensions Looted

The proliferation of unsettled trades in a firm’s stock disrupts the market’s ability to find the true market-clearing price for that stock. As a result, a troubled firm that comes under such an attack will be prevented from selling any stock into the capital market in order to raise capital to fund its ongoing operations. Similarly, healthy firms cannot sell additional stock to raise capital to fund their expansion. In both cases the parties engaged in this crime will shelter themselves under ideology that runs, “These are crappy companies that do not deserve to make it!” They forget that in a free market operating under the rule of law, such questions are to be answered by the market, not by the market with one side of it being ale to manipulate prices.

Convincing the reader of this can be accomplished through intellectual argument, which I will provide in due course in this section.

For now, however, I would like to proceed by first offering links to mainstream journalism that describes how this practice can achieve its evil effects. I am arguing, I know, the economic equivalent of saying, “Martians walk among us,” and I have learned that it is easier to do so if the reader first sees that other capable, serious, mainstream publications have glimpsed the Martians too, before I try to expose their plot. So first, please consult these sources:

• This article from Bloomberg Magazine.
• This Bloomberg Special Report (nominated for an Emmy for long-form investigative journalism)
• This Wall Street Journal article from summer, 2007 .

Next will come a series of case studies about various well-known firms that have been affected by failures-to-deliver in their stocks (“failures to deliver” being, as the reader knows by now, the residue of naked short selling).
For the last part of this chapter, I will explain why it has taken so long for the finance guys to understand this problem.