After years of intermittently ignoring and whitewashing one of history’s biggest financial swindles, the Wall Street Journal today, for the first time, published some basic truths about the crime: “Illegitimate naked short selling is different from [legal short-selling]…this kind of manipulative activity can have drastic consequences…Eliminating the prospect of naked short selling will help assure investors that… when the market declines it is not because of unseen manipulators and `distort and short’ artists.”
Unfortunately, these words were not written by some enterprising journalist seeking to nail the criminal hedge funds who have manufactured billions of phantom shares (shares sold “naked” because they don’t exist) while using other dubious tactics – such as publishing false “independent” financial research, working with a crooked law firm (the recently indicted Milberg, Weiss) to saddle companies with bogus class action lawsuits, hiring thugs and private investigators to harass corporate executives, orchestrating dead-end government investigations, employing armies of basement-dwelling creeps to bash companies and smear reputations on Internet message boards, and feeding distorted and maliciously false information to compliant or naïve journalists – all part of a massive, collusive effort to destroy public companies for profit.
No, sadly for anyone who cares about the state of our financial markets and media, those crimes go mostly unreported. And as for the few basic truths that appeared in today’s Wall Street Journal, they were not products of any journalistic effort. They were, rather, the words of SEC Chairman Christopher Cox, who managed (no doubt, with some difficulty) to convince the Journal to publish an op-ed wherein he explains why he had to issue an “emergency order” to prevent abusive short-selling from crashing the American financial system.
Why is this not front page news? Why is the Journal not clamoring for the criminals to be put away?
We’ve noted that The Wall Street Journal’s “Money & Investing” section, which covers the hedge fund beat, was once under the control of editor David Kansas, who was known for unleashing reporters on companies targeted by his long-time short-selling friends, while ignoring, with seemingly purposeful intent, all evidence suggesting that his friends were up to no good. Kansas, I believe, was the principal reason why the Journal long held back from investigating the naked short selling scandal.
But Kansas and some of his comrades have left the Journal, and I believe most of the paper’s other reporters are well-intentioned. It’s just that this is a complicated story – it can take time to wade through the grim data, to see for yourself the rapes in progress, and to come to terms with the ugly dimensions of the problem. It’s all the harder when you’re having smoke blown in your face by people whom, for whatever mistaken reasons, you have come to respect.
It is no coincidence that Jim Chanos, manager of hedge fund Kynikos Associates, was elected chairman of the Coalition of Private Investment Companies, the hedge fund lobbying and PR outfit. Chanos is the guy who helped Fortune Magazine’s Bethany McLean break the Enron story. Ever since, he’s been the David Koresh of media, convincing a cohort of zombified journalists that he can bestow blessed immortality — the next big scoop. The reporters swoon to this guru’s sermons, even when they sense that there is something untrue – even when, Waco-like, the authorities are closing in and a gruesome end is nigh.
Chanos has been busy dishing out the usual proselytizations: short-selling is good for the markets, short-sellers help root out bad companies like Enron, short-sellers are victims – nice fellows under attack by crazies and people who don’t like free markets. “We’re on the side of the angels,” Chanos proclaimed yesterday, clearly hoping that the media’s cries of “Amen!” would drown out the rumblings of a government that finally seems to be waking up to the notion that while there is nothing wrong with short-sellers, and free markets are swell, there is something not so good, and not so free, about a market getting pummeled by peddlers of fake stock and false information.
Chanos and his followers should throw in the towel. Contrary to our earlier concerns, it seems like the SEC is blowing off the hedge fund lobby and its media followers. Short-sellers of stocks in 19 financial companies have actually been forced to borrow real shares — not just locate them; not just say “yeah, yeah, my buddy in Staten Island’s got ‘em in his drawer,” but have real shares in hand before selling them. Even better, Cox said today that he intends to expand the enforcement across the entire market. We’ll see if he follows through.
Perhaps to avoid panic, the SEC Chairman has said that his emergency order was a preventive step, and was not meant to suggest that naked short-selling of the financial stocks was already rampant. But we know from SEC data that more than $6 billion worth of shares go undelivered every day. We know further that the phantom stock has been targeted at specific companies, including Bear Stearns, which saw as many as 13 million shares fail to deliver in its final days. Much more naked shorting takes place “ex-clearing” – for which no public data exists.
The immediate results of the SEC’s emergency order speak to just how big the ex-clearing problem is. Since Monday, when the order took effect, short-selling of the affected companies has decreased by 70 percent – and 90 percent in the cases of Fannie Mae and Freddie Mac. It is safe to say that a lot of that reduction is attributable to hedge funds that were previously selling shares without borrowing them. Now extrapolate to the entire market. We know that short-sales make up around 30 percent of total market volume. If we knock some points off that 70 percent number and decide that, say, half of short-selling has been naked – then 15% of total market volume on any given day could be phantom stock.
That is an admittedly rough number. The fact is, we just don’t know the exact figure. But as evidence for the hypothesis that the number is, in fact, even larger, consider that Chanos and friends insist that the SEC’s restrictions on illegitimate naked short selling will seriously reduce “liquidity” in the markets. Some Wall Street lobbyists have even suggested to the SEC that the New York Stock Exchange would have to temporarily shut its doors if the SEC were to enforce its emergency order market-wide.
In other words, people like Chanos (who has denied that he has ever participated in naked short selling and has previously expressed surprise that it even occurs) is now saying that the practice is so widespread that the markets cannot function without it. The market’s “liquidity” depends on illegitimate naked short selling. Without the phantom stock which predominates in our markets, nobody would know what to do–prices would go haywire, there’d be total chaos.
All of which is reminiscent of the SEC’s earlier weird statements that naked short selling occurs rarely, but there’s so much naked short selling that enforcing rules against it might “create excess market volatility.”
If you’re a journalist, and you’re still confused, just wrap your head around this: even the hedge funds now admit that a very significant chunk of the stock that they sell cannot be readily borrowed. It cannot be borrowed, because it does not exist. This massive supply of phantom stock is what is setting prices in our supposedly “free market.”
It is a recipe for financial meltdown It is the scandal of a lifetime. And the financial media fiddles.