The Short Seller Myth of "Market Efficiency"

By the way, why am I wasting my time with this? Who cares about these screwball statistics?The SEC is talking about protecting companies from getting clobbered by illegal market manipulation. The SEC is talking about stopping a crime and upholding the basic tenet of capitalism and correct human conduct that says that someone who sells something had darn well better deliver it.

In light of the news today that the SEC might not permanently apply its naked short selling “emergency order” to the entire market, and media reports that a study by Professor Arturo Bris is influencing this decision, we republish the following Deep Capture installment, which shows that Professor Bris quite blatantly fudged his numbers.

“The SEC’s public data say that on any given day over the first three months of this year, there were more than one billion shares that had been sold and failed to deliver (within the allotted 3 days) and that 70% of those fails were concentrated in just 100 companies. That’s a real red flag for the SEC that naked short selling is very widespread, is highly concentrated, and consequently might be being used today to manipulate the price of scores of stocks.”

-Former Deputy Secretary of Commerce Robert Shapiro on CNBC

It’s great that CNBC allowed someone to report this news. It seems pretty interesting – criminals manufacturing piles of phantom stock in order to systematically manipulate the share prices of perhaps 100 companies. Come to think of it, it sounds like a really big financial scandal.

Strange that in the week since Secretary Shapiro’s CNBC debut, naked short selling has not been mentioned even once in any mainstream news publication. And last we heard from some publications, they were arguing that the SEC should allow hedge funds to continue selling stock that they have not borrowed or purchased.

Which was different from a few months ago, when hedge funds and journalists were telling us that there was no such thing as naked short selling. As of last week, the new line was that naked short-selling happens all the time, but cracking down on it would cause irreparable harm to “market efficiency.”

This line even appeared in an editorial by the Economist. If it was in the Economist, it must have been true. Or maybe not. As someone who spent several years writing for the Wall Street Journal editorial page, which is similar to the Economist, I can tell you that the opinions of these places are informed by paradigms, not reporting. String together the words “market” and “efficiency,” throw in a threat of “regulation,” and they’ll be on your side, even if you’re defending criminals.

As it were, the articles in the Economist and every other publication were based almost entirely on a report by a guy named Arturo. As I noted in an earlier blog, some of these same publications reported that the SEC’s emergency order banning naked short selling in 19 financial stocks had caused the stocks to lose value, “according to Arturo Bris, a professor in Switzerland,” even though Arturo’s numbers showed quite clearly that the performances of those stocks had improved dramatically.

I don’t mean to pick on Professor Arturo, but when even the Economist is giving this guy the last word on naked short selling, it seems worth noting that the professor, with considerable help from the American hedge fund lobby, has poured into the media’s credulous gullets a mind-bending brew of cherry-picked numbers and calculated balderdash. Nearly every single number in his report contradicts his thesis that the SEC’s emergency order “significantly” harmed “market efficiency.”

I doubt any journalists read the report, but it should be obvious on the surface that its thesis is absurd.Markets are efficient when prices properly reflect supply and demand. You’d think that preventing people from diluting supply with a bunch of phantom stock would improve “market efficiency.” But apparently there is a “debate” over whether the market can efficiently set prices without criminals manipulating prices, so I hope some journalist, somewhere, will join me as I trudge through the only “expert” report on the planet that makes such a claim.

The report’s relevant section, “The Effect of the Emergency Order,” analyses the 19 affected stocks compared to a sample of 59 U.S. financial stocks not directly impacted by the order, and to a sample of non-U.S. financial stocks that, obviously, will be unaffected by any current or future SEC regulations. Professor Arturo chooses to focus his analysis on the following:

  1. Volatility (measured by “open-to-close” price volatility; “close to close” price volatility; and the so-called “trade price range”).
  2. Liquidity (measured by “Quoted Spreads” and “Relative Quoted Spreads”).
  3. Pricing Efficiency (measured using five statistics that show the extent to which there is a correlation between stock prices and swings in the overall market).

Professor Arturo would have us believe that the emergency order increased volatility, decreased liquidity, and increased market correlation (suggesting less efficient pricing). In fact, his numbers (and, indeed, his words, if you read them closely) suggest precisely the opposite.

I will work, line by line, through the report’s section titled “The Effect of the Emergency Order,” addressing Professor Arturo’s claims in order.

Professor Arturo begins by referring to table IX. Take a look.

According to this table, Professor Arturo writes,the SEC’s emergency order caused “significant volatility increases: open-to-close and close-to-close volatility [of the 19 affected stocks] increased 158 percent and 188 percent respectively. Trade price range increases 4.37 percent in the post-EO period.The table reports similar results for other measures.”

Professor Arturo has determined that open-to-close volatility of the 19 stocks “increased 158%” merely by subtracting the pre-EO open-to-close volatility (168.1%) from the post-EO volatility (327.4%) to get the “difference” of 158.23%.

Similarly, for close-to-close volatility, he merely subtracts the pre-EO number (216.18%) from the post-EO number (404.67%) to get the “difference” of 188.49%.Same for the trade price range: he subtracts pre-EO (2.74%) from post-EO (7.11%) to get the 4.37 number.

He highlights these “differences” throughout his text and in the above table, clearly intending for us to believe that they are important.

But the “differences” are completely irrelevant. They do not tell us by what percentage these numbers increased. And what is important is the whether the percent increases of the 19 stocks exceeded the percent increases of the U.S. and non-U.S. samples.

So let’s compare the increases of open-close volatility, close-close volatility, and trade price range.

Open-to-Close Volatility: For the 19 stocks, the increase is (difference) / (pre-EO volatility) = 158 / 168.1 =94.4%.For the U.S. sample, the increase is 79.68 / 123.65 =64%. For the non-U.S. sample, the increase is 70.60 / 64.34 = 109.7%.

In other words, open-close volatility of the non-U.S. stocks increased far more than that of either the 19 stocks or the U.S. sample. Given that the non-U.S. stocks are in no way affected by an SEC action in the U.S., we can assume the professor’s open-to-close volatility numbers say nothing about the effects of the emergency order.

Close-to-Close Volatility: For the 19 stocks, the increase is (difference) / (pre-EO close-close volatility) = 188.49 / 216.18 = 86.7%. For the U.S. sample, the increase is 170.37 / 93.65 = 182%.And for the non-U.S. sample, the increase is 120.87 /125.52 =102.5%.

In other words, the close-close volatility of the 19 affected stocks increased far less than that of both the U.S. and the non-U.S. sample.

Trade Price Range: For the 19 affected stocks, the increase is (difference) / (pre-EO trade price range) = 4.37 / 2.74 = 159%.For the U.S. sample, the increase is 4.20 / 2.79 =151%.For the non-U.S. sample, the increase is 1.53 / 2.39 = 64.01%.

The increase in the trade price range of the 19 stocks increased more than the U.S. and non-U.S. samples. But given that this contradicts the close-close and open-close volatility numbers, we certainly are not able to conclude that “volatility increased” as a result of the emergency order.

This might explain why, a few paragraphs after pointing to “significant volatility increases,” which is the line that was apparently fed to the press, Professor Arturo admits that “we do not find significant differences in volatility in either the pre or post EO period between G19 and US financial firms.”

Moving on to liquidity, Professor Arturo writes that “differences in liquidity [of the 19 affected stocks] significantly deteriorate.”

As noted, Professor Arturo measures liquidity by looking at quoted spreads and relative spreads. Again, he seems to see some significance in the “differences,” but what matters is the relative increases.

Look back up at that table. What you see is that for the 19 stocks, quoted spreads increased from $0.08 to $0.12 (50%). For the U.S. financial institutions, the increase was from $.0.04 to $0.06 (50%).

Isn’t 50 the same as 50?What “significantly deteriorated”?

As for relative quoted spreads, Professor Arturo writes in the introduction to his report that“from the pre-EO period to the post EO period, relative quoted spreads for G19 stocks have increased from 18 to 48 percent, but they have increased only from 11 percent to 29 percent for comparable US financial stocks. “

“Only from 11 percent,” he writes. Only? If something increases from 18 to 48, that’s a 166 percent increase. If something increases from 11 to 29 percent, that is a 163 percent increase. Isn’t 163 and 166 pretty much the same? This does not suggest that the 19 protected stocks “significantly deteriorated” relative to the sample of U.S. financials.

It is true that the spreads increased a lot more in the U.S. than they did overseas, but by this point Professor Arturo’s picture of what he calls “market quality” is looking pretty fuzzy.

Indeed, a bit further down, he writes that “controlling for firm and market characteristics, the EO has led to a significant increase in market liquidity.”

You read that right. Before he said there was a “deterioration” in liquidity. Then he said that the EO led to a significant increase in liquidity.

By the way, why am I wasting my time with this? Who cares about these screwball statistics?The SEC is talking about protecting companies from getting clobbered by illegal market manipulation. The SEC is talking about stopping a crime and upholding the basic tenet of capitalism and correct human conduct that says that someone who sells something had darn well better deliver it.

If some economist sees a change in some decimal point – big deal!If some blogging media critic had the stupid idea to stare cross-eyed at the economist’s decimal points until he noticed that they’d been completely fudged – well, big deal!Unless these numbers measure radioactivity, I don’t know why we’re even discussing them.Criminals are destroying market value and ruining lives. Decimal points be damned!

Sorry. Onwards with the report.

I notice that Professor Arturo throws some “semi-variance” numbers into the table that I posted above. Semi-variance increased dramatically for the 19 stocks. That must mean that “market quality” got really bad, right?

Wrong. Semi-variance isn’t a measure of volatility or liquidity. It is a measure of how much stocks could fall, based on their performance during a previous period. Perhaps Professor Arturo stuck the semi-variance numbers in the table to create a misimpression, but he doesn’t include them in his written discussion of the effects of the emergency order, no doubtbecause he knows they are not particularly relevant to “market quality” and “market efficiency” (though they do suggest that the performance of the 19 stocks soared during the emergency order, relative to the previous period, which is the opposite of what the professor and his media mimics said they did).

Moving on, Professor Arturo measures the correlation between the movement of stock prices and the movement of the market as a whole. If there’s a higher correlation, it supposedly suggests that the market isn’t efficiently processing information – that stock prices are determined by general market sentiment, rather than specific data points about the companies’ track records.

Professor Arturo measures correlation using five statistics, shown in the table below.

Referring to this table, the professor writes that there has been “an important deterioration of market efficiency as a result of the EO. The R squared increases from 22 to 33 percent for US financial firms (an absolute increase of 11 percent). R-squared increases 12 percent for G19 firms.”

You see? He did it again. He subtracted 22 from 33, which is 11. Since that’s less than 12, we’re supposed to believe that the R-squared for the 19 protected firms increased more than the R-squared of the U.S. financial firms. The table similarly displays these “absolute differences” as if they were the key to understanding the effects of the SEC’s ban on naked short selling.

But, again, the “difference” numbers are irrelevant. The relevant number, cited nowhere, is the percent increase of R-squared.For the sample of U.S. financial firms, the increase is 10.82 / 22.46 = .481, or 48%. For the 19 affected firms, the increase is 11.5 / 32.22 = .356 or 35.6%.

So the R-squared for the 19 firms increased less than the R-squared for the sample of U.S. financial firms, which is the opposite of what the professor would have us believe.

In the next line, Professor Arturo writes that “Cross-autocorrelation increases by the same magnitude in G19 and US financial stocks. However, cross-autocorrelation increases much more for G19 than for U.S. financial stocks.”

Yes, he said it increases by “the same magnitude.” Then he said the opposite–that it“increases by much more.” If this were the first time, I’d call it a mistake.

In any case, look at the table, and you will see what happened to the cross-autocorrelation of the 19 stocks. Before the emergency order there was a correlation of 8.24%. After the emergency order there was an inverse correlation of -24.4%.

In other words, the emergency order made it exceedingly less likely that the stocks would move with the market, which by professor Arturo’s standards, means the market became more efficient.

The professor goes on to say that “downside cross-correlation increases 3.26 percent for G19 stocks, while it decreases 4.05 percent for U.S. financial institutions.” So market efficiency “significantly deteriorated,” right?

No. Look at the table. Before the emergency order, downside cross-correlation for the 19 stocks was an insignificant -1.61%. After the emergency order, it was an insignificant 1.65%. In other words, there was never much of a correlation. By this standard, the market in the 19 stocks was almost perfectly efficient before the emergency order. And it remained almost perfectly efficient after the emergency order.

As for the sample of U.S. financials, downside cross-correlation was inversely correlated (-1.79%) before the emergency order. After the emergency order it was even more (-5.84%) inversely correlated. By this standard, the market for the U.S. sample of stocks became more efficient.

The downside cross-correlation numbers for foreign stocks show that they became less inversely correlated to the market after the emergency order. So, according to this statistic, the market in foreign stocks, but not U.S. became less efficient as a result of the emergency order in the United States. I don’t know what to conclude from that, but it certainly isn’t that U.S. market efficiency “significantly deteriorated” as the result of a ban on naked short selling.

Lastly, the downside R-squared of the 19 stocks increased 26.9 / 21.94 = 123%. That is significantly more than the increase in the U.S. financial stocks.However, the downside R-squared for overseas companies increased 56%, so obviously something other than an American regulatory action can affect downside R-squared.

All in all, most of the statistics in this report contradict the hedge fund party line that a ban on naked short selling harmed “market efficiency” – and that speaks volumes about the way in which our financial media processes and delivers information.

As for the data showing that criminals are hammering around 100 companies – destroying not just stocks but the lives of employees and small investors…Well, if you’ve read this far, you give a hoot, and that sets you apart from a great many journalists.

  1. I know, lets all let Lex Luthor and the Siths pillage and plunder the rest of the american instituitions.

    Hasn’t anyone realised that all of Wall Street is one huge zero sum game?

    Zero-Sum Game
    Definition: Situation or interaction in which one participant’s gains result only from another’s equivalent losses.

    I’m disgusted by this mess.

    Our childrens futures have been mortgaged away into at least 30 years of future inflation to pay for the wealth that the Zero sum gamers have extracted.

    I, for one will not be saving US$ at any time again as my currency of choice. There is no point. I expect raging inflation will erode all the value of my savings away until my purchasing power is diminimous.

    What I cannot understand is where is the anger and the fury of millions of americans whose wealth has been destroyed?

    Are all Americans so complacent, so trained , so weakened that US citizens just take the Gamers punishment and accept the fate that in store?

    I cannot nearly express this in terms that inform or entertain curious minds, so I’ll leave it to interest rate guru James Grant:

    July 19, 2008

    Why No Outrage?
    Through history, outrageous financial behavior has been met with outrage. But today Wall Street’s damaging recklessness has been met with near-silence, from a too-tolerant populace, argues James Grant
    July 19, 2008; .

    Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.

    The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed’s crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn’t the nation’s small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as “triple-A.” Yet it’s the savers who took a pay cut — and the savers who, today, in the heat of a presidential election year, are holding their tongues.

    Possibly, there aren’t enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people’s money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people’s wrath?

    The American people are famously slow to anger, but they are outdoing themselves in long suffering today. In the wake of the “greatest failure of ratings and risk management ever,” to quote the considered judgment of the mortgage-research department of UBS, Wall Street wears a political bullseye. Yet the politicians take no pot shots.

    Barack Obama, the silver-tongued herald of change, forgettably told a crowd in Madison, Wis., some months back, that he will “listen to Main Street, not just to Wall Street.” John McCain, the angrier of the two presumptive presidential contenders, has staked out a principled position against greed and obscene profits but has gone no further to call the errant bankers and brokers to account.

    The most blistering attack on the ancient target of American populism was served up last October by the then president of the Federal Reserve Bank of St. Louis, William Poole. “We are going to take it out of the hides of Wall Street,” muttered Mr. Poole into an open microphone, apparently much to his own chagrin.

    There’s a gripping story behind every financial scandal. Here’s a roundup of movies that examine the money-making industry’s dark side:

    ‘Clancy in Wall Street’ (1930)
    Starring: Charles Murray, Lucien Littlefield, Aggie Herring and Eddie Nugent
    An Irish-American plumber, Clancy (Murray), happens on some good stock-market bets , eventually making millions and elevating him in society. But once the market crashes and he’s left with nothing, he returns to his roots in hopes that old friends will take him back.

    ‘It’s a Wonderful Life’ (1946)
    Starring: James Stewart, Donna Reed and Lionel Barrymore
    Generally filed away in the holiday-favorite category, this film’s run-on-the-bank scene and its fallout is a classic example of financial duress on the silver screen.

    ‘Wall Street’ (1987)
    Starring: Michael Douglas, Charlie Sheen, Daryl Hannah and Martin Sheen
    Oliver Stone’s classic film centers on Gordon Gekko (Douglas), a ruthless Wall Street corporate raider who takes an ambitious young stockbroker (Charlie Sheen) under his wing and exposes him to the perks and pitfalls that come with the high-stakes territory.

    ‘Glengarry Glen Ross’ (1992)
    Starring: Al Pacino, Jack Lemmon, Alec Baldwin and Alan Arkin
    In this film based on David Mamet’s Pulitzer Prize-winning play, a group of tough real-estate salesmen struggle to deal with a downturning housing market — or face the ax.

    ‘Rogue Trader’ (1999)
    Starring: Ewan McGregor, Anna Friel, Yves Beneyton and Betsy Brantley
    In this film, based on a true story, Ewan McGregor plays a trader working in Singapore who makes illegal trades to cover up his losses. He ends up in jail.If by “we,” Mr. Poole meant his employer, he was off the mark, for the Fed has burnished Wall Street’s hide more than skinned it. The shareholders of Bear Stearns were ruined, it’s true, but Wall Street called the loss a bargain in view of the risks that an insolvent Bear would have presented to the derivatives-laced financial system. To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed’s earning assets. Nowadays, they amount to just 54%. In their place are, among other things, loans to the nation’s banks and brokerage firms, the very institutions whose share prices have been in a tailspin. Such lending has risen from no part of the Fed’s assets on the eve of the crisis to 22% today. Once upon a time, economists taught that a currency draws its strength from the balance sheet of the central bank that issues it. I expect that this doctrine, which went out with the gold standard, will have its day again.

    Wall Street is off the political agenda in 2008 for reasons we may only guess about. Possibly, in this time of widespread public participation in the stock market, “Wall Street” is really “Main Street.” Or maybe Wall Street, its old self, owns both major political parties and their candidates. Or, possibly, the $4.50 gasoline price has absorbed every available erg of populist anger, or — yet another possibility — today’s financial failures are too complex to stick in everyman’s craw.

    I have another theory, and that is that the old populists actually won.

    This is their financial system. They had demanded paper money, federally insured bank deposits and a heavy governmental hand in the distribution of credit, and now they have them. The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future.

    Before the Great Depression of the 1930s, there was the Great Depression of the 1880s and 1890s. Then the price level sagged and the value of the gold-backed dollar increased. Debts denominated in dollars likewise appreciated. Historians still debate the source of deflation of that era, but human progress seems the likeliest culprit. Advances in communication, transportation and productive technology had made the world a cornucopia. Abundance drove down prices, hurting some but helping many others.

    The winners and losers conducted a spirited debate about the character of the dollar and the nature of the monetary system. “We want the abolition of the national banks, and we want the power to make loans direct from the government,” Mary Lease — “Mary Yellin” to her fans — said. “We want the accursed foreclosure system wiped out…. We will stand by our homes and stay by our firesides by force if necessary, and we will not pay our debts to the loan-shark companies until the government pays its debts to us.”

    By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).

    Thus, the Wall Street of the Morgans and the Astors and the bloated bondholders is today an institution of the mixed economy. It is hand-in-glove with the government, while the government is, of course — in theory — by and for the people. But that does not quite explain the lack of popular anger at the well-paid people who seem not to be very good at their jobs.

    Since the credit crisis burst out into the open in June 2007, inflation has risen and economic growth has faltered. The dollar exchange rate has weakened, the unemployment rate has increased and commodity prices have soared. The gold price, that running straw poll of the world’s confidence in paper money, has jumped. House prices have dropped, mortgage foreclosures spiked and share prices of America’s biggest financial institutions tumbled.

    One might infer from the lack of popular anger that the credit crisis was God’s fault rather than the doing of the bankers and the rating agencies and the government’s snoozing watchdogs. And though greed and error bear much of the blame, so, once more, does human progress. At the turn of the 21st century, just as at the close of the 19th, the global supply curve prosperously shifted. Hundreds of millions of new hands and minds made the world a cornucopia again. And, once again, prices tended to weaken. This time around, however, the Fed intervened to prop them up. In 2002 and 2003, Ben S. Bernanke, then a Fed governor under Chairman Alan Greenspan, led a campaign to make dollars more plentiful. The object, he said, was to forestall any tendency toward what Wal-Mart shoppers call everyday low prices. Rather, the Fed would engineer a decent minimum of inflation.

    In that vein, the central bank pushed the interest rate it controls, the so-called federal funds rate, all the way down to 1% and held it there for the 12 months ended June 2004. House prices levitated as mortgage underwriting standards collapsed. The credit markets went into speculative orbit, and an idea took hold. Risk, the bankers and brokers and professional investors decided, was yesteryear’s problem.

    Now began one of the wildest chapters in the history of lending and borrowing. In flush times, our financiers seemingly compete to do the craziest deal. They borrow to the eyes and pay themselves lordly bonuses. Naturally — eventually — they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government’s first responders — the Fed, the Treasury or the government-sponsored enterprises — bearing the people’s money. One might suppose that such a recurrent chain of blunders would gall a politically potent segment of the population.

    That it has evidently failed to do so in 2008 may be the only important unreported fact of this otherwise compulsively documented election season.

    Mary Yellin would spit blood at the catalogue of the misdeeds of 21st-century Wall Street: the willful pretended ignorance over the triple-A ratings lavished on the flimsy contraptions of structured mortgage finance; the subsequent foreclosure blight; the refusal of Wall Street to honor its implied obligations to the holders of hundreds of billions of dollars worth of auction-rate securities, the auctions of which have stopped in their tracks; the government’s attempt to prohibit short sales of the guilty institutions; and — not least — Wall Street’s reckless love affair with heavy borrowing.

    Readers, why aren’t the financial scandals creating more of an uproar, particularly during an election year? Share your thoughts.

    For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street’s biggest broker-dealers could hardly bear to look themselves in the mirror if they didn’t extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets. “Leverage,” as the laying-on of debt is known in the trade, is the Hamburger Helper of finance. It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets as highly leveraged as Wall Street’s requires a keen eye and superb judgment. The rub is that human beings err.

    Wall Street is usually described as an industry, but it shares precious few characteristics with the metal-fasteners business or the auto-parts trade. The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders. Rather, they open their doors to pay their employees — specifically, to maximize employee compensation in the short run. How best to do that? Why, to bear more risk by taking on more leverage.

    “Wall Street is our bad example because it is so successful,” charged the president of Notre Dame University, the Rev. John Cavanaugh, in the time of Mary Lease. He meant that young people, emulating J.P. Morgan or E.H. Harriman, would worship the wrong god. The more immediate risk today is that Wall Street, sweating to fill out this year’s bonus pool, runs itself and the rest of the American financial system right over a cliff.

    Some classic nonfiction and fiction on financial troubles.
    ‘L’Argent’ by Émile Zola (1891)
    First published as a newspaper serial, Zola’s “L’Argent” (“Money”) tells of Aristide Saccard, a down-and-out financier who founds a bank. As speculation flourishes, Saccard goes to great lengths to keep the stock rising, lying to investors and covering up schemes.

    ‘Little Dorrit’ by Charles Dickens (1855-57)
    The novel features Mr. Merdle, a banker whose schemes lead to financial ruin for many.

    ‘Extraordinary Popular Delusions & The Madness of Crowds’ (1841)
    Scottish writer Charles Mackay’s classic examines the psychology of crowds, touching on everything from the popularity of beards to witch hunts. The last three chapters look at financial manias, such as the Dutch tulip bubble of the 17th century.

    ‘The Great Crash 1929,’ by John Kenneth Galbraith (1954)
    A best seller when it was first published in 1954, this book by the noted Harvard economist details the U.S.’s most famous crash and the events that precipitated it.It’s just happened, in fact, under the studiously averted gaze of the Street’s risk managers.

    Today’s bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder.

    Bear Stearns is kaput and Lehman Brothers is reeling, but Morgan Stanley perhaps best illustrates the gluttonous ways of Wall Street. Having lost its competitive edge on account of an intramural political struggle, the firm, under Chief Executive John Mack, set out to catch up to the rest of the pack. In the spring of 2006, it unveiled a trillion-dollar balance sheet, Wall Street’s first. It expanded in every faddish business line, not excluding, in August 2006, subprime-mortgage origination (the transaction, intoned a Morgan Stanley press release, “provides us with new origination capabilities in the non-prime market, which we can build upon to provide access to high-quality product flows across all market cycles”). Nor did it pull in its horns as the boom wore on but rather protruded them all the more, raising its ratio of assets to equity to the aforementioned 33 times at year-end 2007 from 26.5 times at the close of 2004. Naturally, it did not forget the help. Last year, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.

    Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much. It would not be so bad if the inevitable bout of indigestion were its alone to bear. The trouble is that, in a world so heavily leveraged as this one, we all get a stomach ache. Not that anyone seems to be complaining this election season.

    James Grant is the editor of Grant’s Interest Rate Observer.

  2. Too Little Too Late….
    “Not My Brothers Keeper”

    Fed holds emergency meeting on market developments

    34 minutes ago

    WASHINGTON (Reuters) – The Federal Reserve Bank of New York held an emergency meeting on Friday evening with top financial market representatives to discuss recent market developments, a Fed official said.

    “Senior representatives of major financial markets met at the Federal Reserve Bank of New York Friday evening to discuss recent market developments,” a Fed official told Reuters.

    The official said New York Fed President Timothy Geithner, U.S. Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox were among the participants in the meeting.

    Financial markets have been on tenterhooks over the future of Lehman Brothers Holdings Inc and whether the struggling investment bank, whose stock value has collapsed, may or may not be able to find a buyer. The talks at the New York Fed took place as discussions between Lehman and other parties continued.

    The Treasury and Fed have been involved in talks regarding Lehman’s future. Earlier on Friday, a source familiar with the thinking of Treasury Secretary Henry Paulson said Paulson was “adamant” no public funds be put on the line to help facilitate a sale.

    (Reporting by Glenn Somerville; Writing by Tim Ahmann; Editing by Gary Hill)

  3. September 12th, 2008 at 11:14 am

    Deutsche Bank was THE central player when MJK Clearing failed because of a naked short daisy chain.

    MJK cleared for 175,000 investors and was brought down by presidential connected Saudi Arabian arms dealer Adnan Khasshogi on September 11th, 2001 by naked shorting and the mainstream media considers it too boring a story to cover.

    Why has the general public never heard of this failure?

    This is the story about Deutsche Bank and naked shorting that is too boring for the mainstream news to cover (from the wiki link above). The naked short daisy chain caused the largest SIPF payout in history.

    “Khashoggi, along with Ramy El-Batrawi, was the principal financier behind GenesisIntermedia, Inc. (formerly NASDAQ: GENI), a publicly traded Internet company based in Southern California. After the September 11, 2001 attacks, Khashoggi’s U.S. based checking accounts were frozen and Khashoggi was unable to make a margin call with Native Nations Securities, whose CEO and largest shareholder, at the time, was Valerie Red Horse, former office manager of junk bond king, Michael Milken. In turn, Native Nations and Red Horse were unable to meet their obligations on the margin loan to MJK Clearing, Inc.[2][3] Trading in the stock of GenesisIntermedia was halted in September 2001. Khashoggi’s unwillingness to pay his margin loan to Native Nations Securities, and Native Nations (and Red Horse’s) inability to pay its debts to MJK Clearing, began a series of bankruptcies that ended in the largest payout in Securities Investor Protection Corporation history.[4][5] Native Nations Securities and MJK Clearing both eventually filed for bankruptcy.[6]

    Adnan Khashoggi’s sister Samira Khashoggi Fayed was the mother of Dodi Fayed, who died with Princess Diana.

    He was implicated in the Iran-Contra Affair as a key middleman in the arms-for-hostages exchange along with Iranian arms dealer Manucher Ghorbanifar and, in a complex series of events, was found to have borrowed money for these arms purchases from the now-bankrupt financial institution the Bank of Credit and Commerce International with Saudi and US backing. In 1988, Khashoggi was arrested in Switzerland, accused of concealing funds, and held for three months and then extradited to the United States where he was released on bail and subsequently acquitted. In 1990, a United States federal jury in Manhattan acquitted Khashoggi and Imelda Marcos, widow of the exiled Philippine President Ferdinand Marcos, of racketeering and fraud.[1] He has also worked for Col. Ghaddafi of Libya in 1992 as a mediator.”

  4. Hears why so many Americans are clueless today……

    “One of our best-kept secrets is the degree to which a handful of huge
    corporations control the flow of information in the United States. Whether it
    is television, radio, newspapers, magazines, books or the Internet, a few giant
    conglomerates are determining what we see, hear and read. And the situation is
    likely to become much worse as a result of radical deregulation efforts by the
    Bush administration and some horrendous court decisions. Television is the
    means by which most Americans get their “news.” Without exception, every major
    network is owned by a huge conglomerate that has enormous conflicts of
    interest. … The bottom line is that fewer and fewer huge conglomerates are
    controlling virtually everything that the ordinary American sees, hears and
    reads. This is an issue that Congress can no longer ignore.”
    — Bernie Sanders
    (1941-) US Senator VT, former US Congressman VT
    Source: “Congress Can No Longer Ignore Corporate Control of the Media,” The Hill (12 June 2002)

  5. “Public sentiment is everything.
    With public sentiment nothing can fail.
    Without it nothing can succeed.
    He who molds opinion is greater
    than he who enacts laws.”
    — Abraham Lincoln
    (1809-1865) 16th US President

  6. Mark et al.,

    I have not seen any such news reports, though based on the history of the SEC in this matter it is not surprising. Can anyone direct me to the news reports that the SEC is wimping out yet again?


  7. Jerimiah 9:24

    here it is..

    Recs: 0 SEC Said to Be Unlikely to Impose Short-Sale Ban on Every Stock
    SEC Said to Be Unlikely to Impose Short-Sale Ban on Every Stock

    By Edgar Ortega and Jesse Westbrook

    Sept. 13 (Bloomberg) — The U.S. Securities and Exchange Commission is unlikely to expand to every stock the curbs imposed two months ago on naked short sales, three people familiar with the matter said.

    Regulators are instead likely to focus on measures that would strengthen requirements that brokers deliver shares they sell short, said people familiar with the agency’s thinking. SEC spokesman John Nester said staff may offer recommendations as early as this month, and declined to comment on specific plans.

    The commission in July imposed an “emergency” order that expired last month limited to mortgage finance companies Freddie Mac, Fannie Mae and 17 brokerage firms. The rule, which triggered dozens of e-mails of support to the agency, required investors betting on a decline in stock prices to arrange to borrow the shares before completing the so-called short sale.

    “The SEC is very likely going to get some negative comments from retail investors, but institutional investors that employ significant short-selling strategies, including hedge funds, are going to be very glad,” said Sean O’Malley, a former SEC lawyer and now a partner at Goodwin Procter LLP in New York.

    The American Bankers Association had urged the SEC to broaden the ban to include all publicly traded banks and bank holding companies. The Managed Funds Association, the largest hedge fund industry group, asked regulators not to renew the order, saying it damps legitimate trading.

    Manipulative Investors

    The SEC is concerned that manipulative investors may use the sales, which are legal in some circumstances, to drive down prices by flooding the market with orders to sell shares they don’t have, or naked short selling. In traditional short sales, traders borrow shares that they sell. If the price drops, they profit by buying back the stock, repaying the loan and pocketing the difference.

    Regulators may require that traders disclose to the agency short positions they have in stocks, said a person briefed on the SEC’s plans. The U.K. Financial Services Authority required hedge funds and other speculators in June to reveal short positions equaling 0.25 percent or more of a company’s shares during a rights offer.

    The SEC staff also may shorten the time brokers have before they must step in and buy a company’s stock to clear a short sale, said two people who declined to be identified because the conversations with regulators were private. The new rules may also eliminate an exemption that options market makers had from delivering shares of companies in the so-called threshold list.

    Companies are listed when they have a high number of borrowed shares that have not been delivered to buyers. For those companies, the SEC mandates that brokers step in after 13 days to buy the stock. The SEC staff is considering shortening that time frame, two people said.

    To contact the reporter on this story: Edgar Ortega in New York at [email protected]; Jesse Westbrook in Washington at [email protected]

    Last Updated: September 13, 2008 00:01 EDT

  8. Please folks, this is a good read but consider the source..

    Recs: 0 Einhorn & shorting….

    From the NY Times…..

    September 15, 2008
    New Push to Reduce Short Selling
    In May, David Einhorn, one of the most vocal short-sellers on Wall Street, made no secret he was betting against Lehman Brothers.

    Now, some investors are afraid that fund managers like him will take advantage of the climate of fear stirred up by the troubles of Lehman to target other weak financial firms whose declining share price would bring them rich rewards.

    At emergency meetings over the weekend, the heads of major financial institutions urged Timothy R. Geitner, the president of the New York Fed, and Treasury Secretary Henry M. Paulson Jr., to consider having the Securities and Exchange Commission reinstate a temporary rule to limit the risky but potentially lucrative practice of betting on a firm’s falling share price, according to two people who were briefed on, but did not attend, the meetings. They are concerned that short-sellers might fix their gaze on big financial institutions like Merrill Lynch and the insurance giant American International Group, which also need billions of dollars in capital to strengthen their businesses.

    In July, the S.E.C. briefly halted a practice known as naked short selling after speculators placed large bets that shares of Fannie Mae and Freddie Mac, the troubled mortgage giants, would decline. That also made it harder to short the stocks of 19 financial institutions, including brokerage firms like Lehman Brothers and Morgan Stanley, although the curb wound up having little impact on the price of their shares.

    The investment tactic of betting a stock will slide is not new, of course. But it has become particularly controversial in the last year, when Wall Street firms started to be targeted as the credit crisis turned the financial sector upside down. Short sellers and their free market supporters say they have done nothing wrong. If anything, they say, they have merely spotted problems at financial institutions ahead of everyone else, making them a useful early warning system for the rest of the market. Critics believe they have contributed to the speed of the decline of any number of financial shares.

    Short-selling against financial institutions has proven particularly lucrative for hedge funds. Mr. Einhorn’s accusations that Lehman was failing to properly account for its marks on troublesome holdings, which appear to have presaged the bank’s early report of a $2.8 billion loss for its second quarter, has presumably netted him a handsome return.

    Lehman’s shares were already under pressure when he took the microphone at a large industry gathering in May to lay out his case against the investment bank. The firm, he told the crowd, had used “accounting ingenuity” to avoid large write-downs and remained tainted by bad commercial real estate investments. Mr. Einhorn stood to profit by convincing people of his view: He had been betting against Lehman’s stock — it stood at around $40 when he spoke — since July 2007, when they traded for around $70 a share.

    While Lehman’s shares have declined as investors lost confidence in its ability to repair its balance sheet, in the four months after Mr. Einhorn’s remarks, short-selling played a role in the erosion. A rapid plunge in the shares to below $4 last week ultimately created the conditions that brought the 158-year old firm to its knees on Sunday.

    For all his boldness, Mr. Einhorn is aware of the havoc that bank failures can create. “We would not win if Lehman went down and took the whole financial system with it,” Mr. Einhorn said in an interview in June. “An actual collapse of Lehman — that would not be a good thing.”

    Other hedge fund managers recognize the dangers and the harm that is befalling bank employees who have been paid in their companies’ stocks . “My children, their playmates’ fathers work at Lehman,” said one manager who is short Lehman and asked to remain anonymous, citing the sensitivity of the situation. “Obviously I had nothing to do with what happened, and the idea that I profited, and they got clobbered, and I’ve got to see them on Monday is awkward. I feel badly for them.”

    Mr. Einhorn was never shy with his criticism of Lehman. He pointed to the bank’s investments in two real estate companies, Archstone and Sun Cal, and said Lehman had not marked its mortgage assets down enough. “Lehman is one of the deniers,” he said in the June interview.

    He first mentioned Lehman in a speech in October when he pointed out that the company had shifted $9 billion of mortgage securities into the “hard-to-value” category on its balance sheet. In April, he appeared unsure whether Lehman would suffer any time soon, saying “given that Lehman hasn’t reported a loss to date, there is little reason to expect that it will any time soon.” To many, Mr. Einhorn simply saw the writing on the wall early. And, hedge fund managers say, Lehman executives failed to realize how much credibility Mr. Einhorn has in the investor community. Lehman might have fared better if it raised capital or took write-offs far earlier, as Mr. Einhorn suggested.

    But to some in the world of finance, Mr. Einhorn and investors like him are dangerous.

    “It is really like taking a baseball bat to someone who is down,” said Jim Hardesty is president of Hardesty Capital Management in Baltimore. “A bunch of these guys with very large bats are circling around certain companies and banging them over and over again. It is unsportsmanlike conduct.”

    Mr. Hardesty is among the investors who believe the S.E.C. made a mistake in allowing the temporary curb to slow the impact of short-selling to expire.

    Hedge fund managers who focus on shorting companies stand out in the industry in an otherwise terrible trading year. Hedge funds are down more than 4 percent but short-focused hedge funds are up 9.76 percent, said Hedge Fund Research, a firm in Chicago.

    Ironically, Mr. Einhorn’s fund, Greenlight Capital, is down 4.3 percent this year through Aug. 22, according to HSBC (he also invests in stocks, as well as shorting them). His is a so-called long-short fund, which means he invests $2 buying shares in companies for every $1 he places shorting other companies. One company he took a positive view on in recent years was New Century, one of the first subprime mortgage lenders to file for bankruptcy.

    Mr. Einhorn declined to comment for this article and a spokesman would not say if he is still short Lehman’s stock or on what day he exited the position.

  9. I think that we are at a most critical point in our country’s economic history. Bear Stearns, Fannie Mae, Freddie Mac, Merril sold to B of A, Lehman left to twist in the wind, SEC emergency rules put in place that obviously stem the selling tide and quickly vanish as Chanos and Cox meet to discuss what?

    Our government is hired to oversee our country and protect the citizens – yet we witness Martha stewart sent to jail for a single stock trade, while the CEOs of financial institutions play fast and loose with mortgage backed securities and no one goes to jail…just some fines and a non-admission of wrong doing….

    Chris Cox, Jim Cramer and others finally admit to the world something we have known for years – that counterfeit shares have been sold into our markets for years, companies destroyed, unable to raise capital, people’s lives ruined…and what does our government do?

    Oh yes – we sent Martha to jail for a single stock trade….

    Darkness doesn’t even cover how bad things are…and there is apparently no reason to expect things to change….as Patrick said, it’s not the rot in the system…it’s the rot that is the system….

    Very very dark days for America….

  10. On a non short selling note, does it seem strange to anyone else that B of A would make a bid for Merrill Lynch (a company that nobody wants right now) at a 70% premium to the closing price on Friday? Might be an interesting fact to inject into the public domain at the various places you visit. I would love to hear someone explain how the bid makes sense.

  11. Long game Dr Byrne.

    We knew it would get here.
    G_D help us all

    This is the end
    Beautiful friend
    This is the end
    My only friend, the end

    Of our elaborate plans, the end
    Of everything that stands, the end
    No safety or surprise, the end
    I’ll never look into your eyes…again

    Can you picture what will be
    So limitless and free
    Desperately in need…of some…stranger’s hand
    In a…desperate land

    Lost in a Roman…wilderness of pain
    And all the children are insane
    All the children are insane
    Waiting for the summer rain, yeah

    There’s danger on the edge of town
    Ride the King’s highway, baby
    Weird scenes inside the gold mine
    Ride the highway west, baby

    Ride the snake, ride the snake
    To the lake, the ancient lake, baby
    The snake is long, seven miles
    Ride the snake…he’s old, and his skin is cold

    The west is the best
    The west is the best
    Get here, and we’ll do the rest

    The blue bus is callin’ us
    The blue bus is callin’ us
    Driver, where you taken’ us

    The killer awoke before dawn, he put his boots on
    He took a face from the ancient gallery
    And he walked on down the hall
    He went into the room where his sister lived, and…then he
    Paid a visit to his brother, and then he
    He walked on down the hall, and
    And he came to a door…and he looked inside
    Father, yes son, I want to kill you
    Mother…I want to…fuck you

    C’mon baby, take a chance with us
    C’mon baby, take a chance with us
    C’mon baby, take a chance with us
    And meet me at the back of the blue bus
    Doin’ a blue rock
    On a blue bus
    Doin’ a blue rock
    C’mon, yeah

    Kill, kill, kill, kill, kill, kill

    This is the end
    Beautiful friend
    This is the end
    My only friend, the end

    It hurts to set you free
    But you’ll never follow me
    The end of laughter and soft lies
    The end of nights we tried to die

    This is the end


  12. Chaps (I wish I had more time to follow this blog) have you seen this – related to FTDs etc and LEH:


    it’s pretty wild out there this morning
    lots of really strange moves
    as we alluded to above
    stocks that should just not be up in the present environment are doing really well
    such as
    some of the toxic pub co’s
    Enterprise Inns (ETI:LSE): Last: 222.00, up 13.5 (+6.47%), High: 222.75, Low: 201.25, Volume: 6.43m
    Punch Taverns (PUB:LSE): Last: 244.50, up 9 (+3.82%), High: 251.00, Low: 227.50, Volume: 2.97m
    Mitchells and Butlers (MAB:LSE): Last: 295.75, up 20.5 (+7.45%), High: 302.25, Low: 267.00, Volume: 2.66m
    : in fact there are a load of consumer facing stocks in demand this morning
    which is just plain odd
    Kesa Electricals (KESA:LSE): Last: 136.75, up 7 (+5.39%), High: 139.50, Low: 126.75, Volume: 4.07m
    DSG International (DSGI:LSE): Last: 53.00, up 2.5 (+4.95%), High: 54.00, Low: 48.75, Volume: 9.06m
    and even some housebuilders
    Taylor Wimpey (TW:LSE): Last: 46.00, up 0.25 (+0.55%), High: 47.75, Low: 43.00, Volume: 7.38m
    Barratt Developments (BDEV:LSE): Last: 140.75, up 6.5 (+4.84%), High: 143.75, Low: 122.00, Volume: 4.28m
    what. is. going. on.
    People turning to drink, flat screen tvs etc
    well, its possible
    but I reckon there is another answer
    go on
    well, there is a rumour that PWC, the administrators to Lehman, have gone into the prime brokerage division
    and said recall all loaned stock NOW
    that in turn has forced the hedge funds, who are short, to buy back the stock and deliver it to PWC
    so they can sell it again, i presume
    yes, I suppose they would
    how ironic
    actually this trend is not just confined to the UK
    there is as one broker put it
    Lots of shit up today on the back of this rumour, such as Sandvik
    of course there is no way of proving whether any of this is true
    but it seems to make sense
    there has to be an unwind
    but I guess Lehman is going to be blamed for any odd moves in the market at the moment
    Hang on
    just received a mail from a real market pro
    he says the Lehman short selling thing is more subtle
    what he says is happening is as follows
    seems a lot of people agreed to borrow stock from Lehman to sell short
    and now it is not going to arrive
    In order to cover their exposure
    the hedgies are being forced into the market
    and are using their own cash to close the position
    hmm, makes sense I suppose
    here’s a mail from another broker explaining what she thinks is happening
    I think that some of them will have lots of trouble with recent deals though I gather that most stopped trading with them last week. Still, sometimes people buy shares one day and get them the next…but Lehman has stopped delivery so some people will have a big problem
    Also, can Goldman and BofA serve ALL the prime broking needs of the world in terms of how much they can lend – probably not.

    right, just been talking to another senior broking source and he is furious with the LSE
    apparently Lehman’s prop desk was trading frantically at the end of last week
    and taking some really big short positions
    the LSE told everyone not to panic on Monday morning
    and don’t close the positions
    clearly people are not listening to that Mr Mainwaring
    and have broker ranks this morning and are covering the Lehman position before their rivals push the stock up even further
    goodness me

  13. Mark, we need to rally the troops to write their Congressmen and demand that legislation be passed making a pre-borrow in a short sale federal law. We can no longer leave such decisions to captured regulators.

  14. Actually, I believe that misses the point. It’s too technical. Keep it simple.

    The law should require T+3 delivery for all securities as well as the money of the buyer. Violations should be punished. No market maker exceptions. Any exceptions due to mistakes nust be cleared in 10 days. Penalties for violators. Big penalties for repeated violations. Broker gets no commission until delivery is accomplished. Buyer can rescind if delivery is not accomplished.

  15. Did anyone see Cramer on Mad Money last night? You would think he was reading directly from the DeepCapture story! It was like a confession. Did Patrick Byrne figure out a way to take over Jim Cramer’s body??

    I can’t figure out what the deal is with him lately. Has he had a true “conversion” or is he just engaged in CYA? It seems like he wants to assign blame for all NSS to the SEC and Chairman Cox.

    He was also very cryptic about “preparing people for the smear campaign that would start tomorrow [today]”.

  16. news/press/ 2008/2008- 204.htm

    SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses

    Washington, D.C., Sept. 17, 2008 — The Securities and Exchange Commission today took several coordinated actions to strengthen investor protections against “naked” short selling. The Commission’s actions will apply to the securities of all public companies, including all companies in the financial sector. The actions are effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.

    “These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling,” said SEC Chairman Christopher Cox. “The Enforcement Division, the Office of Compliance Inspections and Examinations, and the Division of Trading and Markets will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation.”

    In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn’t actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.

    Today’s Commission actions, which are the result of formal rulemaking under the Administrative Procedure Act, go beyond its previously issued emergency order, which was limited to the securities of financial firms with access to the Federal Reserve’s Primary Dealer Credit Facility. Because the agency’s exercise of its emergency authority is limited to 30 days, the previous order under Section 12(k)(2) of the Securities Exchange Act of 1934 expired on Aug. 12, 2008.

    The Commission’s actions were as follows:
    Hard T+3 Close-Out Requirement; Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-Borrow

    The Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.

    If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller’s behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer’s activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.

    Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.
    Exception for Options Market Makers from Short Selling Close-Out Provisions in Reg SHO Repealed

    The Commission approved a final rule to eliminate the options market maker exception from the close-out requirement of Rule 203(b)(3) in Regulation SHO. This rule change also becomes effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.

    As a result, options market makers will be treated in the same way as all other market participants, and required to abide by the hard T+3 closeout requirements that effectively ban naked short selling.
    Rule 10b-21 Short Selling Anti-Fraud Rule

    The Commission adopted Rule 10b-21, which expressly targets fraudulent short selling transactions. The new rule covers short sellers who deceive broker-dealers or any other market participants. Specifically, the new rule makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. This rule also becomes effective at 12:01 a.m. ET on Thursday.

    # # #


    Dave Patch addresses the SEC on recent action against NSS

    ( in an email to the Chairman, Commissioners, and designated officials )

    From: Patch, David
    Subject: SEC Denies Public Protection – AGAIN

    Mr. Chairman,

    I must commend you on the steps taken today towards addressing naked short sale abuses. With Congress, public issuers, and investors alike seeking to have you and your staff tarred and feathered for the egregious negligence executed under the umbrella of federal protection you stepped out today and threw caution to the wind and told us all to pound sand.

    I fully understand that the Commission staff and the Office of Economic Analysis is not convinced that this is a real issue that is destroying public confidence in our Capital markets. I understand that the OEA is not committed at looking at this issue seriously by dedicating the time and resource into analyzing actual trade data before opining on how this may or may not impact our markets. And I understand that private meetings with wealthy short sellers such as Jim Chanos provide opportunity for the Commission to gain support material into the positions taken despite the conflicts such meeting may create. But what I don’t fully grasp is why the general public must carry the burdens for the SEC’s negligence. Why should we be the people who must work longer to protect our retirements? Why should we be the people who must cut our expenses because we can’t afford to pay our bills due to the destruction of our personal savings accounts? Why should we suffer the pains so that people like jim Chanos and his peers can be provided ample opportunity to destroy public companies, local communities, and the financial stability of families across this nation.

    Today the SEC took yet another half step to a whole problem. The SEC maintained loopholes in the short sale process so that certain short sellers would not have to carry the burden of expense in the execution of rapid short sales never intent on existing by settlement day. These are the very same short sellers who destroyed confidence in our financial markets and now the short sellers who will continue to destroy other markets and other public issuers.

    Let me help you out here:

    Hard T+3 Close-Out Requirement; Penalties for Violation Include Prohibition of Further Short Sales, Mandatory Pre-Borrow

    The Commission adopted, on an interim final basis, a new rule requiring that short sellers and their broker-dealers deliver securities by the close of business on the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so.

    If a short sale violates this close out requirement, then any broker-dealer acting on the short seller’s behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer’s activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer.

    Although the rule will be effective immediately, the Commission is seeking comment during a period of 30 days on all aspects of the rule. The Commission expects to follow further rulemaking procedures at the expiration of the comment period.

    Under this rule there are serious flaws in the Commissions thinking.

    1. To determine a lack of compliance to this rule it requires the SRO’s or SEC to conduct an audit of the failing firms. These audits are not done daily but periodical. By the time the violation is identified the culprit is long gone with the monies and the markets manipulated by the potential abuse. This rule is a responsive rule instead of a pro-active rule.

    2. This rule, as it stands will yield compliance violations at the BD level and will rarely result in penalties imposed on the originating seller. Compliance violations rarely achieve the penalty status as that which investors lost by the violation itself. This rule can likewise by circumvented by engaging in a separate violation; marking the trade long and failing that trade instead.

    3. This rule does nothing to address the initial abuses of multiple locates on a common share during the time of trade execution. Since multiple locates can exist, fails will exist. This also allows, instantaneously, for there to be too many short sales executed at a single moment in time. Such trading creates the leverage the short seller need in order to drive down a market.

    4. The day trader. How does this rule impact the abuses associated with the rapid day trading short seller? Using multiple locates and acting in concert with other hedge funds, a market can be destroyed within the 3-day settlement window and so long as the trades are covered by T+3 the SEC and SRO’s have no authority to take enforcement action. This rule simply redefined the window of time a short seller has to abuse a stock and create profit and with sophisticated computer programs the systems will be set up to cover this window. If a portion of the trade falls into the settlement window the trade will fail but…the SEC does not require a mandatory close-out with guaranteed delivery, the Commission only restricts future short sales until it is closed out.

    5. Close-out of fails. What ever happened to mandatory w/Guaranteed delivery? The NASD presented the SEC with an argument in 2004 that identified how failed trades were not being closed out because it was not “cost effective” for the failed party to do so. The SEC continues to fail in adopting such language. In fact, the Commission is aware that firms have engaged in rolling failed trades to restart the clock. Nothing in this law changes that tactic. Nothing in this law requires that on T+4 the failing member must go into the market at market open and purchase this stock under guaranteed delivery status. Without such specific language members will game the system to make the close-out profitable.

    Mr. Chairman your time is limited but your legacy will live on forever. This Commission will be remembered in history as the most conflicted of all time. The Comission staff that allowed a group of bandits to run rampant across our capital markets and destroy so much of our nations family wealth.

    There will be people who no longer can afford to retire, as well as people who will lose their homes and their familes due to financial ruin and it will all be due to the negligence of this Commission.

    The Commission has failed to hear the voices of the people and instead has listened to those who have their own self-interest in mind. This is the grandfather clause all over again and this delay is only a delay that will most likely force Congress to step in and make law for you.

    Shame on you.

    Dave Patch

  18. “They” Are Listening NOW…

    SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses


    Washington, D.C., Sept. 17, 2008 — The Securities and Exchange Commission today took several coordinated actions to strengthen investor protections against “naked” short selling. The Commission’s actions will apply to the securities of all public companies, including all companies in the financial sector. The actions are effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008.

    “These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling,” said SEC Chairman Christopher Cox. “The Enforcement Division, the Office of Compliance Inspections and Examinations, and the Division of Trading and Markets will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation.”


  19. Fred, you always need to stay ahead of the curve. When you go to a T+3 enforcement policy you allow a window of opportunity for manipulation to take place. that window is teh difference between T and T+3. Under Continuous Net Settlement a sell and a buy net out and so long as you sell and then buy within T+3 you are never called upon to settle a trade. Short sellers can raid a stock on Trade Date, with no shares borrowed for settlement, and cover before T+3 and that raid would be opaque to the regulators.

    With the leverage these hedge funds have, a great deal of damage can take place in that T+3 window.

  20. To my mind, Ben Stein deserves recognition this evening, saying on cable news that the market won’t be fixed unless the government goes after the short sellers.

  21. If the Hedge funds can raid big banks how easy is it for them to destroy a small-cap or micro-cap ?

    John Mack is just upset because his stock isnt going up LMFAO

  22. ALL short selling of financial sector stocks has just been banned in the uk

    one thinks they may have missed the point somewhat

  23. Patrick! There Might Be a “Job” Opening 4’Ya, Soon…

    McCain Says Cox Should Be Fired As SEC Chief Amid ‘Casino’ Markets…

    “Republican presidential candidate John McCain, in remarks prepared for delivery Thursday, said he thought Christopher Cox, chairman of the Securities and Exchange Commission, should be dismissed.”


  24. Here is the height of hypocrisy: John Mack and Morgan Stanley press release today. Ah the irony….

    And the UK joins the SEC in financial apartheid.

    Morgan Stanley Applauds Cuomo and FSA Actions on Short Selling

    Sep 18, 2008 3:28:00 PM
    Copyright Business Wire 2008


    Morgan Stanley applauds Attorney General Cuomo for taking strong action to root out improper short selling of financial stocks. By initiating a wide-ranging investigation of this manipulative and fraudulent conduct, Attorney General Cuomo is showing decisive leadership in trying to help stabilize the financial markets. We also support his call for the SEC to impose a temporary freeze on short selling of financial stocks, given the extreme and unprecedented movements in the market that are unsupported by the fundamentals of individual stocks.

    The FSA has already put in place a freeze on short selling in financial stocks that is designed to protect the integrity of markets in the UK, and we applaud their actions.

    Morgan Stanley (NYSE: MS) is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm’s employees serve clients worldwide including corporations, governments, institutions and individuals from more than 600 offices in 35 countries. For further information about Morgan Stanley, please visit

    Source: Morgan Stanley

  25. Any rule that discriminates against certain kinds of companies is WRONG. If you stop the shorting in financials, they’ll just go after something else….do it across the board

  26. After reading here for quite a while, I am frightened about the implications of naked short selling (and short selling more broadly) in regards to the meltdown in the financial sector. I guess some of us plebes hoped the battles between our financial betters would be left to their echelon, but that is painfully not the case.

    Market panic caused by rumor and speculation is now increasing the amount of capital needed by financial organizations so they can cover collateral, which is resulting in bailouts and bankruptcies. One can argue about the fairness of caps and limits on collateral obligations in relation to credit worthiness (Moodys, etc.), but the root cause is clear– the power of market panic, innuendo, and collusion. Market giants do not fail in the matter of weeks because of balance sheets, they fail because they are forced to fail by a series of ‘perfect storms’, such as threats of default swaps, bank runs, lack of liquidity due to fear, and declining stockholder confidence (thank you short sellers).

    I don’t have answers, but regulations-off or hands-off capitalism is not the answer in my opinion.


    SEC bans short-selling
    Agency puts temporary halt to trading practice that ‘threatens investors and capital markets’ for 799 financial companies.

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    By David Goldman, staff writer
    Last Updated: September 19, 2008: 7:41 AM EDT

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    NEW YORK ( — The U.S. Securities and Exchange Commission took what it called “emergency action” Friday and temporarily banned investors from short-selling 799 financial companies.

    The temporary ban, aimed at helping restore falling stock prices that have shattered confidence in the financial markets, takes effect immediately.

    “This will absolutely make a difference,” said Peter Cardillo, chief market economists at Avalon Partners. “Short sellers are going to have to cover their positions very heavily.”

    Short sellers borrow stock with the aim of selling it, then buy it back at a lower price, hoping to pocket the difference. The commission said short sellers add liquidity to the markets during normal conditions, but recent unbridled short-selling has contributed to the recent tailspin in the stock market.

    “The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” said SEC Chairman Christopher Cox in a statement. “The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets.”

    Cox said the action “would not be necessary in a well-functioning market,” and is just one of many actions being taken by the government to jump-start the embattled financial markets.

    The SEC also said it would temporarily ease restrictions on companies’ ability to repurchase their stock, and force money managers to report their short positions in certain stocks that are not included in the 799 banned companies.

    Some market observers have also blamed short sellers for the punishing declines in bank stock prices over the past few days. Critics of short sellers have argued that some had been spreading rumors about a company while “shorting” the stock in order to drive the price lower.

    “In the marketplace, we need both sides of the equation,” Cardillo said. “But the relaxed regulation of the SEC has led to abuses of short selling that have destroyed many, many companies.”

    As panic began to permeate the financial markets, many investors took short positions on already battered financial companies regardless of the news that came out of the companies or the government. For instance, investment banks Morgan Stanley (MS, Fortune 500) and Goldman Sachs (GS, Fortune 500) reported better-than-expected earnings Wednesday, but dropped significantly in trading.

    “This decision will squeeze the shorts,” Cardillo added. “Now, if there is any good news, shorts will have to cover.”

    The ruling comes after the SEC decided Wednesday to ban the practice of so-called “naked” short-selling, in which investors short the stock without actually borrowing it.

    On Thursday, Britain’s Financial Services Authority also temporarily banned short-selling for financial companies. The SEC said it is consulting the FSA in the matter. To top of page
    First Published: September 19, 2008: 6:12 AM EDT

    SEC puts ‘naked’ short sellers on notice

    New bailout planned


    September 18, 2008, 1:42 pm
    Clamoring For the Uptick: Brokers Beg For Return of Short Reins; Siebert Urges Global Margin Reqs, Disclosure

    Bring back the uptick rule!
    Almost with the same fervor as Beatles fans, some folks on Wall Street are clamoring for the return of the uptick rule that helps regulate short selling.

    Last year, the Securities and Exchange Commission removed the rule that only allowed short selling when the last tick in a stock’s price was positive. This rule was implemented after the 1929 market crash to prevent short sellers from driving the price of a security down in a bear run. Now the SEC is investigating whether aggressive short selling is driving down shares of Goldman Sachs (GS) and Morgan Stanley (MS). John Mack, Morgan’s chief executive officer, certainly thinks so, according to an email he sent to employees Wednesday. Goldman shares have breached the $100 barrier once again to fall 20% today to $91.99. Morgan is down 28% to $15.48.

    “An aphrodisiac for volatility”
    The SEC removed the uptick rule after years of testing out stocks through a pilot program. That data is unclear, but for some market players the issue is black and white. Teddy Weisberg, a 69-year old floor trader on the NYSE and president of Seaport Securities, says he can’t tell whether short sellers are responsible for Morgan’s fall, but the absence of the uptick rule has only fueled the downward spiral. “It reintroduced the concept of the bear trade to the equities market, something we haven’t seen since the crash of ‘29, and I think it was a huge mistake on the part of the SEC,” he says.

    “Removing the plus-tick rule is nothing more than an aphrodisiac for volatility,” says Weisberg, using the alternate term sometimes employed in place of “uptick.” “My frustration and unhappiness about this rule change is not directed to the short sellers, it is directed to the methodology” because it puts short sellers on parity with long sellers, adds Weisberg.

    New rules to rein in shorts
    On Wednesday, the SEC tried to rein in short selling, the process of borrowing a security and selling it, buying it at a lower price than you sold it, and returning the shares to the lender. The SEC’s approach involved issuing three new rules. Hedge funds and large investors are now required to publish their short positions daily. Investors are prohibited from “naked shorting” by requiring shorted securities to be backed by borrowed securities. And for options traders, the SEC is “making it illegal for a customer to mislead a broker about having located stocks and then failing to deliver them,” according to the Wall Street Journal. (Subscription required.)

    But, concludes Weisberg, “anything short of reintroducing the plus-tick rule will not solve the problem.”

    Global margin requirements needed
    The first woman member of the New York Stock Exchange, Muriel “Mickie” Siebert, president of Siebert Financial Services, agrees. In addition to reinstating the uptick rule, she has been saying for decades that there needs to be greater transparency. The move requiring investors to disclose their short positions daily was long overdue. Now the financial sector needs global margin requirements because funds not allowed to borrow in New York were able to get money from London. The public is also entitled to know Goldman’s leverage and Morgan Stanley’s leverage, and to disclose how much exposure firms have to the “quadrillion dollars of derivatives out there,” Siebert says.

    Awareness of the financial crisis has trickled down to the individual level, she observes. “I realize people are afraid and I’ve never seen this kind of fear,” says Siebert, who is approached by strangers about whether their bank accounts are safe. With that kind of fear, says Siebert, “What if the public said ‘I don’t want my money in mutual funds anymore’ and redeemed them. It would make this mess look like child’s play.”

    – Naureen Malik, Reporter, Barron’s Magazine
    Permalink | Trackback URL:
    Save & Share: Share on Facebook | | Digg this | Email This

  29. Where are the updates on the main page. The last 3 days have been incredibly good for the naked short story. Are Judd, Mark and Patrick all asleep? or have the shorts hired hitmen and taken them out. What gives?


    September 19, 2008 9:20AM
    What the SEC’s Ban on Shorting Really Means
    By Elizabeth MacDonald

    The Securities and Exchange Commission took the dramatic step of banning for ten days short-selling on 799 financial stocks.

    And of course with any hastily planned regulatory intervention, potholes have opened.

    The SEC’s ban could be extended for up to 30 days, and comes after Wall Street executives say short sellers have caused catastrophic declines in stock prices that have led to the downfall of Bear Stearns, Lehman Bros, and American International Group.

    The SEC’s moves follows close on the heels of Great Britain’s decision to ban short selling in 29 stocks until the end of the year. U.K. investors have accused short sellers of causing shares in HBOS Plc to plunge before it entered into a $18.9 bn takeover by Lloyds TSB Group Plc.

    Short-sellers profit from falling share prices. They borrow shares from brokers and then sell them. When the price declines, they turn back the shares at the lower price and pocket the difference. In a naked short sale, the short seller does not borrow the shares and physically have them in hand.

    Some $3 tn was wiped from stocks globally this week as financial shares plunged, causing the SEC to go on the offensive. The fear is that shorts are causing massive price plunges, triggering credit downgrades, slamming capital and forcing companies to sell assets at garage-sale prices. (See “Get Shorty,” “Did the SEC’s Plan to Get Shorty Work?,” and “Still Trying to Get Shorty.”)

    The SEC acted after it met with heated entreaties to intervene from Wall Street executives including Goldman Sachs Group (GS: 133.63, +25.63, +23.73%) chief executive Lloyd Blankfein and John Mack, chief executive of Morgan Stanley (MS: 30.50, +7.95, +35.25%).

    A stock price plunge in recent days could still force Morgan into the arms of a commercial bank like Wachovia (WB: 19.91, +5.41, +37.30%). Short interest in Morgan Stanley is triple the levels of a year ago. Both Mack and Blankfein have discussed short sellers five or six times in the last week, Mack told employees.

    In taking the emergency action, the SEC says it wants to “prohibit short selling in financial companies” to protect the integrity of the securities market and boost investor confidence.

    Who is on the List?

    Wall Street titans Morgan Stanley, Merrill Lynch (MER: 28.27, +6.21, +28.15%), Citigroup (C: 21.43, +4.78, +28.70%), JPMorgan Chase (JPM: 45.56, +5.26, +13.05%) are on the SEC’s new list, as are Washington Mutual (WM: 3.81, +0.82, +27.42%) and Wachovia (WB: 19.91, +5.41, +37.30%). The SEC had met with criticism in mid summer when it initially banned a form of short selling in 19 financial stocks and left off the list Wamu and Wachovia.

    Damaged bond insurers Ambac (ABK: 6.17, -0.50, -7.49%) and MBIA (MBI: 13.91, -0.09, -0.64%) also made the list, which couldn’t have come too soon as Moody’s Investors Service once again just placed the ratings of Ambac and MBIA on review for possible downgrade.

    Warren Buffett’s Berkshire Hathaway (BRK) is on the list, Blackstone Group (BX: 17.98, +0.96, +5.64%) is on it, as are beaten-up companies E*Trade Financial (EFTC), Dollar Financial (DLLR: 18.47, +1.54, +9.09%) and Conseco (CNO: 6.73, -1.22, -15.34%).

    Even Greenlight Capital (GLRE: 19.46, -0.28, -1.41%), the reinsurance company that is a wing of famous short David Einhorn’s hedge fund Greenlight Capital, is on the list. Einhorn earlier this year made his case for shorting Lehman Bros., arguing the now-collapsed firm was engaging in questionable accounting.

    Market analyst Paul Kedrosky, who writes for the website, notes ironically that Lehman is on the list, though it is in bankruptcy status, that the SEC has Silver State Bancorp on the list, though it’s a failed bank already seized by the FDIC, and that the SEC is blocking shorting of NAHC. That ticker doesn’t exist, unless it stands for the Nigerian Aviation Holding Company, Kedrosky says wryly.

    The Crackdown

    The Securities and Exchange Commission is also clamping down on “naked” short-selling, where the underlying stock in a short sale is neither borrowed nor delivered by the short-seller. The SEC is not outlawing the practice.

    Instead, short sellers and broker dealers must now actually deliver securities borrowed for short sales–or risk being accused of securities fraud and of being permanently barred from engaging in naked short selling.

    The SEC’s moves comes fast on the news this week that the SEC has subpoenaed 50 hedge funds to find out if they were engaging in rumor mongering in order to drive down shares in 19 financial companies they had shorted in naked short sales to book a profit.

    Hedge Funds Must Confess

    The SEC now wants to force hedge funds to make disclosures of daily short positions, a move that would let regulators assess the impact of short-selling at funds with $100 mn or more.

    Currently shorts file forms with the SEC that disclose their long positions and options on a quarterly basis. In the past, the hedge fund industry has gone so far as to sue the SEC to stop any regulation of the industry, litigation which could arise again.

    The disclosures may help, though famous short James Chanos, who blew the whistle on Enron, says it would be the equivalent of forcing Coca-Cola to reveal its secret formula.

    Check out the most recent filing from Greenlight Capital, run by David Einhorn, who raised serious questions about accounting problems at Lehman. Einhorn gave speeches and went on t.v. with his criticism, but his latest filing only shows about 581,000 in put options on Lehman, with little else detail.

    Other Moves to Get Shorty are Underway.

    After writing to 60 other pension funds asking them to follow its lead, the largest U.S. public pension fund Calpers, the California Public Employees’ Retirement System, said it is no longer lending out shares of financials like Goldman, Morgan Stanley or Wachovia to short. New York State and Texas pension funds are considering similar moves.

    And New York Attorney General Andrew Cuomo said he was opening investigations into short sellers who he believes are engaging in false rumor mongering to manipulate stocks down in order to take profits. Cuomo went so far to say he’ll use the state securities-fraud law to go after short sellers, the Martin Act, which permits criminal and civil actions.

    Marking to Taxpayers

    The SEC’s emergency ban on shorting coincides with the US government’s announcement that it will set up a Resolution Trust-type entity, harking back to the S&L crisis, that would act as an assisted living facility for financial companies across the country, a mega-dumpster for their toxic subprime waste.

    Now Wall Street and other banks would not have to pricetag these toxic assets and record losses on their own, an accounting endeavor called “marking to market,” which lately is the equivalent of sticking a finger in the wind.

    Instead the government is “marking to taxpayers” these assets.

    A so-called mega bad bank structure for thousands of banks around the country, a structure that Lehman desperately clung to in its final hours. An entity far different from the RTC structure of the S&L crisis, where the government got assets dumped on it from insured thrifts that had bellyflopped, then liquidated them.

    The new entity would buy frozen solid assets from banks and then sell them, likely at auction, into the market.

    The move might entail an $800 bn fund to purchase these so-called failed assets and a separate $50 bn pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, as a mini-run on these funds is now underway.

    Takes the Pressure off the Federal Reserve

    Setting up this government warehouse would take the pressure off of the Fed’s discount window, now strained with record bank borrowing. The Treasury in the past two days announced $200 bn in special bill sales to help the Fed expand its balance sheet.

    Already banks around the world have taken more than $510 bn in writedowns and losses from the housing and credit crisis. Wall Street created about $1.2 tn of subprime mortgage-backed securities, some $200 bn to $300 bn are now thought to be sitting at FDIC-insured banks and thrifts.

    It’s estimated that Citigroup, JPMorgan Chase (JPM: 45.56, +5.26, +13.05%), Bank of America Corp. (BAC: 36.97, +6.39, +20.89%), Goldman Sachs Group Inc., Merrill Lynch & Co. (MER: 28.27, +6.21, +28.15%) and Lehman Brothers had more than $500 bn of the most illiquid, toxic stuff, the so-called Level 3 assets as of June 30, according to research firm CreditSights Inc.

    Markets Soar on the News

    The governments’ moves have sent the markets soaring. Shorts now are racing to cover their positions, helping to send stocks higher as well.

    Volatility is hitting record levels. The closely watched CBOE Volatility Index, the VIX or the Fear Index, has easily blown through the 30 ceiling in recent days, and briefly rose higher than 42.

    The Potholes in the SEC’s Moves

    A heated debate is now underway over the SEC’s ban, namely, that the companies under attack were rightfully shorted as they are insolvent, reflected in their stock prices.

    An insolvency some say may have been inadvertently created by the SEC itself, as the agency did not do enough to force Wall Street firms who shoved debt into off-balance sheet vehicles that many thought went the way of Enron. The agency also is being criticized for not doing enough to get Wall Street firms to bolster their capital cushions, and instead let five firms weaken their capital positions (see blog “Still Trying to Get Shorty”).

    The question too is when the SEC is going to pursue executives of defunct companies, or companies now on life support, when they’ve walked away with lucrative compensation packages they won after their companies essentially reported artificially higher profits from their management decisions.

    Another irony, too, is that shorting selling has fueled the profit engines at the very Wall Street firms now complaining about the practice, including the big, bulge-bracket broker dealers like Morgan, Goldman and Merrill. The SEC’s move too would ban the investing strategies used by hundreds of mutual funds, hedge funds, pension funds, endowments and governments.

    Also, short sellers can still short synthetically, via puts, exchange traded funds that carry many of the names on the SEC’s list of 799 companies via the option market. And market analyst David Merkel warns that the SEC’s move could hurt in the interim merger arbitrage funds, statistical arbitrage funds and other quant funds. He also warns that the implied volatility for put options would go up.

    It’s unclear now whether the collapse of Bear Sterns, Lehman Bros. and AIG, and the near demise of Merrill Lynch, Fannie Mae and Freddie Mac were caused largely by short sellers. Gut-clenching price declines on a daily basis of 40% in companies thought to be healthy should give you pause.

    Crisis of Confidence

    Our equity and credit markets are suffering from a crisis of confidence that touches all securities and all investors across the country.

    It is a crisis of confidence exacerbated by the news that Lehman Brothers wanted to suddenly double the dollar amount of its Kryptonite assets shoved into a bad bank structure in a matter of days, from $40 bn to $80 bn.

    It is a crisis of confidence aggravated by the news that American International Group can now borrow up to $85 bn in a credit facility from the Fed, more than double in a matter of days what it said it needed, $40 bn.

    It is a crisis of confidence worsened by the news that Congress had to hire Morgan Stanley to go find out what landfill was sitting on the books of Fannie Mae and Freddie Mac.

    It is a crisis of confidence over solvency.

    And over the fact that our nation’s financial chieftains really don’t know what they are doing.

  31. Many articles are being written about this crisis by journalist as if this all happened with Bear Stern fallout. Now is the time for Patrick, Mark, Patch, Bud and all the others to contact these journalist and let them know about their long fight against these market manipulators and the endless emails to the SEC for reform. Get your stories out in mainsteam media. Now is the time. Tell them about NCANS, Deep Capture, Antisocialmedia, Investigatethesec, Sanitycheck…Let your voices be heard……..


  32. Once again the regulators and elected officials have completely botched things, but why should we be surprised? There was no reason to ban legitimate short selling, provided that the rules of locate, borrow, deliver and settle were abided by. The reasons why the SEC refuses to take on this most important issue are nt immediately clear, but the DTCC is a beneficiary of the unwillingness to celan up the settlement system.

    It is simply and totally unfair for the SEC to ban short selling in a specific category of stocks. It is unfair to discriminate against any company by not providing the same protection. It is unfiar to game the system to try to clean up a problem created by those who game the system.

    I am not a huge fn of short selling, but it should be a part of our capital markets. Indeed, what happens when all of the short squeezes are done by these emrgency rules that have little to do with cleaning up rthe system and the rules expire? what will prevent the shares from imploding from artificially high levels.

    This isn’t capitalism, it’s stupidity.

    Clean up the settlement system and stop this BS

  33. Why is Chris crook Cox deaf to the call for a return of the up-tick rule? Promise of a big payday someday when he gets run out of DC?

  34. Cox and the SEC are friggin’ idiots….totally clueless and useless…..

    SEC Said to Consider Revising Short-Sale Ban in Options Market

    By Edgar Ortega

    Sept. 19 (Bloomberg) — The U.S. Securities and Exchange Commission is considering revising a rule barring short sales of financial companies to exempt options market makers, according to three people briefed on the SEC’s plans.

    The agency may amend the rule to grant an exemption as soon as today, said the people who declined to be identified because a final decision hasn’t been reached.

    John Heine, an SEC spokesman, didn’t immediately return a telephone call and e-mail message seeking comment.

    To contact the reporter on this story: Edgar Ortega in New York at [email protected].

    Last Updated: September 19, 2008 15:42 EDT

  35. Here is the uptick bill submitted July 08

    Sponsor: Rep. Gary Ackerman [D-NY]show cosponsors (3)
    Cosponsors [as of 2008-08-31]
    Rep. Michael Capuano [D-MA]
    Rep. Carolyn Maloney [D-NY]
    Rep. Carolyn McCarthy [D-NY]

    Cosponsorship information sometimes is out of date. Why?

    Bill Text: Full Text
    Status: Introduced Jul 16, 2008
    Scheduled for Debate –
    Voted on in House –
    Voted on in Senate –
    Signed by President –

    This bill is in the first step in the legislative process. Introduced bills go first to committees that deliberate, investigate, and revise them before they go to general debate. The majority of bills never make it out of committee. Keep in mind that sometimes the text of one bill is incorporated into another bill, and in those cases the original bill, as it would appear here, would seem to be abandoned. [Last Updated: Aug 30, 2008]
    Last Action: Jul 16, 2008: Referred to the House Committee on Financial Services.

    Question & Answer
    Have a question about this bill? Submit a short fact-oriented question and see if it will be answered by other visitors.
    Enter your question. Tips: Be clear and precise. No abbreviations. Don’t ask about the status of this bill or when it will be voted on (other users are not likely to know). Don’t ask a loaded question or for individual advice: Your question will be rejected.

    After submitting your question it will be reviewed, and if approved will appear here.
    Articles About This Bill
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    Paste the web address (URL) of an article from a well-established publication below.

    Only thoughtful news articles from established publications will be accepted. All submissions are approved by a moderator before appearing on this page.

    To cite this information, we recommend the following: H.R. 6517–110th Congress (2008): To require the Securities and Exchange Commission to reinstate the uptick rule on short sales of securities, (database of federal legislation) (accessed Sep 19, 2008)
    Because the U.S. Congress posts most legislative information online one legislative day after events occur, GovTrack is usually one legislative day behind.

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  37. Not to hijack this thread, but I want to know if I’m eligible for a short sale and I don’t know how to find a local, highly regarded realtor… do you have any info on this realtor? They’re located in sacramento, near my son’s school and I can’t find reviews on them – Becky Lund & Associates – Sacramento Realtors, 8814 Madison Avenue #2 Fair Oaks, CA 95628 (916) 531-7124

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