Make no mistake: what you witnessed this week was not some natural process – an economy “souring,” a bubble “bursting.” This was not the “invisible hand” at work. This was not even capitalism.
This was the premeditated, systematic destruction of market value by an elite crowd of Wall Street cronies who no doubt cackled with delight in the cleverness of their mischief-making. This was criminal behavior on an ungodly scale – the unprecedented looting of America.
Do you think I’m overstating this? Consider that the hedge funds who did this employed precisely the same tactics that precipitated the stock market crash of 1929 and the Great Depression that followed.
One of these tactics, as almost everybody now finally realizes, is called “naked short selling.” It involves hedge funds and their brokers selling stock that they do not possess – phantom stock – to dilute supply and drive down prices.
Often, the short-selling saboteurs engage in other shenanigans – whispering scurrilous rumors, oozing innuendo, orchestrating bogus class action lawsuits, deploying armies of Internet message boards to foment negativity, paying seedy “independent” financial research shops to publish distorted analysis, hiring thugs to harass executives and their families, conducting corporate espionage, and instructing government cronies to launch dead-end investigations.
You never heard about this from the mainstream financial media. You never heard it because the market saboteurs were writing the media’s talking points. Some reporters were merely addicts, dependent on the dealers of distortion for negative stories. Other reporters were genuinely corrupt. They thought the market machinations were good fun. “I wanna play, too,” they said. They reveled in taking down companies, and then they asked their short-selling accomplices for jobs.
Our nation’s most influential financial journalists knew that naked short selling was rife. They knew that hundreds of companies had been victimized. They had all the data and they had every reason to believe that billions of phantom shares floating around the system could not be good. But they said naked short selling never happens. They said only bad CEOs and crazy people complain about short seller crimes. They whitewashed the biggest scandal of our lifetimes, and then our markets crumbled.
It was the darkest moment in the history of American journalism.
* * * * * * * *
In July, the SEC issued an “emergency order” to prevent naked short selling from destroying the financial system. The order required short sellers of stock in 19 financial companies to actually obtain real stock before selling it.
This was hardly intrusive, but the media, copying straight from the hedge fund lobby’s script, said that the SEC should leave the short sellers alone. The emergency order had hurt “market efficiency,” the journalists wrote, though common sense would suggest that a market cannot efficiently set prices when it is bloated by phantom supply. The emergency order decreased “liquidity,” the reporters wrote, though they provided no credible data to support this claim, and failed to explain how a liquid market in phantom stock benefits anyone other than a few hedge fund billionaires.
Even worse, some reporters argued that the SEC should not crack down on naked short selling because short sellers are “vital” sources of negative information to the media. What if some of these “vital” sources are manipulating markets? Criminals, apparently, are untouchable, so long as they dish dirt to reporters. The abomination riles all the more when you know (as I do, having studied thousands of these dirt-strewn stories) that the majority of them contain insinuation, omissions, and outright falsehoods.
At any rate, the financial media convinced the SEC to let its emergency order expire. Even as the markets nosedived, journalists, including CNBC’s Charlie Gasparino, were calling the emergency order “ridiculous,” and the SEC cowered. Within a few weeks Lehman Brothers was gone, Merrill Lynch was gone, Fannie Mae and Freddie Mac were nationalized, and American International Group, a company with a trillion dollars in assets, was trading for a dollar a share and soliciting handouts from the Fed.
On Wednesday of this week, the SEC rushed out new rules that purported “zero tolerance” for naked short selling. According to the SEC, there would now be a “hard” close out rule, requiring hedge funds to deliver real stock within three days of selling it.
Even if the SEC were to enforce a three day settlement, it wouldn’t do much, because the manipulators work like this: A hedge fund tells his broker to sell a million shares of XYZ. The broker doesn’t have any shares, but he sells them anyway. That is phantom stock and for three days it dilutes supply, and eats away at the financial system. When settlement day comes, the broker asks a second broker to sell him a million shares of XYX. The second broker doesn’t have any shares, but he sells a million shares of XYZ (the price now much lower) to the first broker, who uses the phantom stock to settle his initial sale of phantom stock.
When the second broker has to settle, he calls the first broker…and the phantom stock shuffle continues until the falling price makes it impossible for the company to raise capital. Then it’s bankruptcy, the stock is zero, and nobody has to deliver anything.
In any case, “Oooh, weee…‘zero tolerance.’ Really scary.” For years, hedge funds have habitually violated stock delivery requirements, and the SEC has done nothing. Big words didn’t scare anybody. When the SEC announced its new rules, the hedge fund lobby cheered, the media reported the cheers, and the manipulators went hog wild.
By Thursday afternoon, it was looking like Goldman Sachs, Morgan Stanley, and countless smaller banks were on death row. Call this “liquidity.” Call it “market efficiency.” Call it what you like, but it wasn’t good. The meltdown was so severe that traders on Wall Street genuinely believed that Al Queda was taking down the financial system.
More likely, it was the small clique of terrorist hedge fund managers who are most beloved by our financial media. Alas, the SEC panicked. To forestall the end of the world, it decided on Thursday night to ban all short selling of stocks in 700-plus financial companies.
It is a shame that it had to come to that. Short-selling is a legitimate practice, and lots of people do it the legal way. Proper short selling probably keeps the markets honest. If the SEC had cracked down on illegal short selling long ago, the cataclysm would have been averted.
At any rate, maybe now would be a good time for the media to take a closer look at the naked short selling scandal. Stephen Moore, who works for the Wall Street Journal editorial page, said on CNBC that naked short selling caused this week’s turmoil. Why has the Journal not published an editorial expressing outrage?
The Journal’s editorial page, the finest in the country, rightly abhors government interventions, but this is not about free markets. It is about preserving property rights – the basic capitalist tenet that people must own what they sell. It is about stopping criminals.
Aside from the Journal’s editorial page, there is a world of media that has not been compromised by short sellers – a world of good reporters who live far from Wall Street and could be covering this scandal from multiple angles. They need to do so quickly. The SEC will lift its current ban. And if it doesn’t start prosecuting people – if we don’t get a permanent, market-wide, and properly enforced rule requiring short sellers to pre-borrow real stock – then it will once again be open season for hedge fund terrorism, and where our towering financial system once stood, there will be nothing but a gaping, smoldering hole.
I’m sorry for the repeated post, but I think this story is one we need to put in the mainstream media’s faces. Why DIDN’T they cover this story on September 11th, 2001, which tied naked shorting to almost every other scandal at the time?
If the media carried this story seven years ago, the financial system wouldn’t be spiralling down the toilet. They pretend like they are learning about this for the first time, but the SIPF told the SEC what would happen in 2001 when MJK failed if they didn’t fix this.
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. 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. Native Nations Securities and MJK Clearing both eventually filed for bankruptcy.
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. He has also worked for Col. Ghaddafi of Libya in 1992 as a mediator.”
Great article as usual. How’s that list of scum, scammy, NSS miscreants to send to prison? I’ll believe the government when the first of many indictments are handed down.
Or how about this clue, from two years ago when Yasser Araffat died and it brought down Refco, the first clearing house to admit the had $10 billion in securities they sold, but hadn’t yet purchased?
The tale of Refco’s bank — and its role in the biggest meltdown on Wall Street since junk bond scandals felled Drexel Burnham Lambert Inc. in 1990 — shows how executives gambled with customers’ money and may have deceived the elite of the global financial community, including Goldman Sachs Group Inc., whose chief executive officer, Henry Paulson, is poised to become the next U.S. Treasury Secretary.
We need to start rounding up and arresting these people.
Here is the extinguished Linda Chatman Thomsen today:Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, added,
“Abusive short selling, market manipulation and false rumor mongering for
profit by any entity cuts to the heart of investor confidence in our
markets. Such behavior will not be tolerated. We will root it out, expose
it, and subject the guilty parties to the full force of the law.”
This is the same idiot that squashed the subpoenas of Greenberg and Cramer, and said of us in January of 2005, “they just want their stocks to go up.”
Who needs regulators this stupid – this captured? Deep Cap guys, a good stand alone blog would be some of her comments to past crises. It will paint a picture of reactionary politicians that will be irrefutable.
The SEC needs to go. We need some real enforcement with criminal powers.
There is plenty of blame to go around. The American financial markets have become a Ponzi, with powerful, previously untouchable criminals using financial weapons of mass destruction to profit from both its inflation and its inevitable collapse. The criminals have been abetted by many “smart” people who couldn’t connect the dots, and their ability to run roughshod over the few with the temerity to point out that the emperor had no clothes. The utilization of esoteric financial techniques nnd the total lack of transparency have allowed these criminals to steal wealth from the companies that create it, and the investors who own them.
As Buffet pointed out long ago, derivatives are a toxic brew, a “time bomb” as he put it. Just one example is the CBOE, where the number of contracts traded rose from 254 MM in 1999 to 944 MM last year (http://www.cboe.com/data/AnnualMarketStatistics.aspx), a 17.8% CAGR. For what purpose have these been used? In many if not most cases they have been used to hedge what otherwise would be imprudent speculation, whether a bet on a rise or a fall. The problem is, someone has to take the other side of the bet, and the derivatives market maker pushes off his risk in the beginning of a Ponzi that eventually has someone removed from the initial bet taking on the risk without understanding that the underlying transactions have layered on more than the salient risk.
The simplest example is where an investor buys stock in a promising technology company, without realizing that the stock he is purchasing is being manufactured and sold to “hedge” the other side of an options transaction large enough to swamp the ordinary interest in the stock, and which sales will continue to depress the price of the stock until rational investors conclude that there are forces they do not understand driving the price and abandon the stock, at which time the initial transaction is unwound. Of course, this same scenario can work in reverse, and has.
The point is, options and derivatives have become tools not just for prudent hedging of risk, but criminal manipulation of underlying securities.
This (http://www.bloomberg.com/apps/news?pid=20601087&sid=aDdnTzYhJGAs&refer=home) allows for some real hope. Hope that the criminals who have profited mightily from unabashed manipulation of the markets will be brought to account, stripped of assets, and serve real jail time. Maybe such is a forlorn hope, and the point will be driven home that there are indeed perfect crimes, and crime does indeed pay if you are successful at it. Shoplifting an article of clothing or a bit of food can bring you real trouble if you are caught, but the millions amassed by ignoring both the letter and spirit of securities laws can make you impervious – even if you and your fellow racketeers bring down the entire financial system and impoverish and destroy the families of millions.
SO FUBAR___ speechless
(now that abusive naked short selling is at the center of the world stage educational efforts might play a key role in allowing an appreciation of the heinous nature of this particular form of a “fraud on the market”. Hope this helps.)
THE ROLE OF “SELF-FULFILLING PROPHECIES” IN ABUSIVE NAKED SHORT SELLING (ANSS) ATTACKS
No matter what industry a corporation under an ANSS attack is in one can always recognize the use of “Self-fulfilling prophecies” involved in the modus operandi of the securities fraudsters doing the attacking. From an educational point of view the attacks made on companies involved in the banking sector illustrate this phenomenon quite clearly. The recent debacle in the financial sector serves as an excellent example of the incredible power that these “Self-fulfilling prophecies” can exert.
The foundation for companies in the banking sector is provided by confidence. Why? Because our banking sector is based upon a “fractional reserve” concept wherein a bank is only in possession of about 12% of the money that it has loaned out. If even a minority of depositors were to lose confidence then a “run on the bank” might ensue with disastrous consequences. The initial phase of an abusive naked short selling “bear raid” on a bank or any other corporation for that matter is to get as many “failures to deliver” as possible into the share structure of the targeted company. These “failures to deliver” result in the creation of mere “securities entitlements/IOUs” that predictably depress the share price by artificially manipulating upwards the “supply” of readily sellable legitimate “shares” plus the “supply” of readily sellable “securities entitlements/IOUs”.
After establishing massive naked short positions the usually unregulated hedge funds that use the bank or brokerage firm under attack as their prime broker can merely pull their prime brokerage accounts from the firm. This further exacerbates the confidence issues and soon the ratings agencies are there to mark down the bank’s debt ratings. This forces the bank to increase the amount of cash collateral they pledge to their counterparties; cash that is desperately needed at the time to put out fires elsewhere. All of these developments feed upon each other and the share price is placed into a self-propagating death spiral. The smell of blood in the water attracts other naked short sellers that serves to intensify the death spiral. What started out this cascade of events? It was the refusal of the DTCC to “promptly settle” the trades involved back during the initial naked short selling phase wherein the securities fraudsters absolutely refused to deliver in a timely manner that which they sold. What are the key elements to this self-fulfilling prophecy? The foundation is the 100% predictable claim from the DTCC that they are “powerless” to buy-in the delivery failures of its abusive participants. Add to that an industry based on confidence but supported by a not too confidence inspiring “fractional reserve” system subject to a “run on the bank” especially when the “run on the bank” was pre-planned. The banking sector is the perfect patsy for abusive naked short selling attacks but unfortunately it serves as the foundation for our overall financial sector. In the recent Bear Stearns debacle the failures to deliver shares of Bear Stearns went up 10,800% as their share price went from over $100 to $2. Their trading volume on certain days went from an annual average of 4 million shares to 131 million shares.
These “self-fulfilling prophecies” utilized by abusive naked short sellers also flourish in the nonbanking sector and typically involve yet to be cash flow positive development stage corporations. Once again unfortunately but this is the very sector that serves as the “job growth engine” in the U.S. The modus operandi here is pretty much the same. The initial phases involve relying on the DTCC to claim to be “powerless” to buy-in the delivery failures of its abusive participants. These unaddressed “failures to deliver” result in the creation of mere “securities entitlements/IOUs” that predictably place the share price into a death spiral. The mechanics from here on out differ from that which we see in the banking sector. Knowing that yet to be cash flow positive issuers must constantly go to the markets to sell shares in an effort to pay their monthly “burn rate” the securities fraudsters can force these easily preyed upon companies to raise cash by selling shares at often steep discounts (due to the implied risk of investing in a company whose share price is in a death spiral) to share prices that can easily be placed into a death spiral. If the time period before which these companies can turn the corner to profitability is prolonged then by the time they get there they have so many shares “outstanding” that even if they ever did have earnings they would be diluted into oblivion and the critically important “earnings per share” would be minimal.
What are the critical foundations to these frauds? Once again it is the DTCC and the fact that yet to be cash flow positive issuers must pay their monthly bills. Thus there is a critical period in the development of these “job producing engines” wherein securities fraudsters can tap into these “self-fulfilling prophecies” and predictably shunt the funds of the investors therein into their own pockets in spite of the fact that they continue to absolutely refuse to deliver that which they previously sold. How can that be? At the DTCC the DTCC management only mandates that their abusive participants collateralize these “failures to deliver” on a daily marked to market basis. Thus as the share price predictably plummets the funds of the investors are unconscionably allowed to flow to those that sold fake shares and continue to refuse to deliver that which they sold. Think about it, why would they deliver anything when the DTCC management which by the way are the employees of the abusive DTCC participants says that they don’t have to? Why would Wall Streeters with access to the DTCC ever risk buying low to sell high when they can bypass the need to spend money to buy anything and yet have the right to sell all that they wish to? Oh to have employees empowered to forgive the debts of its bosses!
Well said, dr. d.
I want to take this a step further in the form of a question. If there is all this thievery going on, and clearly this is the case, where are the funds coming from that allow it??
It is my Theory that it came from the Housing Market, the Mortgage markets. When the average person with that new far too high mortgage could not make his payments, on a VAST scale, the whole money river making possible the floating of NSS paper (for years) came to a grinding halt. Not only that, but the water evaporated in the process. Prove me wrong.
The money for the “thievery” comes from the shorts themselves. when you short, you get money. Basically, you are selling something that you don’t own.
Shorting implies an obligation to buy back. If you never intend to buy back. If you never intend on buying back, then the money you get is pure profit.
Yes I understand that, but still the money is financed somehow….. It is my belief that the Mortgage Markets were a HUGE part of it. It is no coinkidink they BOTH failed at the same time….. Its all wrapped up together I think. If ony as a giant money laundrying scheme. Be that as it may. I still believe they are connected.
“When the average person with that new far too high mortgage could not make his payments, on a VAST scale, the whole money river making possible the floating of NSS paper (for years) came to a grinding halt.”
That’s simply not the case. When home defaults started to rise, it was the proverbial weak link in the economic food chain. This allowed the Miscreants to attack many companies that had some vulnerabilities. Were the vulnerabilities significant enough to actually cause these traditionally sound companies to face sudden crises of confidence. Since confidence is the cornerstone of our economy (and especially so for financial institutions), the combination of media onslaughts, flooding the market with non-existent shares, and engaging in all the other standard tactics that we’ve all read about here on Deep Capture become even more dangerous to these companies and their shareholders.
Just think about the monumental changes we have witnessed in the past six months: Bear Sterns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, AIG, and now the entire financial sector either out of business or being bailed out by the Fed.
Anyone who has engaged in the Naked Shorting of any of these companies in the past six months has made out like bandits (pun intended).
And the first question we must always ask is this: WHO BENEFITS???
The answer seems to be: The Miscreants.
The next question is: WHO PAYS THE PRICE?
Unfortunately, the answer to that seems to be: All of us.
How did it allow the Miscreants to attack them? I am new to this and struggling to understand at times. So I don’t know how that made them vunerable, ignorance on my part.
I get that they made out like bandits. As long as the Mortgage loan monies were coming in, things were all good, but when the housing market collapsed, didn’t that just shut off a big source of liquidity in the markets? Maybe I am a moron, but it seems to me that it was something the Big Banks were depending on, because they sure didn’t live long with out it.
Some Naked Short Sellers as you say, made off like bandits. That implies deliberation if not intent. I mean, it isn’t as if the whole industry didn’t know about Naked Short Selling…. and was participating in it at one level or another! I think its all linked. The buying and selling of Mortgages was a HUGE business just a year and a half ago.
5 investment banks get the SEC to increase their leverage.
Illiquid bonds get marked down according to an artificial index that was recently created rather than face value or the value of the performance of the bonds over time.
Investment banks appear insolvent with these mark-downs. Competitors short the index and facilitate the “insolvency”.
Shorting and NSS drive the price of these investment banks securities down, keeping them from accessing the capital markets.
BSC gets taken out. Same BSC that did not win friends when they didn’t participate in the SL bailout. Taxpayer backup.. Paulsen and FED making decisions and this is made to look like an emergency.
SEC stumbles and puts in temporary stopgap measures.
This appears to be a classic bear raid. Get someone highly leveraged. Drive the price down, create a margin call, (in this case, a potential bankruptcy), get all the assets at discount prices.
New kinks.. get the treasury involved as a backstop on the first takeover so that the public has been innoculated and believes that this is how it is done.
FNM and FRE… same thing. Do it on the weekend to make it look important.. Raid the treasury again.
Don’t change the rules for accounting that would allow the bonds to be priced on performance. Don’t enforce the laws on naked shorting or reinstate the uptick rule.
Create a crisis.
Solution.. Educate Congress as to what just happened.
JPM didn’t need that backstop. If they thought that BSC were worthless, they wouldn’t have bought it. They were just taking market share.
When the bonds get marked back up, the CEO’s will award themselves big bonuses.
After all, they survived the credit crisis that they created.
Paulsen has been given complete control over FNM and FRE and their assets. We’ve been told that the taxpayer could actually profit from this. If the paper is that good, why all the hubbub?
We need for the SEC to change accounting rules, reduce leverage to previous levels over time.
Banks and Investment banks need to be separate. Go back and rework the amount of leverage so that banks are not so speculative.
The very people who created this “crisis” are the people who asked for more leverage, created the ABX and traded in it. These people are supposed to get everything straight. More likely, they will get everything and the method is complex enough that Congress can’t understand how it happened.
If you ask me a ‘ small clique of terrorist hedge fund managers’ should be tried in a court of law as ‘terrorists’.
They HAVE maliciously attacked America. Not with guns, not with knives, but with the public market and with the media and for what? Money.
And in this war with ‘ terrorist hedge fund managers’….so far America is losing.
Obviously naked short selling should be eliminated. I say that all short selling of stock should be banned. Even the so called “borrowing” of shares in normal shorting is problematic as the owner of the shares often does not get compensated for the borrowed shares and therefore the true cost of the entity shorting is not paid. Covered PUT options on the other hand compensate the owner. Just think how much worse the housing market would be if I could borrow my neighbor’s house, without paynig my neighbor anything, and sell it.
Some how it needs to be expalined so Joe sixpack gets it and all the fine details.
I don’t think we will see that since so many in power whould be exposed…or shot!
I agree with ron doc. As valuable as this site and The Sanity Check sites are, they can be a bit impenetrable to the new student of this calamity. My suggestion to Patrick, Mark and the other brave warriors is to write a paragraph that states the dimensions of the situation clearly and briefly, then directs the new visitor to a more detailed explanation. Place it front and center on the home page. Especially important is a link to a Breaking News section, with daily updates if possible. Just poking around, especially on TSC site, leads one to articles that are months or years old; one senses the presence of spider webs and dust bunnies, as some of the blogs haven’t been contributed to in years.
This story is too important to be understood by just a few “buffs” who have read up on it in detail. If change is gonna come, millions of folks will need to pressure their state and federal representatives.
Patrick: how about a ten minute condensed version of “Dark Side” for YouTube?
Congratulations for your fine work to all who have contributed here.
Apparantly we came real close to the end huh?
Pretty silly, given that the problem was not caused by, and had little to do with shortselling:
MARKETS WERE 500 TRADES FROM A MELTDOWN
Comments: 55Read CommentsLeave a Comment
By MICHAEL GRAY
Click image to enlarge.
Last updated: 6:20 am
September 21, 2008
Posted: 4:16 am
September 21, 2008
The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level – a 22 percent decline! – while the clang of the opening bell was still echoing around the cavernous exchange floor.
According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.
The panicked selling was directly linked to the seizing up of the credit markets – including a $52 billion constriction in commercial paper – and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.
The Fed’s dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.
While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.
Without commercial paper, “factories would have to shut down, people would lose their jobs and there would be an effect on the real economy,” Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.
Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund – which touted itself as super safe – fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default – which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.
By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.
Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.
And for good reason. By the close of business on Wednesday, $144.5 billion – a record – had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.
By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.
The banks knew something drastic had to be done. So did Paulson.
The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.
Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.
Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.
By that time, Paulson had announced the plan. It included insurance on money market accounts, a move that started in quiet Thursday morning, when the former Goldman Sachs executive saved the country from a paralyzing meltdown.
Why hasn’t Dr. Byrne ever put forth a solution to the “naked short selling” issue? What would he do to correct the regulation/system?
And why hasn’t he ever named the “small clique of terrorist hedge fund managers ” who are causing all of the problems? There’s 10,000 hedge funds in the world, are they all involved? Are they all guilty by association?
Michael, where have you been, dude?
Why hasn’t Dr. Byrne ever put forth a solution to the “naked short selling” issue? What would he do to correct the regulation/system?
Reinstate uptick rule, force buyin of all FTDs, eliminate ex-clearing, more transparency from DTCC/NSCC.
And why hasn’t he ever named the “small clique of terrorist hedge fund managers ” who are causing all of the problems?
They have been named here and on thesanitycheck web site. Go read if you’re interested (I doubt you are).
There’s 10,000 hedge funds in the world, are they all involved? Are they all guilty by association? There are a number of hedge funds named. The posters here go out of their way to say that there are legitimate hedge funds that do not resort to NSS to profit.
Immediately reinstate the uptick rule as a condition of the bailout.
Well, there’s egg on my face. I falsely attributed a ridiculous comment to Linda Chatem Thomsen. when actually it was Annette Nazareth:
At the S.E.C., Annette Nazareth, the head of the division of market regulation, said the rule was aimed at assuring that new naked shorts would be cleaned up relatively quickly. Some people, she said, “are very disappointed that the impact of this rule was not to make these stocks go up.”
For the record, it was Thomsen who was Director of Enforcement when the Cramer/Greenberg subpoenas, issued by the
SF office of the SEC, were squashed.
There is plenty of arrogance and fraud to go around. I do apologize. Because I’m sure they’re sorry for everything they’ve done to us, and haven’t done to the perps. I can feel the love.
More Valerie Red Horse Scandal:
In what may amount to little more than a symbolic victory, a New Jersey brokerage has agreed to pay almost $210 million to the former stock clearing unit of Stockwalk Group Inc. The settlement represents the amount, plus interest, that Native Nations Securities owed MJK Clearing as of last September following the collapse of a complicated stock loan transaction.
Regulators seized MJK Clearing after Native Nations was unable to make a payment of about $192 million. The shutdown and liquidation of MJK led, five months later, to the bankruptcy filing of Minneapolis-based Stockwalk. The liquidity crisis forced the Securities Investor Protection Corp. to step in to protect the assets of Stockwalk’s brokerage clients in the most expensive case the SIPC has yet handled.
“How much we ultimately collect remains to be seen,” said Robert Schell, an attorney with Faegre & Benson, the Minneapolis law firm that represents the court-appointed trustee, James Stephenson. Stephenson also is an attorney at Faegre.
An attorney representing the all-but-defunct Native Nations declined to comment on what kind, if any, insurance policies the brokerage had in place. Executives of Native Nations could not be reached. The company has not been liquidated but is not currently operating, either. Native Nations had net capital of only about $5 million when it arranged to lend $192 million in stocks and bonds to MJK Clearing. The stock included 7.2 million shares of GenesisIntermedia Inc., a Los Angeles-based telemarketing firm controlled by Saudi arms dealer Adnan Khashoggi. A plunge in the price of Genesis’ stock led to the collapse of MJK Clearing.
Native Nations bought New Jersey-based Freeman Securities in February 2001.
Stephenson has maintained that it was Freeman Securities that initially loaned the Genesis shares to MJK, beginning in November 2000.
Founder Valerie Red-Horse and other top executives resigned from Native Nations last October and have formed a new broker-dealer, Red-Horse Securities.
– Eric Wieffering is at [email protected].
A tiny New Jersey brokerage agreed Monday to accept a $209.8 million judgment rather than fight a lawsuit related to the bankruptcy of Minneapolis securities firm Stockwalk Group, according to an attorney involved in the case.
Whether Native Nations Securities actually pays anything close to that figure remains to be seen, said attorney Bob Schnell. Schnell represents Minneapolis attorney James Stephenson, who was appointed to oversee the liquidation of MJK Clearing, a former subsidiary of Stockwalk.
“If they had $209 million in cash, we probably wouldn’t be having this conversation,” Schnell said. “They have something, but exactly how much and how that’s going to work out remains to be seen. We’ll go collect something, and I would guess that it will be less than that.” Stephenson sued Native Nations in late October in an attempt to recover $209.8 million that the firm owed MJK Clearing. Native Nations, which had $5 million in capital at its peak, ceased doing business in late September and defaulted on the debt, which was related to a series of stock loans between the firms. The default left MJK Clearing with too little capital to meet federal requirements and securities regulators forced it into bankruptcy.
Losing MJK Clearing cost Stockwalk more than one-third of its revenue and left the firm unable to pay $55 million in debt. Stockwalk filed for bankruptcy in February and has since received approval for a reorganization plan that would repay its debts over a decade.
Stephenson’s lawsuit against Native Nations was set for trial Monday, but was settled when Native Nations agreed to stipulate that it owes the money, Schnell said.
Patric for sec chairman. He understands the raping of the average investor, keep up the good work Mr.Byrne America needs thousands more like you to expose this totally corrupt and controlled market.This is anything but a fair and free market.
strange question… but when writing articles do you think it looks better if i use complicated punctuation like colons?
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