NYT's Nocera Digs Deep Into Naked Short Selling Scandal

In testimony before Congress yesterday, Richard Fuld, the former CEO of Lehman Brothers, said that (criminal) naked short selling precipitated the demise of Bear Stearns and Lehman, and nearly toppled Goldman Sachs and Morgan Stanley.

Given that not only Fuld, but also the CEOs of Goldman Sachs, Morgan Stanley, JP Morgan and a good number of traders on Wall Street – along with John McCain, Hillary Clinton, the Chairman of the SEC, the Secretary of the Treasury, and countless others in Washington — have all now implicated naked short selling in the hobbling of the American financial system, you would think that the mainstream media could produce just one investigative report – just one story taking a serious look at this criminal activity and its recent effect on our markets.

Instead, we get the usual platitudes from the likes of Joe Nocera at The New York Times. He writes:

“Mr. Fuld, in typical C.E.O. fashion, claimed to take ‘full responsibility’ for his actions — but spent the entire time blaming others for Lehman’s downfall. Early in his testimony, he even blamed [emphasis mine] ‘naked short-sellers’ who passed along “false rumors” that started a run on his bank.”

By Nocera’s standards of anti-investigative journalism, a serious issue is settled not with data or evidence, but with one word – “even.” Could naked short selling have triggered the bank run that has Chernobyled our financial system? Can’t be, writes Nocera, because Lehman’s CEO “even” said it can be.

Nocera continues: “As both The New York Times and The Wall Street Journal pointed out in lengthy stories on Monday, Mr. Fuld had assets on his books that were wildly overvalued.”

So, apparently, Lehman could not have been a victim.

A woman who once shoplifted is raped in an alley. Was she raped? No, because she was a shoplifter and she “even blamed” the rapist.

Keep in mind that Nocera once encouraged an assembly of his media colleagues not to investigate naked short selling. “Life’s too short,” he told a panel audience at the annual conference of the Society of American Business Editors and Writers. “I don’t want to do it.”

Well, somebody should do it – and fast – because the SEC is going to lift its ban on short selling tomorrow, and there are no signs that it’s going to force hedge funds to borrow real shares before selling them.

So it will once again be open season for naked short selling – and market destruction. Countless more companies will fall prey to an easily preventable crime. And more CEOs will “even” point fingers at the criminals while Joe Nocera and the Media Mob stand idly by.

* * * * * * * *

If any journalists are interested, here is Fuld’s testimony:

“The second issue I want to discuss is naked short selling, which I believe contributed to both the collapse of Bear Stearns and Lehman Brothers. Short selling by itself can be employed as a legitimate hedge against risk. Naked short selling, on the other hand, is an invitation to market manipulation. Naked short selling is the practice of selling shares short without first borrowing or arranging to borrow those shares in time to make delivery to the buyer within the settlement period – in essence, selling something you do not own and might not ultimately deliver to the buyer.

Naked short selling, followed by false rumors, dealt a critical, if not fatal blow to Bear Stearns. Many knowledgeable participants in our financial markets are convinced that naked short sellers spread rumors and false information regarding the liquidity of Bear Stearns, and simultaneously pulled business or encouraged others to pull business from Bear Stearns, creating an atmosphere of fear which then led to a self-fulfilling prophecy of a run on the bank. The naked shorts and rumor mongers succeeded in bringing down Bear Stearns. And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers. In our case, false rumors were so rampant for so long that major institutions issued public statements denying the rumors.

Following the Bear Stearns run on the bank, we and many others called on regulators to immediately clamp down on naked short selling. The SEC issued a temporary order that went into effect on July 21 prohibiting “naked” short selling of certain financial firms, including Lehman, Merrill Lynch, Fannie Mae and Freddie Mac. This measure stabilized the share prices of Lehman Brothers and the other firms. However, this restriction was temporary, and on August 13 it expired after 17 trading days. History has already shown how wrong and ill-advised it is to allow naked short selling.

Many of the firms that have recently collapsed or have been forced into emergency mergers, takeovers, or government bailouts – Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, AIG – did so during the gaps of time in which there was no meaningful regulation of naked short selling. On September 15, when the market opened after the collapse of Lehman, naked shorts appeared to turn their attention to Morgan Stanley and Goldman Sachs. In the three days between the announcement of Lehman Brothers’ bankruptcy and the SEC instituting an emergency ban on short selling,

Goldman Sachs’ and Morgan Stanley’s share prices fell 30% and 39% respectively.

None of this was a coincidence.

After seeing this stock price reaction in the week following Lehman Brothers’ bankruptcy, the SEC, like the Federal Reserve, took immediate action to stabilize the system. On September 18, following the decision of the Financial Services Authority in the United Kingdom a day earlier, the SEC instituted an emergency ban and other restrictions on short selling financial institutions. In taking these steps, Chairman Cox explained: “Given the importance of confidence in our financial markets as a whole, we have become concerned about the sudden and unexplained declines in the prices of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence without a fundamental underlying basis. The crisis of confidence can impair the liquidity and ultimate viability of an issuer, with potentially broad market consequences.” These new restrictions are set to expire no later than October 17. Permanent regulation of naked short selling is needed to prevent a similar demise for the firms that survived with the government’s help.”

  1. My goodness me!
    What a read @@@ whew!

    Fuld’s racket was no different to any of the other rackets that the suits call Wall Street.
    This is ludicrous! The Wall Street Banks lent stock and cash to Hedge Funds who got leveraged up on g-d knows what vigorish and then MADE BETS with the Wall Street Banks that it all WOULD go out of business!! AND IT ALL WENT BOOOM!!



  2. You’ve got to respect Joe. No! Really!!! He cast his lot with the devil, and even seeing the end of his little scheme, and seeing his friends implode with 50% losses and redemptions, seeing the SEC respond to the SEC IG piece by saying, “….look. He said we were diligent”, even with seeing all this, he stays true to his masters.

    Regardless, I’ll take my dogs. They’re loyal, and when they lie, they’re cuddly.

  3. Joe should be in politics….”ask not what wall street can do for you, ask what you can do for wall street”

  4. “and seeing his friends implode with 50% losses and redemptions”

    It’s hard for me to imagine that the miscreants who bet on a fall are down in this market. Not to mention down 50%. How can this be?

    Chanos, who ran around $2 billion a few years ago, was quoted recently at $7 billion. Now that I believe.

  5. Feb 2008

    “Speaking at a New York investor gathering, Chanos said his $4 billion-plus investment firm sees rich opportunities”


    Sep 16, 2008

    Instead, Chanos, whose roughly $5 billion (2.8 billion pounds) hedge fund Kynikos Associates

    uk.reuters.com/article/americasHedgeFundsNews/idUKARO12901120080916 – 55k – Cached – Similar pages

  6. There is an explanation for Fuld’s sworn testimony about naked shorting. You missed him taking off his aluminum foil hat. When Congress decides that he was lying, he can fall back on being crazy. I could tell he was just being a shrewd businessman.

    Remember, he wasn’t that far from the Pentagon where commercial airliners crash and leave no trace.. aluminum is hard to find in DC except on the Washington Monument.

    The poor man.. I was in tears when I heard that he hadn’t sold any stock.. thousands of shares and no golden parachute.. and no severance. Later when I learned that he had been physically assaulted in the gym by an employee, again I wept, and wept…

  7. I bet a lot of people would pay good money to see Nocera assaulted and knocked out. He’s the slime bucket of the NY Slimes.

  8. Thanks for the open letter, it should be on all newspaper’s front pages not hidden so well. I found this by carefully reading the whole page and mice type of Overstock.com.

    Am I the only one who has a difficult time unscrambling this stuff…or is that the way it’s designed. Sans a degree from Wharton Business School it becomes jibberish in the hands/minds of such deft scoundrels as all the corrupt CEOs and their compadres. They NEED to be charged with some kind of crime!! Someone, anyone, please find a crime to fit this and prosecute the hell out sof them. Thank You, a begruding tax payer.

  9. Thanks for the open letter, it should be on all newspaper’s front pages not hidden so well. I found this by carefully reading the whole page and mice type of Overstock.com.

    Am I the only one who has a difficult time unscrambling this stuff…or is that the way it’s designed. Sans a degree from Wharton Business School it becomes jibberish in the hands/minds of such deft scoundrels as all the corrupt CEOs and their compadres. They NEED to be charged with some kind of crime!! Someone, anyone, please find a crime to fit this and prosecute the hell out sof them. Thank you, for this forum. Like many of us, I’m a begrudging tax payer who’s just making ends meet and seeing my meager portfolio down by 40%. I’m now grateful for my S. S. check each month. Try living on that you bastards!!!!

  10. Have you ever heard the saying “it’s not the fall that kills you, it’s the sudden stop at the bottom”? He reminds me of this kind of twisted logic. While NSS may not be the sudden stop, it is certainly part of the fall.
    During this massive global recession that is turning slowly toward a depression, the only thing that can save the world is the working men and women that actually produce something. They can play all the games they want with banks and lending but you can’t borrow your way into prosperity and you can’t borrow your way out of debt. You have to work your way out of it. That being said, I’m afraid that the huge NSS positions in many public companies are going to kill them during this period along with the productive jobs they represent to the economy.

  11. oh, and don’t feel bad, Alice. Not only do we not understand it, neither do the masters of the universe that created the problems. It appears to be a ponzi scheme but with the captured authorities I don’t look for any meaningful retributions or relief. I’m actually expecting to see the end game being different and more notorious than we could have ever imagined.

  12. For those who want to be PROACTIVE do as I have done and send the articles links to the Limbaugh: Cavuto, Cnbc, Oreilly, Fox news, and the SEC. Then you will have your document to hold them accountable. I have and have done so since 2003. The problem is many of those dogs sleep together.

    BUT COLLECTIVELY we CAN do something well beyond this great site. Thanks Mark and all who are involved.

  13. I’ve been attempting to contact my senator
    (Susan Collins, R Maine) and my representative (Mike Michaud,D ME) but
    neither they nor they office staff seem to
    get it. Instead all I get back is a form letter
    about the bail out, and whether they voted
    nay or yay on that. I am beginning to believe
    they (congress) don’t understand the difference between short selling and naked short selling, and are not taking the time to educate themselves, much less have a
    position on this crime and the SEC’s lack
    of enforcement against naked short selling!

    Hence we are inthe hands of legislators who don’t understand and won’t bother to
    learn what is going on that costs us
    trillions of dollars in fraudulently created
    naked short shares! Hopefully, if Obama gets elected, he will learn from some well
    educated advisor, that this is a huge problem that has to be corrected, even if it breaks the wall street bank!

  14. It’s a shame you don’t have a donate button! I’d most certainly donate to this excellent blog!

    I suppose for now i’ll settle for book-marking and adding your RSS feed to my Google account.
    I look forward to fresh updates and will share this website with my Facebook
    group. Chat soon!

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