Nearly one year after its original date of publication, my video, Hedge funds and the global economic meltdown has finally received its first bit of serious criticism, and I can’t express how pleased I am about it.
So far, at least as far as bloggers and YouTube commenters are concerned, response to the video has come in five flavors:
- Approval
- Nutty approval (“This makes me so angry I want to take to the streets in bloody revolution! It’s all [insert political party or current/past president]’s fault! ”).
- Tentative approval (“You’ve got part of the story right, but the real problem is…”)
- Random and unaware (“I’ve got a puppy named Patches. He has a wet nose.”)
- Nutty disapproval (“[Insert anything Gary Weiss would say]”)
What’s been missing is educated criticism based on the hard facts presented in the video. And believe it or not, this has bothered me, because it suggests that not enough smart people are paying attention.
As I mentioned, that changed this week when Mike “Mish” Shedlock of SitkaPacific Capital Management analyzed the video on his blog and managed to make a compelling contrary case. Though compelling, Mike misses the mark on a few key points and his analysis requires a rebuttal, which I’ve decided to offer here as it would probably be of interest to DeepCapture.com readers. I’ve also invited Mike to respond, and will print whatever he offers at the end of this post.
(If you’ve not seen the video yet, I encourage you to watch at least the first five minutes now, otherwise nothing that follows will make much sense.)
Shedlock frames his criticism of the video in terms of what he identifies as three assumptions (printed verbatim in black, with my response in blue italics).
1. That whoever bought way out of the money Bear Stearns PUTs “knew” something and illegally acted on it. I agree with this.
2. The same institution that bought the PUTs was illegally shorting shares. I think this is a safe assumption.
3. There is a conspiracy to protect those evil doers. I do not agree that there is a conspiracy to protect the short sellers who attacked Bear Stearns any more than there was a conspiracy to protect Bernard Madoff before his scheme blew up. What “protects” them is Wall Street culture, and it’s no conspiracy…it’s common knowledge.
Shedlock then attempts to explain how the market really works via four statements of fact which he expects will undo my arguments, but which in reality only support them.
Here again, I present Shedlock’s facts verbatim, followed by the information he apparently did not have when he originally wrote them, in blue italics.
Fact #1: When someone buys PUTs the market maker or counterparty who sold them is short those PUTs. This is a mathematical statement of fact. This is 100% truth.
Fact #2: The market maker who sold the PUTs, shorts stocks as a hedge against those short PUTs.
This is also 100% truth, and an indispensible component of illegal naked short selling, which requires the options market maker to sell the stock naked short to the fund buying the puts. This is part of the married put strategy we’ve claimed from early on facilitates illegal short selling. As far back as 2003, the SEC expressed concern about married put strategies as a means of circumventing multiple market regulations. In this 2007 paper, an economist explains how a combined strategy of married puts and reverse conversions provided the engine that powered the naked shorting epidemic that grew unabated until changes were finally made in the wake of Lehman’s demise.
Fact #3: The lower the share price, the more shares the market maker has to short to stay delta neutral. Also true.
Fact #4: Market Makers are not governed by naked shorting rules. Again, Shedlock steals my line. Prior to the repeal of the options market maker (OMM) exception of Regulation SHO, OMMs were not bound by the locate and delivery requirements of that rule. So, it’s entirely predictable that options trading would play a key role in any effort to circumvent Reg SHO.
The existence – and illegality – of these kinds of tactics are documented in this November 2009 administrative action brought by the SEC against Rhino Trading and Fat Squirrel Trading (one of only two enforcement actions specifically alleging naked short selling filed in the Commission’s history). In it, you’ll learn how reverse conversions and “resets” (the call-based alternative to the married put) were used to illegally manipulate other stocks down.
At this point, Shedlock has spelled out the entire philosophical foundation for his disagreement with me, and yet we’re apparently in the awkward position of not disagreeing about any of the parts that really matter. The actual disagreement seems to be based on our interpretations of the implications of these facts, in my case informed by a slightly more detailed (though not very broadly-applicable) knowledge of the tactics used by illegal stock manipulators. That Shedlock is not familiar with these tactics speaks very well of him as an investment manager, in my opinion.
So, while Shedlock claims, “the [options] market makers shorting Bear Stearns did so for purely mathematical reasons, to remain delta neutral” I assert that this necessity, combined with their exemption from Regulation SHO’s locate and delivery requirements in place at the time, made them the perfect counterparty to a short-selling hedge fund seeking to warp the market for Bear Stearns stock through the generation of artificial supply.
Shedlock further asserts that Bear’s demise was the inevitable product of its own greed and toxic balance sheet. I respond by agreeing that Bear probably was destined to go under, and in capitalism, that’s ok. However I further point out that Bear had $18-billion in cash on hand when the assault began, and so the process should not have taken just one week. In a civilized world, even when someone is on their deathbed, it’s not ok to hasten death through forceful application of the pillow; and particularly not when the incentive for doing so is pecuniary.
As promised, the space to follow is reserved for Mr. Shedlock to offer his rebuttal.
======================================
.
When I first saw Mish’s post, it came across as reasoned and articulate, but it glossed over the whole concept of what derivatives are supposed to be.
Derivatives DERIVE their value from an underlying asset.
For example, farmers might sell a contract to sell wheat at a certain price come harvest and speculators might buy and sell that future’s contract, some speculators believing the farmer sold to cheaply and others believing his price was too rich.
But the price of the wheat come harvest should only be about supply and demand of the wheat.
Over the years, Wallstreet has perverted things sound badly that the underlying assets now derive their value from the paper contracts.
It’s the supply and demand of the paper supplied by the speculators that sets the price of the underlying asset.
Speculators can drive the price of silver so low no one wants to mine it or wheat so low no one wants to grow it. It creates perverse situations where you can fish the very last Atlantic salmon and the price doesn’t go up.
These derivative contracts are effectively phantom supply and it’s gotten out of control.
What used to be a side bet can now be used to bankrupt banks, brokerages and development stage companies and put millions out of work.
It’s a zero sum game when value doesn’t come from the growth in the value of the underlying asset.
A zero sum game means the billions that Wallstreet received in bonuses exactly equals the amount the rest of us are losing.
And no real value is created except for the shuffle from my wallet to theirs.
Mish, everything you say is exactly right, but the outcome is not what capitalism is supposed to be all about.
What used to be a side bet can now be used to bankrupt banks, brokerages and development stage companies and put millions out of work.
And you should add: under certain circumstances, whole countries.
At one time, value was created by taking inputs (energy, raw materials, labor, manufacturing facilities) to CREATE products that consumers DEMANDED.
People got rich by making the life of the average working stiff better. Whether it was the railroad tycoons linking the country together or the internet software tycoons linking the country together or whether it was the latest drug saving millions of lives or whether it was a new invention like the electric motor or the car or the computer or the search engine, it was all about innovative people, working hard to better the rest of us.
Sure there were cartels and monopolies, but so what. They benefited and so did the rest of us.
America was great because it made stuff.
This is who gets rich now. What they do is pick money from the public’s pocket to put in their own. I like to call them pick pockets.
http://nymag.com/daily/intel/2010/02/steve_cohen.html
If you ask me the game is deliberately made more complicated than it needs to be. In addition it appears that there are loopholes that are only available to a limited number of players with privileged positions. And you call that a free market?
If this market were anything close to being free, there would be hundreds of companies lined up to take over the top spot from Goldman Sachs. But because of barriers to entry created and maintained by government regulators, there is no competition in sight.
The game is rigged and on top of that the participants are gaming the system. Look at High-Frequency Trading, for example. Naked Short Selling appears to be only a symptom of a system that is corrupt through and through. We don’t need reform, we need a revolution. Too bad the system was not allowed to crash and burn in 2008. The term “creative destruction” was never more appropriate.
The heads of the Wall Street aristocracy must roll and there must be a new and open system put in place to replace it. With today’s computer and networking technology, this should be a snap. Give the job to Google and I’m sure they could come up with a better, more fair and equitable system in a month’s time. Heck it’s hard to imagine a worse system than what exists on Wall Street today.
Of course this would expose the King’s New Clothes and would send shock waves through the financial sector exceeding 10.0 on the Richter scale. Wall Street’s Temple would be completely destroyed – hopefully forever. And the City of London would disappear into the ocean along with it. Good riddance!
Ney: Yes. However, there are still far too few to be able to make much change in the stock market. Most people still believe the stock market is too respectable to carry on a scam such as it is.
http://www.hermes-press.com/neyint.htm
Richard Ney on the Role of the Specialist
“The story is told that after he had been deported to Italy, Lucky Luciano granted an interview in which he described a visit to the floor of the New York Stock Exchange. When the operations of floor specialists had been explained to him, he said, ‘A terrible thing happened. I realized I’d joined the wrong mob’” (1Ney, 8).
http://www.infowars.com/how-the-new-york-stock-exchange-really-works/
The New York Stock Exchange is not an auction market (2Ney, 86), though many investors still hold onto that image. It is a rigged market. Volume is an effect of price. Prices are controlled absolutely by the specialists, the ‘market makers’ in individual stocks. It was this discovery that led Mr. Ney to eventually give us small investors a priceless gift: enlightenment.
All three of the major networks were wary of having Ney appear. NBC banned only two people from appearing on the Tonight show with Johnny Carson: Ralph Nader and Richard Ney. Not only do large banks, brokerage firms, and corporations advertise on television, they also are the largest stock holders (2Ney, 33- 34).
http://w3.tribcsp.com/~fredj/ney.html
Deepcapture, you need to tune down your spam guard.
If you footnote a post with more than two links, it deletes the post. People that take the time to footnote with many links find their time composing the post completely wasted.
If you break the post into multiple posts, it refuses to post them because “slow down, you are posting too quickly.”
Sorry about that. Just know that comments with three or more links (or which are flagged as spam for containing a typically spammy word) are not deleted. They’re just held in moderation until I can check and manually approve them. I check several times each day. Based on your concerns, I’m going to relax the link limit and see how that goes.
Thanks.
Thanks, Judd.
Assumption 3. There is a conspiracy to protect those evil doers
I am firmly in this camp. After all who wouldn`t bend a few rules if they were in a position of power the likes of which has never before been seen, and thought they were smart enough to know what was best for everyone. Remember certain SEC officials declaring that they intended to prevent “market volatility and short squeezes”? They neglected to say HOW they intended to prevent these from happening. But one need look no further than the Madoff Exemption to understand. The option hedging was the same. The concept of a free market is an old wives tale that never really existed. But when the regulators take sides against the general small investing public in such a vehement way something is seriously wrong.
Judd –
The term “conspiracy theory” has become a PC label used to discredit inconvenient facts.
Why not just focus on what’s factual or reasonable?
In other words, instead of bandying about a propaganda term that’s meant to shut down rational discussion, let’s simply focus on whether something is “documented,” “probable but lacking a smoking gun,” “plausible but not yet documented,” “reasonably proven,” “incontrovertibly proven,” “irrational,” or “impossible”?
These are nuanced and graduated terms that have clear criteria that everyone can agree on.
Actually, when I hear someone distance themselves from an argument/hypothesis SOLELY on the grounds that it is “conspiracist” – they begin to lose their credibility.
Go where the evidence and the logic take you, let the conspiracies fall where they may..
Don’t be intimidated by labels, if you’re clear in your conscience about who you are and what you’re doing.
Reason, truth, honesty, fairness, respect – these are tools available to all of us equally.
Never doubt they will win in the end.
Lila
buybuybuy,
In regards to your comment re:agreeing with Assumption 3. There is a conspiracy to protect those evil doers.
It might go a little deeper in that there is also a need to cover-up just how far asleep at the wheel the congressionally mandated provides of investor protection have been and how some of them have willfuly functioned in a facilitative role. It is crucial to withold from the investing public that many of the historical investments in especially development stage U.S. corporations perceived to be an “easy prey” to these attacks never did have a chance for success.
If you lent money to Goldman Sachs, denominated in Greek currency, would you expect a higher interest rate then lending the money to Greece?
I would as there’s more risk.
What GS and others figured out is by naked shorting government bonds, whether it be US, Greece or California, they are effectively able to borrow money at the same interest rate as the governments are getting and the lender is none the wiser.
Actually, that’s not quite true. The extra supply of counterfeit bonds pushes up the interest rate the government and tax payers have to pay.
What do the politicians have to say about this counterfeiting? They support it.
http://www.reuters.com/article/idUSTRE62900820100310
By the way, did you notice the propaganda in the last article. It says the Obama administration rejected clamping down on naked shorting and CDS’s, but then the quote is from a former JP Morgan investment banker, now at a right wing think tank, Citigroup and the privately owned Federal reserve, three parties that benefit from counterfeiting and using derivatives to set the price of the underlying asset. There are no quotes from actual government officials.
Seems to me the vulture capitalists, the free-market octogenarians that comprise the right-wing in congress are all for these instruments in the name of a ‘free’ market.
Or is it free ‘ride’?
http://www.ft.com/cms/s/0/bb555a60-2baa-11df-a5c7-00144feabdc0.html?nclick_check=1
http://www.ft.com/cms/s/0/7b56f5b2-24a3-11df-8be0-00144feab49a.html
Naked shorting gold and silver.
http://www.zerohedge.com/article/gata-claims-have-evidence-massive-physical-short-gold-and-silver-positions-can-not-be-covere
To prevent from failing why can a bank not just get a long term loan from the fed discount window?
With what collateral?
I found deepcapture.com and various videos because I check Mish’s blog regularly. However, it was only with your comments about deep capture and the implications that lead me to understand that, while Mish and others in the econ-blogosphere, talk about an ‘Emperor with no clothes’, (the disconnect between the market indices and the reality of growth on the ground) we still haven’t seen any correction yet.
This annoys me, as it seems that the entire system isn’t based on underlying value at all, but the opinions of the value by the majority of holders.
Your rebuttal was fabulous, and I knew there was something bothering me with Mish’s response. You have elucidated it for me in your statement: “I assert that this necessity, combined with their exemption from Regulation SHO’s locate and delivery requirements in place at the time, made them the perfect counterparty to a short-selling hedge fund seeking to warp the market for Bear Stearns stock through the generation of artificial supply.”
Excellent response! I hope that Mish is willing to come back and offer a response.
Thank you, U238Willy.
Mish tells me he’s traveling but will look at offering a response upon his return.
It seems perception is 9/10ths reality…at least on Wall Street.
Wait, are you saying the purchase of puts priced radically lower than the then current market price was executed with manipulative forethought because the buyer knew that the seller of the puts would have to naked short like crazy flooding the market with “artificial supply” to remain delta neutral? So all one has to do to “warp” or manipulate a stock’s price on the downside is buy bunches of low priced puts because you can count on the naked shorting put seller to do the “dirty work” for you? Why doesn’t or didn’t given the new restrictions this happen all the time to all different sorts of companies then? Low priced puts are very very cheap to buy … what has stopped the same thing from happening to hundreds of companies? Have you done the calculations on how much stock would have to have been sold for the put seller to achieve delta neutral while the stock fell? What % of the known FTDs does it account for? I doubt it will be all that significant.
I agree that the unbelievably perspicacious put purchase in Bear is suspicious … but it was not the magic bullet … 18 billion in cash means nothing when you owe 35X that (come on, you understand that right???). Bear’s leverage was mostly short term, mostly on the basis of interbroker goodwill and these loans could be revoked at any time. Their credit structure was like a house of cards. Remove a few loans and that would trigger covenants on others and so on and so on. That’s how it happened so quickly. The company depended on flimsy short term credit. 18 billion of cash might as well have been 18 cents.
I do think your work exposing the fabrication of borrow via matched option trades is golden. I think or hope that will lead to scrutiny of the practice and a prohibition on it, which is great for the market. Kudos there but not on the Bear stuff.
Wall Street understands a simple fact. Human nature creates buyers. People believe hype, trust people they have never met, buy things they haven’t researched, and believe in “get rich easy”. Wall Street knows this and has created a culture that makes money on selling. They sell into hype, they know that fear can create panic, they understand that the SEC is either ignorant or complicit, and so they flash trade, naked short, use CDS and play every game in the book to take our money. And what has Obama done about it? Seen any perp walks for BSC, LEH? Cramer’s still on TV a YEAR after Jon Stewart showed the world that Jim was a manipulator of the markets…
Unless something CONCRETE happens…
zzzzzzzzzzzzzzzzzzzzz
Help me understand. What is the current status of the MM exception? How does a MM hedge puts he sells?
I’m not sure how the hedge works.
Owning a call and selling a put at the same strike price is the same as owning 100 shares (S=C-P).
Imagine the scenario where everyone was selling him puts. Wouldn’t the contrarian in him expect the market to move against the crowd?
For example, if he sold $20 puts on a stock trading at $22, he could collect the premium and $22 by going short, against a risk of buying the stock at $20, locking in a $2 gain.
But what happens if it goes up? He still has to cover the short and could really easily end up losing money. If it went to $25, he would be down a dollar, minus whatever he got for the premium. It seems that would be likely if the sheep were betting the other way.
It seems like the market maker is taking all the risk for someone else who is getting the bigger option benefit on the put if it goes up.
Wouldn’t the option market maker prefer to sell an equal number of puts and calls, so he collects all the premiums and manipulates the price to the point where the most options contracts expire worthless (max pain)?
That should be “If it went to $25, he would be down three dollars…”
Got this from a message board that I frequent and I dare anyone to listen to this uncensored interview with Harry Markopolos. DARE YOU!!!
what comes around goes around
mo’fo’s
thats right sec you mo’fo’s get ready the storm is comin
click mic next to harry
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/3/2_Harry_M._Markopolos.html
fh_xx
Thanks for the link. I highly recommend this candid interview with Harry Markopolos. For those who may have forgotten, Markopolos was the one that blew the whistle on Madoff early on, only to be ignored by the SEC.
Markopolos calls for an end to both the Democrats and the Republicans. He encourages everyone to vote for independent candidates.
He speaks in more detail in this interview about a subject he brought up at the Congressional hearings, which is the involvement of Organized Crime investors with Madoff. One thing I’ve been wondering for a while is whatever happened to Sonja Kohn, the founder of Bank Medici. Her “bank” was another one of the feeder funds that kept Madoff’s Ponzi scheme alive. She was based in Europe and apparently attracted funds from the Russian Mob.
Soon after Madoff’s scheme collapsed, Kohn completely disappeared from sight. She has since reappeared and is under investigation, but no charges have been brought against her. Perhaps she is “gray-mailing” people in positions of power – threatening to expose them if they go after her.
I wrote an article about Madoff and Markopolos in early 2009 that talks about the relation between Kohn and the Russian Mob.
The Madoff Connection
Geitner serving his masters faithfully!!
Re: Greece wants US to get tough with hedge funds
Yea, you called that one…one of the biggest racketeers has already responded with a ‘warning’.
BRUSSELS (Reuters) – U.S. Treasury Secretary Tim Geithner has written to the European Commission warning that plans to regulate hedge funds and private equity firms could cause tensions with Washington, the Financial Times reported.
EU defends hedge fund rules against U.S. critics
although the article has changed from when I first copied the link, the
http://www.reuters.com/article/idUSTRE62A12Y20100311?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+reuters/businessNews+(News+/+US+/+Business+News)&utm_content=Google+Feedfetcher
It’s not just our regulatory agencies and media that are captured..its our Government also.
Naked Swaps Crackdown in Europe Rings Hollow Without Washington
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Ben Moshinsky and Aaron Kirchfeld
March 11 (Bloomberg) — European politicians and regulators could initiate a continent-wide ban on speculative trading of sovereign credit-default swaps tomorrow. Making it stick without the Americans won’t work.
New York and London dominate swaps trading, and both have resisted greater regulation. Last year, U.S. regulators and Congress rejected a proposed ban on buying credit-default swaps without owning the underlying debt. Adair Turner, chairman of the U.K. Financial Services Authority, said yesterday that these so-called naked swaps weren’t the “key driver” of the Greek debt crisis and it would be wrong to rush to ban them.
“You need to get the U.S. on board, otherwise the effect will be minimal because trading will simply move elsewhere,” said Jan Hagen, head of the financial services group at the European School of Management and Technology in Berlin. “A ban would allow European politicians to tell voters at least they’re doing something.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aj9Qo2YqmFKs&pos=3
Apparantley not all politicians are crooked or captured..or at least not this one and Ron Paul!!!
http://www.huffingtonpost.com/2010/03/11/senator-calls-for-aggress_n_494699.html
Senator Calls For Aggressive Financial Reform, Deplores Current ‘Incremental’ Steps
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A senator is calling for the break-up of megabanks and a firmer separation between Main Street banking and Wall Street trading, joining the ranks of leading economists and business titans demanding aggressive financial reform far beyond what the Obama administration and Democrats in Congress are pushing.
In a Thursday morning speech on the Senate floor, Sen. Ted Kaufman (D-Del.) blasted the “incrementalism” approach to fixing the nation’s broken financial system, laid bare by a financial crisis that wiped out trillions of dollars in wealth and sent the economy into a tailspin not seen since the Great Depression.
Rather than nibbling around the edges, Kaufman wants to impose strict limits on financial firms’ activities; significantly cut them down in size; and wants Congress to act more forcefully because federal banking and securities regulators failed to protect the public from an increasingly dangerous financial industry.
The fact is, he intoned, “the government’s response to the financial meltdown has only made the industry bigger, more concentrated and more complex.”
Because of that, “[f]inancial regulatory reform is perhaps the most important legislation that the Congress will address for many years to come,” said Kaufman, Vice President Joe Biden’s replacement in the Senate. Otherwise, “if we don’t get it right, the consequences of another financial meltdown could truly be devastating.”
Simon Johnson, former chief economist of the International Monetary Fund, professor at the MIT Sloan School of Management and contributing editor to the Huffington Post, said it’s “the speech for which we have been waiting.”
Excerpts below…
Thought you guys would want to see this video
http://www.youtube.com/watch?v=Z7OOuJwOP5U
Sad thing about the otherwise stellar Markopolis interview noted above:
Why the hell did he let scumbag Einhorn write the forward to his new book?
Einhorn is no hero. On the contrary, he is guilty of exactly what we can’t afford to indulge anymore in this country, or world, for that matter.
Markopolis undercut his own argument by bringing trash like Einhorn into the debate.
Perhaps this is a case of ‘the enemy of my enemy is my friend’…
HM wouldn’t be given this much play in the media unless his popularity could provide gift-wrapping for Einhorn & Co….thus nicely confusing the issue for the casual reader, who thinks Markopolis=whisteblower=Einhorn=reformer.
Look around. Many people are getting themselves Einhorn wrapping paper.
It’s quite funny, actually.
Laughing so hard I’m crying.
Jim, I think you are 100% right in you above observation.
And I thought, until now, that Markopolis would have been a good SEC head.
Reconsidering, I think he’d just destroy what’s left of the Financials in the name of mark-to-market and so-called ‘price-discovery’…
Having shorted all the while with Einhorn, Sen Shelby, and the rest of the cabal…
Surely, Harry the Greek can’t be proud of what these bastards have been doing to Greece, can he?
Unbelievable!
Judd, you can title this one “Evidence of Mass Murder on Wall Street”
http://www.huffingtonpost.com/2010/03/11/lehman-bankruptcy-report_n_495668.html
Lehman Bankruptcy Report: Top Officials Manipulated Balance Sheets, JPMorgan And Citi Contributed To Collapse
The examiner in charge of investigating the bankruptcy of venerable Wall Street investment house Lehman Brothers, the most expensive bankruptcy in U.S. history, said in a report publicly released Thursday that senior officials failed to disclose key practices, opening them up to legal claims, and that JPMorgan Chase and Citigroup contributed to the firm’s collapse. In addition, the report concludes that the firm’s auditor, Ernst & Young, failed to meet “professional standards.”
The exhaustive report was unsealed today by Judge James M. Peck, who said the report reads “like a best-seller.”
The examiner, Anton Valukas, also found that parties have claims to pursue against JPMorgan Chase and Citibank in connection with their behavior regarding the modification of agreements with Lehman and their increasing collateral demands in Lehman’s final days. These demands had a “direct impact” on Lehman’s diminishing liquidity — its cash on hand — which was a prime reason behind the firm’s demise.
Please note: The’ve already gotten their bonuse and golden parachutes and we are left holding the bag
. Ain’t life grand!!! This post is from investorsvillage. Blackbart I believe wrote it.
Lehman…Where Are The Arrests?
Caught doing what Refco did. Flopping repo’s at the end of quarters. Look who knew and did nothing…..
“The Examiner concludes that colorable claims of breach of fiduciary duty exist against Richard Fuld, Chris O’Meara, Erin Callan, and Ian Lowitt, and that a colorable claim of professional malpractice exists against Arthur Anderson Ernst & Young.”
“an apparent admission that FRBNY and Tim Geithner specifically knew that the marks that these banks were taking on their assets was materially and intentionally false.”
“So The SEC knew, and they too did nothing.”
http://market-ticker.denninger.net/archives/2070-EXPLOSIVE-Lehman-Where-Are-The-Cops.html
How long will it take to get any semblance of justice other than a watered-down Uptick rule?
So-called ‘Activist Investor’ Carl Ichann shut out of Lion’s Gate entertainment:
http://www.reuters.com/article/idUSTRE62B29F20100312
Good for Lion’s Gate!
I don’t get it. WHat’s keeping him from buying in the open market?
Spread over a period of time, of course. Not all at once.
The bankruptcy examiner at Lehman Brothers issued a 200 page report on who was responsible for torpedoing Lehman Brothers. Was it hedge funds? Naked shorting? No in fact it was Lehman Brothers itself.
Lehman Brothers engaged in transactions to make their balance sheet appear safer than it really was. According to Lehman’s own COO, the transactions served no financial purpose other than to make Lehman’s capital position appear to be better than it really was.
The comments of the bankruptcy examiner seem to exonerate hedge funds who at the time were skeptical of Lehman’s accounting. As it turns out they were one hudred percent right and profited from it.
Now that Deep Capture has once again been proven wrong by a regulatory authority. What a shock! Will it issue an appology and remove the eroneous information from its website? Don’t hold your breath.
“…Deep Capture has once again been proven wrong by a regulatory authority”
Ms. Shapiro, is that you?
Surely you jest. I mean… yes Lehman was cooking the books, but how gullible are you? Do you think Lehman was the only one using questionable “accounting” methods? And the revisionists have now showed up 18 months post mortem to place blame squarely on the deceased. How convenient. Hmmmm…
http://www.zerohedge.com/article/lehman-brothers-dies-while-getting-away-murder-regulatory-capture
The truth is the captured government regulatory authorities do not regulate. They prefer to protect big money self-interests. At the root of all our problems is a grotesquely, morbidly obese government. You think it might cost a lot of money to fund all this goverment excess? Is it a coincidence we have an exorbitant debt & continual deficit spending policy? I think not.
Speaking of morbidly obese government:
BATF, BIA, CBO, CDC, CENTCOM, CIA, DARPA, DIA, DISA, DEA, DHS, DLA, DOC, DOD, DOE, DOJ, DOL, DOS, DOT, DSS, DTRA, ED, EEOC, EPA, FBI, FDA, FDIC, FHA, HHS, HUD, INS, IRS, ITA, ITC, NIST, NSA, OSHA, OMB, ONDCP, SEC, SBA, SSA, TSA, USDA, VA, …
And there are many more failed agencies. Too many to list them all. See for yourself…
http://www.usa.gov/Agencies/Federal/All_Agencies/index.shtml
Greenday, I appreciate your comment, mostly because we don’t get enough contrary voices here. I hope you’ll continue participating in the discussion. Having said that, allow me to point out the weakness in your premise, and why it’s a good example of how our two “sides” view the world.
We feel that every public company deserves access to fair markets. You feel that only certain companies do, and you get to decide which.
If Lehman made mistakes, as has long been apparent (and as Deep Capture has already said numerous times), then there are appropriate ways of dealing with that which do not include illegally warping the market for the company’s stock.
Would Lehman have been a good short? Sure looks that way. But that fact does nothing to affect the company’s right to see its stock traded fairly from cradle to grave.
Mr. Bagley-
The independant bankruptcy examiners did not conclude that the “illegal warping” Lehman Brothers stock contributed to its demise in any way. Hence your continued insistance that it did goes against the stated opinion of independant examiners who carefully analyzed the situation. The soul reason why Lehman Brothers does not exist today is because it made bad business decisions on a highly levered basis which erased its equity.
To argue that Lehman did not have “fair access” to the financial markets is ridiculous. Lehman had the chance to offer equity to the public at much higher prices and refused. They even had the chance to raise capital from Warren Buffett, but refused. Had they done so, this would have enhanced Lehman’s reputation and allowed them to raise even more capital. Lehman still refused.
The argument that Lehman “made mistakes”, seems akin to the old argument that Enron “made mistakes”, but was really brought down by illegal market manipulation. Wow poor Jeffrey Skilling spending wrongfully spending twenty five years in the pokey for nothing! Lehman didn’t just “make mistakes”, they made financial transactions that served no other purpose but to hide their true financial condition from potential investors. Earth to Judd they didn’t just spill some milk, they lied.
Several hedge funds stated at the time that Lehman was indeed mistating the value of its assets and using the decline in the value of their debt to inflate their earnings. Deep Capture accused these funds of “lying” to support their short positions. Given that the independant bankruptcy examiners and Lehman’s own COO concluded that these hedge funds were 100% correct in their assertions shouldn’t Deep Capture now retract its accusations and appologize? That’s what any legitimate news organization would do, but I’m not holding my breath for a printed appology.
If a private investors refused to invest in a privately held highly levered entity where it was clear that the managers were lying about the company’s financial condition we’d call them prudent. But when public stockholders do the same thing its somehow the fault of shadowy hedge fund’s.
Why is this? Because those like Feld who blame their company’s woes on market manipulators are usually just trying to draw attention away from their own incompentance and/or fraud. By blamming others they can continue to issue stock at inflated prices and continue living the good life with huge slugs of compensation in both cash and stock options. In Feld’s case, he hopes to use this defense in hopes that potential jurors will acquit him when he is inenvitably indicted.
You’re not understanding what I’m saying. So I’ll try again.
Legitimate short selling is fine, and Lehman was clearly a great short.
Manipulative naked shorting is always wrong.
Feel free to heap evidence of screwball accounting by LEH all you want. It doesn’t change the fact that illegal short selling occurred in massive amounts in the days immediately prior to the company’s bankruptcy, and indeed the depressive impact on share price generated by that illegal shorting created the liquidity crisis that directly led to the bankruptcy.
Yes, who placed the big put bet???
“Feel free to heap evidence of screwball accounting by LEH all you want. It doesn’t change the fact that illegal short selling occurred in massive amounts in the days immediately prior to the company’s bankruptcy, and indeed the depressive impact on share price generated by that illegal shorting created the liquidity crisis that directly led to the bankruptcy.”
Judd-
The paragraph above is pure nonsense and I think you know it.
An independant court appointed bankruptcy examiner wrote a 200 page report and disagreed with what you claim is fact. How can that possibly be?
What caused Lehman’s bankruptcy, according to the examiner, was a severe decline in its assets that wiped out its equity. No independant investor was willilng to fill this capital hole because they wouldn’t have earned acceptable returns and likely would have lost everything. Not even Judd Bagley would have filled the capital hole.
Deep Capture also slammed hedge fund manager David Einhorn for his public criticism of Lehman Brothers at the time. The report shows that Mr. Einhorn’s criticisms of Lehman were absolutely correct. Will Deep Capture apologize to Mr. Einhorn and retract its comments?
That bank examiner report…? Two-thousand-two-hundred pages in the main narrative volumes (the appendices are another 1800 pages).
Then again, in the screwball world of ANSS & GAAP I am not surprised that folks so readily confuse “200” with “2200.”
As for “wiping out their equity” – what else would you call the precipitous decline in the price of LEH common-stock? It’s the Deep Capture thesis that abusive naked short selling was a key contributing technique in that process. Let’s not forget too that a large round of fails-to-deliver in LEH stock took place in July 2008, two months before their final collapse into bankruptcy. (It’s as if the financial terrorists were practicing their methods and testing LEH’s vulnerability to them.)
Jim-
Deep Capture’s thesis shows a deep misunderstanding of Lehman’s business model. Your own comments show a misunderstanding between the market value of Lehman’s equity and the private market value of Lehman’s equity.
I’ll take the second point first. The actual value of Lehman’s equity will be the cash that it receives from its assets discounted to present minus the cash it will have to pay for its liabilities discounted to present. If the cash value of the liabilties exceed the equity than the equity is worth zero. Lehman declared with the bankruptcy court liabilities that were worth far in excess of the value of their assets. To date it seems as though the sale of its investment bank and real-estate to Barclays and the sale of its asset management platform will not be enough to finance its liabilties. Its unknown at this point if the discounted cash-flows from these assets will exceed the price the buyers paid for them. Its highly unlikely that the cash-flows will exceed the liabilities.
This is quite different from the actual public market value of Lehman’s equity. The actual market value is the aggregate perception of the market participants at any given time. Though the two metrics should eventually converge, for various reasons there maybe huge discrepencies for periods of time. This will especially be true if information about the actual value of the equity is hidden from the public as it was here.
There are two important lessons here. No matter the fall in the shareprice doesn’t effect the actual value of the equity. Since the value of Lehman’s liabilities were greater than its assets, its equity was worthless regardless of how the market priced it. In fact, even if Lehman were a private company with no public “share price”, its equity would still be worthless.
Further the allegation that Lehman’s liquidity crisis was triggered by the movement in its share price is simply ridiculous and those that actually think this is true misunderstand Lehman’s business model. A plain vanilla bank makes loans to individuals and businesses and funds those loans and its operations with deposits from its community. It makes money on the difference between what it gets paid to rent its money out and the money it has to pay to depositors. Lehman however didn’t collect deposits and instead relied on short-term funding from counterparties in the REPO market. Every day, Lehman had to borrow $200B just to keep its doors open. It had just $2B in actual liquidity set aside to weather storms. The buyer of a REPO requires collateral to make this loan however. Usually the seller of the REPO puts up high quality assets such as U.S. Treasuries or other securities that are backed by the full faith and credit of the U.S. Government. However Lehman had taken excessive risk in its asset base and doubled this risk when the financial crisis became apparent. This created a two fold problem. No one would buy enough of Lehman’s assets to support its capital deficet and it didn’t have sufficient collateral to roll over its debts.
The Deep Capture thesis assumes that if not for Lehman’s low stock price it would have either been able to raise over $200B in capital in a matter of hoursm, that its counterparties would have accepted its collateral which was depreciating every day, or that it could have monetized its assets in time. This is just silly. No matter if Lehman’s share price was $2, $40, or $500 at the time the result would have been the same. The equity would have eventually been worthless.
You have to wonder why Deep Capture tries to fob off a thesis that has obvious flaws. Why is it that Deep Capture despite evidenc to the contrary tries to shift the blame from Lehman executives who put themselves in such a situation to begin with and on to hedge funds who themselves were the ones who warned about Lehman’s decisions many months prior.
Larry Kudlow was in rare form last night on CNBC. His message was that due to the SEC being inept thank goodness we had the short sellers there to take care of Lehman Brothers in the SEC’s absence. Now let me get this straight: a 151-fold (15,000%) increase in FTDs associated with abusive naked short selling (ANSS)while the share price of Lehman Brothers was falling off of a cliff was a good thing i.e. the end justifies the means. Okee-dokee!
Dr. DeCosta. Larry Kudlow is a Jackass and a shill for wall street. PERIOD!! He does not even try to hide it.
“Surely you jest. I mean… yes Lehman was cooking the books, but how gullible are you? Do you think Lehman was the only one using questionable “accounting” methods?”
Lehman wasn’t just using “questionable accoutning methods”. It was using financial transactions that served no other purpose than to hide its financial condition.
I don’t know if Lehman was the only one doing this but it several things seem clear.
#1 Lehman was using the decreasing value in its debt to inflate its earnings more so than other firms.
#2 Unlike GE and Goldman, Lehman refused a necessary life-line from Warren Buffett.
#3 Lehman was likely invested a greater percentage of its capital base in assets that greatly declined in value than other firms.
#4 Lehman was a highly levered entity.
“The truth is the captured government regulatory authorities do not regulate. They prefer to protect big money self-interests.”
But the big-money self interests aren’t who you think they are. The volume of shares held long dwarfs the number of shares sold short by a huge margin. Obviously the financial interests of long investors greatly outweighs the financial interests of short-investors. Why is it that Deep Capture believes that it is the relatively small pools of money that are doing the capturing?
“And there are many more failed agencies. Too many to list them all. See for yourself”
The agencies you list aren’t failed at all. Government isn’t perfect but by and large gets it mostly right. I am guessing that if you live in this country you have a roof over your head food to eat and don’t live in fear of your physical safety. You also have a pretty good social safety net so you likely won’t have to comprimise any of those things should you financial misfortune befall you. Who do you think is responsible for these things? The U.S. government along with all the agencies that you claim have “failed”.
“Adding up all unfunded liabilities for Social Security, Medicare, Medicaid and Government sponsored pension funds gives us a figure slightly in excess of $100 TRILLION dollars. That’s TRILLION with a ‘T’. The Federal budget deficit for fiscal 2009 will be approximately $1.84 TRILLION. That’s TRILLION with a ‘T’. Over the next ten years the projected deficit will be $9 TRILLION”
http://www.americanthinker.com/2009/09/is_the_us_government_bankrupt.html
We currently have an approx. $2 Trillion budget deficit. That’s a Two Million x Million dollar DEFICIT… as in one year’s excess spend… If you don’t see a problem with the size of our government, you’re a blooming idiot.
All these innovative financial shenanigans, whether they be CDOs, CDSs, ANSS, whatever… to Wall St it’s jut playing games with numbers. It is indeed unfortunate to be without a trust fund these days, as all this innovation has had the effect of destroying the engine of real economic growth in this country (the middle class). That middle class is what built this country & is the only way back to prosperty. But middle class jobs continue to be transfered offshore at an accelerating pace. How can this possibly end well for the USA? Oh right, the government will take care of us… In a couple years, MBAs will be competing to land that job as the greeter at WalMart.
How did this happen? Government has undergone a corporate takeover. It no longer represents the interests of the constituency. It no longer respects the Constitution. How is it acceptable that none of our congress critters actually read the F-ing legislation they vote on? You think they’re working for you? HAh! The jokes on you then.
This “social safety net” you speak of… just more unfunded liability. It’s all gonna evaporate as soon as our esteemed economists figure out we can’t pay for it. Perhaps we will retain some of our beloved entitlements, the only change being that inflation will have eroded the value of the dollar in the next couple of years to 1/5 of what it is worth now.
The security you seem to think you have is an absurd notion. Our government is running the biggest confidence game in history, founded on the labor & reputation of previous generations (back when we used to build things). All we “produce” today is innovation in gaming theory (i.e. advanced gambling techniques). Confidence in this system is wearing thin. I don’t know what it will be like, but I’m certain we’ll have a complete financial system reset in the next few years. The only question is how long Madoff err… Bernanke can manage the financial markets.
I consider corrupt morbidly obese government to be a failure. In private industry, if a business can’t make a profit after a reasonable amount of time, it fails. Why is it that you believe our government is something other than a complete & utter failure? What exactly is it that our government does well? We can kick ass in a fight I’ll give you that, but that’s about it.
Good luck with that whole “government gonna take care of me” thing… You might want to start thinking how to make a can of tomato soup (or perhaps cat food) last all week.
“How did this happen? Government has undergone a corporate takeover. It no longer represents the interests of the constituency. It no longer respects the Constitution. How is it acceptable that none of our congress critters actually read the F-ing legislation they vote on? You think they’re working for you? HAh! The jokes on you then. ”
What you are describing is a Kleptocracy. A Kleptocracy is a corrupt system of government where only the select few who curry favor with the government can make returns on their capital. What happens in these systems is that no one wants to put capital to work because of the risk that the government will just take their returns away from them. The result is that no one wants to hold the currency, which causes severe inflation and a huge reduction in the quality of life of anyone who isn’t part of the Kleptocracy. Zimbabwae under Mogabi is a perfect example of this.
However that’s not the case in America. In America people are willing to put capital to work because they rightly believe that they can make adequate returns on capital.
The fact is that you likely have a much better quality of life than you would if America were truly a Kleptocracy. You have an adequate roof over your head, food whenever you want it, and likely a decent job that allows you to make a living. If you should lose that job you won’t starve, the government will write you a check while you look for another job. If things really get bad you won’t have to have your children starve as the government will give you food stamps and welfare.
This can’t happen in the world that you describe.
Plus I never said that the government would take care of me. The government protects a system that allows me to get a job so I can take care of myself.
“What you are describing is a Kleptocracy. A Kleptocracy is a corrupt system of government where only the select few who curry favor with the government can make returns on their capital. What happens in these systems is that no one wants to put capital to work because of the risk that the government will just take their returns away from them. The result is that no one wants to hold the currency, which causes severe inflation and a huge reduction in the quality of life of anyone who isn’t part of the Kleptocracy.”
Well stated. This concisely describes the relationship that exists between large investment banks & our government. You also hit upon the prime reason that record numbers in the US have taken to acquiring & holding precious metals to preserve the wealth they have from the ever eroding forces of inflation on our currency (BTW another failure of the Federal Reserve).
You’re very short sighted in making grand declarations to the effect of “it can’t happen here”. In fact, you’re absolutely wrong. It has been happening since the Fed was created. Consider that the dollar has already lost 98% of it’s value since the inception of the Federal Reserve in 1913 (evidence of failed quasi-government kleptocracy). Servicing the interest payments on our massive debt which will grow exponentially with interest rate increases (if there ever is economic recovery), is what will facilitate the lowering of our standard of living. It’s not far away. And it ain’t like we have a choice in the matter either.
I suspect you, as a card carrying liberal, don’t understand the concept of money. You seem to know all about spending it & have grand schemes in that vein, but I don’t think you grasp what money truly represents. Perhaps I can help…
In terms of trade, consider that, at its essence money is a store of value one accepts in exchange for spending a portion of his/her life doing something, often in 1 hour increments. This is why money is often referred to as the fruits of our labor. This is a profound concept that I bet most people haven’t given much thought to. Do you place a value on your time? You should. When you punch the timeclock, you’re agreeing to trade X hours of your life in exchange for money. I value my time in this world & wish to use it as I see fit. We must retain control of the distribution of the fruit of one’s labor in accordance with one’s wishes. When the government takes from the citizenry under duress, this essentially places them under forced servitude (i.e. slavery). Don’t kid yourself, this is exactly what is at stake. The goal of the kleptocracy is for all beneath them to live in debt slavery. BTW if you’re carrying a large credit card balance, you’re already a debt slave and you may not have even realized this until now.
I hope that was helpful.
I accept that there is a need for limited government, but its role should be restricted to providing for the national defense, & protecting life, liberty, & the pursuit of happiness of its citizens. Any growth beyond these core responsibilities of government is just a political control/power grab.