Deep Capture: The Elevator Pitch

Point #1: Agents in a marketplace first commit to a trade, and then exchange the property rights they committed to trade.  The financial jargon for the mechanism which permits this exchange of property rights is “clearing and settlement”.

Point #2: In the USA there is much slop in these “clearing and settlement” mechanisms. Processes that you would expect to be one-to-one, or fixed-number-to-one, are actually sponge-to-one. People who understand this slop can loot the system knowing that it will not be discovered for a long time (and not in the ruins, if it comes to that).  Unfortunately, their activity leaves behind a residue that is a form of financial derivative, which in large quantities poses systemic risk.[1]

Point #3: In the last two years this issue has been the common denominator underlying scandals involving stocks,[2] Mortgage Backed Securities (MBS),[3] Credit Default Swaps (CDS’s),[4] commodities,[5] and Exchanged Traded Funds (ETF’s).[6]

Point #4: The line between Organized Crime and the financial community has grown fuzzy.[7] In particular, clearing and settlement is all mobbed-up, and wherever one pokes into it one quickly comes upon Bad Boys and Bad Boy Firms.

Point #5: You hope that financial regulators and journalists are protecting you from things like this, but they are not. Why not? Some have been co-opted intellectually: Our financial intelligentsia holds an inappropriately fervent commitment to the Efficient Market Hypothesis, and this leads them to overlook the ways that slop in the system is pernicious (even if is fungible slop).[8] Some lack the horsepower to follow along.[9] And some, like Jim Cramer, are dirty.[10]


[1] As Warren Buffett’s partner Charlie Munger put it, “Those delays in delivering sometimes reflect tremendous slop in the clearance process. It is not good for a civilization to have huge slop. Sort of like how it isn’t good to have a lot of slop in nuclear power plants.” Berkshire Hathaway Annual Shareholders’ meeting, May 2007.

[2]SEC Extends Naked Short-Sale Order on Fannie, Freddie” (“The U.S. Securities and Exchange Commission extended an emergency limit on short sales in shares of Freddie Mac, Fannie Mae and 17 brokerages as it prepares broader rules to thwart stock manipulation”), Bloomberg, July 29, 2008. “Naked Short-Selling Blamed in Wall St Crisis” Associated Press, 9/16/2008.

[3] In “The End of Wall Street” (Portfolio Magazine, November 2008) Michael Lewis wrote:

““That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?’”

For an explanation of how this ties in to the ongoing foreclosure crisis, see “Foreclosure Crisis: Punchline to a Michael Lewis Joke from 2008?” (Deep Capture, October 18, 2010).  For an explanation of the systemic stakes, see “The Real Danger From the Foreclosure Crisis”, Zerohedge, 10/15/2010.

[4]Regulation: EU Comes Out Against Naked CDS Shorting”, Euromoney Magazine, March, 2010.  Regarding the claim that naked shorting of CDS is a benign activity, “Richard Portes, professor of economics at the London Business School, says that’s a nonsense. He uses the example of the 1992 sterling crisis, when George Soros bet around $10 billion against sterling, which most observers believe significantly affected the market and the outcome, even though daily trading volumes at the time were $100 billion. As Portes sees it, naked CDS as a speculative instrument might be a key link in a vicious chain that eventually could lead to a run on a sovereign’s credit quality.”

[5]Silver Market Probe: Act Now, CFTC Is Urged”, Wall Street Journal, October 27, 2010. “The CFTC’s investigation of silver has heated up in recent weeks. The agency’s enforcement staff has circulated a packet of information to CFTC lawyers and commissioners, outlining some of its findings in the silver probe, including documents that could suggest there have been attempts to manipulate prices.”

[6]New Report Outlines Causes of Market Distortions Choking Recovery and Preventing New Growth Companies from Going Public: Derivatives known as ‘ETFs’ are the true culprits in artificially setting stock prices and posing threats to market stability“, Kaufman Foundation, November 8, 2010. “New Report Blasts ETF’s For Systemic Risk” CNBC, November 8 2010. “Can Naked Shorts Collapse an ETF?”, Barron’s, December 7, 2010.

[7] See FBI Operation Uptick: “In what authorities are calling the largest securities-fraud bust in U.S. history, 120 defendants — including members of all five New York City Mafia crime families and the treasurer of New York City’s police-detectives pension fund — were indicted Wednesday…” CNN, June 14, 2000. For a more recent investigation into how Organized Crime has become entwined in our market, see “Michael Milken, 60,000 Deaths, and the Story of Dendreon“, DeepCapture, July 2009.

[8] For explanation, see “The Deep Capture Analysis: Systemic Risk”.

[9] See for example “Anti-Investigative Reporter Joe Nocera and the Newspaper of Non-Record (New York Times)”.

[10] See Jon Stewart’s magisterial public dismemberment of Jim Cramer at “Daily Show: Jim Cramer Extended Interview Parts 1, 2 and 3”. For fuller background, see “Deep Capture: Jim Cramer is a Complicated Man”.

    1. DC Team,

      Have you visited this site?

      I would understand if DC would prefer to keep your discussion focused on ANSS. However, I don’t think it is possible to compartmentalize ANSS as ‘the’ issue that must be addressed to fix our maladies… The problems, as you have so eloquently (and so often) stated are systemic.

      I would be very eager to hear a DC opine on this material… particularly whether or not you brush it off as BS, or if you believe, as I do, that it is by & large a fair assessment of historical & current state of affairs.
      (the renaissance 2.0 videos)

      IMHO, Damon Vrabel’s videos quite well complement the material on DC with much additional historical context for the how, where, & why we find ourselves at present…

  1. Sue has $1000 worth of Microsoft at Scamco
    Bob has $1000 worth of Google at Ripoffco

    Ripoffco refuses to deliver Sue’s Microsoft shares to Scamco and Scamco refuses to deliver Bob’s Google shares to Ripoffco.

    Ripoffco and Scamco agree that they will cancel their obligations to each other to zero by not forcing delivery, so they have no obligation at all on their books and they can each keep the $1000 cash from their clients.

    They can enter into an x-clearing side agreement that they owe each other nothing.

    Sue has an IOU, Bob has an IOU and Ripoffco and Scamco each have $1000 they can pay out in management bonuses and their firms keep their triple A ratings as on the books, they have no obligation at all because obligations all netted to zero.

    Can you say PONZI SCHEME? The reason they suck all the money out in bonuses is a it is a race to get the money out before the house of cards comes crashing down.

    1. Don’t count on justice or truth yet.I went to down town Mt. Clemens, Michigan with the kids to watch the fireworks. there I was asked by a T.V. crew what my new years resolutions were [They approached ME] so I told them ‘I want to fix the economy’.They kind of laughed and said “all by yourself” so I said ” stop the counterfeiting of stocks ,bonds, and securities’. they then told me” Don’t count on seeing this on T.V.” At least it gave my kids a chance to see censorship in action, very educational!
      The T.V crew then found a vapid blond to interview about her resolution to stop dating bad boys, so much more important a topic to the viewers!

  2. Go to school…learn to game the system…stat at $96,000…any wonder why we have so many crooks?

    From Stockwatch site:

    Canadian National Stock Exchange
    Symbol C : *CNSX
    Recent Sedar Documents
    Pure in third, MX sets record, FINRA watches brokers

    2010-12-30 19:36 ET – Street Wire

    by Stockwatch Business Reporter

    Pure Trading was once again Canada’s third most active alternative trading system during the 4.5-day week ended Dec. 24, 2010. The most active ATS was Alpha Trading Systems with an average of 172 million shares a day or 17.2 of the total market. In second place was Chi-X with 45.1 million shares or 5 per cent of the market. Pure traded 21.2 million shares a day or 2.3 per cent. In last place was Omega ATS with 8.8 million shares or 0.9 per cent. Combined, the ATSs accounted for 25.3 per cent of the market, while the Toronto Stock Exchange, TSX Venture Exchange and the Canadian National Stock Exchange got the remainder.

    Taking a look at only TSX listings, Alpha captured 22.1 per cent, up from 19.2 per cent last week; Chi-X had 5.7 per cent and Pure took 3.8 per cent. The TSX captured only 65.6 per cent of market volume, down from 66.9 per cent a week earlier.

    Only the TMX Group had something to brage about this week. Its Montreal Exchange set a volume record. On Dec. 20, the MX had a year-to-date volume of 43.4 million contracts, up from its previous record of 42.7 million contracts in 2007.

    The United States Financial Regulatory Authority chief executive officer, Richard Ketchum has presented his year-end report. He notes that FINRA’s “first truly effective case addressing high frequency trading” occurred this September. The regulator fined New York-based Trillium Brokerage Services LLC $2.3-million, and suspended 11 of its employees for using a HFT strategy to gain an advantage. FINRA says Trillium repeatedly entered orders which created a false appearance of buy- or sell-side pressure, prompting other traders to buy and sell before Trillium quickly cancelled its own orders. Finra says nine Trillium traders were able to trade at advantageous prices on 46,000 occasions. The brokerage did not admit or deny the charges but did consent to the entry of the findings. Over 2010, FINRA says it levied $41.1-million in fines. In the New Year, Mr. Ketchum says FINRA will watch for price manoeuvring by brokerages.

    Also this year, New York University’s Courant Institute of Mathematical Sciences told Reuters it received 650 applicants for the 35 spots in its financial engineering masters program. During the 18-month course, experienced high frequency traders teach students how to write and use HFT algorithims. It costs $46,000 (U.S.). The university says it has placed 100 per cent of its financial engineering graduates since the program begin in 1999, and the graduates earn an average of $95,000 in their first year of work — presumably not working at FINRA.


  3. Byrne you are a nut job and a crook. I believe you and your company are acriminals that engage in deceptive sales practices. I know this from personal experience and so do the 15 state prosecutors in northern California who have charged your company with exactly that. You need to mend your criminal ways before you audaciously accuse others of similar activity. Hopefully, these pending criminal charges will result in your sorry butt going to jail. Gary E. Johnson

    1. I’ll be the first to suggest that your post (and mine) is off topic and should be removed. This forum is not the right place to discuss any individual company.

      I’m guessing that you “misdiagnosed” OSTK and the people you sold your IOU’s to are looking for their profit.

      Too bad, so sad, but from my vantage point, Mr. Byrne proved his critics wrong and has built a very successful company which benefits customers, shareholders and artisans around the world.

      The counterfeiters never counted on the possibility they could print entitlements out of thin air at 2% down and have the leverage go against them.


  4. Would someone kindly check and see how long ago Patrick and Deepcapture posted about Linda Thompsen landing on her feet after the Madoff debacle. Then see how long it took the NYT to write this story. This is how far a coopted media is behind the curve. Good post Jim U beat me to it. LOL!!

  5. Jim et al is it me or do the “Walls (Street) look like they are slowly caving in on SAC and Little Stevie Cohen? I’m “just sayin”. I am going out on a limb here and saying that Patrick Byrne may have mentioned something like this would happen about 4 years ago.. Am I correct on this As the dominoes fall let them eat cake. The time has finally come lets see how much money they have to spend on legal fees to keep their behinds out of JAIL!!!

  6. JJW The SEC has nothing to do with this ..this has FBI and DOJ written all over it. He should have settled with the ex-wife for whatever she wanted. Now its on like popcorn and she is going to sing like Gladys Night and the Pips. Just a matter of time before they Indict him and then there is Patrick and overstock and about a thousand other companies waiting for his azz. HE IS TOAST can’t U smell it? Plus the little guys don’t want to hang by themselves so they will give up the big fish for softer sentences.

  7. Jim, as I told you they have had this guy on their radar for quite a while. The time has come to put all the cards on the table. its not just Patrick after this guy.. you know that right? Also I wonder who it was made the 1.7 million $ put on Bear Stearns that yield 260 million in less than 9 days? Ever wonder how we never found out who did that? Could it be Stevie? Who knows but it must have been a bigtime player for them not to announce it for so long. .Thanks to the best regulator money can buy.. the SEC!!! LOL!! My Mom has a saying “Night can only run for 12 hours before day catches it” It is soon to be daytime for these miscreants.

  8. RE: RSS feed request to Before It’s News

    I’m the Business editor at Before It’s News. Our site is a People Powered news platform with over 2.5 million visits a month and growing fast.
    We would be honored if we could republish your blog RSS feed in our Business category. Our readers need to read what Deep Capture has to say.
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  9. Well the NYSE is going to Germany with all the ill gotten gains and no American judge, politician or mass population riot will ever bring them or the money back.
    Now after two attempts to over power America by force that Germany lost they came in the back door and took everything.We lose and our hired servants [government and law enforcement] took money from the thieves and let them in the back door to clean us out all the while telling US the residents of the house ‘Everything is fine all the furniture and valuables you see leaving the house are perfectly safe don’t worry.’
    How do you think the population would have reacted to Germany buying wall street back in 1940?
    Why is it different now?
    Has the ruins of America been achieved?
    After world war two the Nazi stand was we will build a new world on the ruins of America.
    Welcome to a new world.

    P.S. How does this affect Mr. Byrnes current court case?
    Who do you sue now?
    DR. De Costa any comments?

  10. Here’s a snip-it from Book #11 on NSS crimes. I think it’s critical to gain an appreciation for the heinous nature of “ex-clearing arrangements”.


    In order to understand the significance of the new “OW” (obligation warehouse) facility of the DTCC you need to gain an appreciation for the most heinous of all of the securities crimes, namely abusive naked short selling involving intentionally circumventing the congressionally mandated “prompt settlement” of securities transactions in the U.S. (Section 17 A of the ’34 Exchange act) via entering into secretive “ex-clearing arrangements” outside of the DTCC.


    Picture corrupt clearing firm “A” that owes corrupt clearing firm (CF) “B” the delivery of $1 billion worth of shares of corporations 1-10. Assume that CF “B” owes CF “A” the delivery of $1 billion worth of the shares of corporations 11-20. Imagine the billions of dollars worth of investment funds abusive naked short sellers could steal from Main Street investors if those two corrupt clearing firms “paired off” outside of the DTCC in an “Ex-clearing arrangement” and forgave each other’s delivery obligations and instead agreed to just have each other collateralize each other’s debts in a marked to market fashion addressing any disparities in the amounts owed. Criminals would never have to deliver the nonexistent securities they would obviously start selling.

    All of those delivery failures/refusals would result in the issuance of share price depressing “security entitlements/IOUs” that would absolutely decimate the share prices of all 20 corporations. If all you have to do on Wall Street is collateralize the monetary value of failed delivery obligations then as the share price of any given corporation predictably plummets from this activity then so too do the collateralization requirements. This then results in the flow of the investor’s funds to the party that intentionally sold nonexistent shares and refused to EVER delivery anything.

    In essence, ex-clearing crimes basically involve a corrupt clearing firm telling another corrupt clearing firm that you and your clients can sell my clients bogus securities all day long if my clearing firm and our clients can do likewise to your clients. This is the epitome of a Wall Street versus Main Street type of crime. Under the bus go the financial interests of U.S. investors and U.S. corporations. Think of illegal “ex-clearing arrangements” as a black hole used to invisibly store delivery failures outside of the DTCC.

    All efforts to address abusive naked short selling to date only apply to delivery failures held in “registered clearing agencies” (RCAs) like the NSCC subdivision of the DTCC. None of these regulations, until now with the establishment of these “obligation warehouses” (“OWs”), did anything whatsoever to shine a light on these “ex-clearing arrangements”. You may have noticed how so few development stage companies that were obviously under attack ever made the “threshold security” lists. This is because the “threshold security” lists only tally delivery failures held in RCAs. Paid Internet bashers have been leveraging this fact to create uncertainty in the minds of investors suspicious that their invested in company was under attack.


    First of all, you have to realize that the “investor protection” hierarchy starts at the top with the two congressional oversight committees given the mandate to oversee the SEC. Next comes the SEC itself performing as the “regulator” congressionally mandated to provide investor protection. After that come the “self-regulatory organizations” or “SROs”, namely FINRA and the NSCC, congressionally mandated to provide investor protection and to lay down and enforce rules and regulations regarding the “business conduct” of their “participants”.
    Historically, in regards to these fraudulent “ex-clearing arrangements”, the SEC basically has held that the SROs are supposed to be acting as “the first line of defense against market abuses”. The NSCC then chimes in and says that these offenses are occurring outside of the DTCC and therefore not our concern. Historically, both of the SROs walking the beat, FINRA and the NSCC, have maintained that these “contracts” being entered into by these clearing firms are none of their business. They have held that they enforce “securities laws” not “contract law”. Meanwhile, the two congressional oversight committees are asking what in the heck are “ex-clearing arrangements”.
    The result has been a regulatory void that has provided a foundation for these crimes involving the sale of nonexistent securities and then refusing to EVER deliver that which one sold. Why? Because at the NSCC you don’t have to deliver that which you sell in order to gain access to the funds of investors. All the NSCC asks that you do is to collateralize the easy to manipulate downwards monetary value of the failed delivery obligation on a daily marked to market basis.

    The important concept to keep in mind is that the congressionally mandated “prompt settlement” of a securities transaction necessitates the “prompt good form delivery” of that which the investor thought he was buying. The mere collateralization of a debt has nothing whatsoever to do with the “prompt good form delivery” of that which the investor thought he was purchasing. Hopefully, the new “OW” will bring about the promised enhanced transparency of these secretive “arrangements” designed to re-route the funds of investors into the pockets of securities fraudsters.

  11. Dr. DeCosta,I have never seen you excited about any proposed legislation that would make our Cap. markets more transparent and yet it seems like you believe this law maybe enforced. Do you believe that this is finally the legislation that would clean up our corrupt markets? After the 28th they all have to cover their “FTDs” or else.

  12. I crave content from this web site, sometimes it feels like we’re trapped in a mine and waiting for the drills. Overall this is the best most consistent web site for these important issues. I appreciate all the past independent investigation that was confirmed by several sources including that rascally wabbit and has proven to be right on target.
    As one who foolishly continues to have sizable investments in the markets it is important to know where people think this insider trading, naked shorted world is going. My guess is that it’s a low hanging fruit operation and will end with nothing much happening and an eventual emboldening of the Hedge Funds after repositioning and shuttering a few and open new ones it will be back to stealing and economically raping America’s and the worlds public companies at stockholders expense .

    One of the things I have postulated of late is that the since the NYSE couldn’t buy the German Bourse they decided to make a gift of themselves in a “Troy” like fashion so as to inevitably corrupt the Germans so that it will once again be true that there are no safe places to hide from stock molesters.

    What does anybody think about this agree, disagree?

    1. Sticking to Dr. De Costa’s example, if A owes B $1 billion shares of companies 1-10 and B owes A $1 billion shares of companies 11-20, there is $2 billion worth of counterfeit phantom shares, but A and B can do an x-clearing agreement that says their obligations cancel out and they don’t owe each other anything.

      If the regulators and activists crack down on x-clearing, all they have to do is for A and B to merge and all of the obligations are now merged into the new superfirm.

      That’s why they never had to settle Refco when they tanked. The firms they owed to swallowed them up.

      Following this logic, we’ll end up with one x-clearing superfirm outside of the DTC system which can’t be regulated as it is bigger than any one country and global new world order style settlement system will be so big, that governments will accept the fiat security system where investors only fractionally own the shares they buy on the open market.

      You might even see a system where you have to pay more for a registered share than a fiat share, just as physical gold and silver trades higher than counterfeit paper gold and silver.

  13. I wonder what hedge fund asked Google for this favor.

    Google is penalizing after the online retailer violated Google policies forbidding companies from artificially boosting their Google Internet search ranking. As a result, Overstock’s search results, which once appeared at the top, now appear on the fifth or sixth page. (Wall Street Journal)

  14. Interesting link and comments from another blog:

    Quote: There’s 3 new laws gaining attention in the NSS market reform arena: FINRA 4320 goes into effect on 2/28/11. It mandates 13 day buy-ins for open delivery failures FINALLY applying to shares of non-reporting corporations. FINRA 2010-043, also starting on 2/28/11 reinstates the “short sale exempt” (SSE) marking requirements for trade reporting and the OATS system. Those MMs accessing the bona fide MM exemption from executing pre-borrows or “locates” before admittedly naked short sales must now FORMALLY acknowledge the accessing of that universally-abused exemption. Being that these trades are theoretically being made to “inject liquidity” then the excuse to hide the related trade data from the public’s eyes goes out the window. You can’t have it both ways and claim the bona fide MM exemption and later claim that the related trade data needs to be kept secret because it might reveal a “proprietary trading strategy”.

    Truly bona fide MMs that are able to legally access that universally-abused exemption cover their naked short position on the next downtick after their short sale when buy side liquidity is in need of being ejected as share prices fall. The 3rd new rule which is in effect now states that the offers and bids that MMs post must be of approximately the same size. No longer can the offers be of 1 million shares and the offsetting bid good for the minimum 5,000 shares.

    The verbiage in 4320 is especially well done as it FINALLY puts the clearing firms that aid and abet this crime wave on the spot. With the FFETF, which is made up of 25 different agencies, now on the scene the transparency has increased markedly. You can imagine how critical the lack of transparency is to a crime involving selling nonexistent securities and then refusing to ever deliver that which you sold AFTER being allowed access to the funds of the investor being defrauded.

    Here are the links to the rules SR-FINRA-2010-028 and SR-FINRA-2010-043:

    Notice the part I marked in bold in the quote above:
    “FINRA 4320 goes into effect on 2/28/11. It mandates 13 day buy-ins for open delivery failures FINALLY applying to shares of non-reporting corporations.”

  15. You got your point and this is very much appreciated.
    I think anyone with this legal issues would have time on reading this blog agiain.
    I would share this to my friend and surely they will visit your blog.

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