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Manipulating Gold and Silver: A Criminal Naked Short Position that Could Wreck the Economy

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Manipulating Gold and Silver: A Criminal Naked Short Position that Could Wreck the Economy


Everyone from U.S. Senators to prominent hedge fund managers say that criminal naked short sellers had a hand in the financial collapse of 2008, but the regulators aren’t listening. Not a single criminal has been prosecuted. Indeed, the regulators continue to allow the miscreants to manipulate the markets — not just the stock markets, but also the markets for corporate bonds, derivatives, U.S. Treasuries, and all manner of commodities – even when the regulators are provided with indisputable evidence of a massive crime in progress. They could easily fix the flaws in the settlement system that allow much of the manipulation to occur, but they refrain from doing so either because they are too captured by the miscreants or too cowed by the possible consequences of throwing the lights on what may be an enormous confidence game.

So I am inclined to say that it is hopeless. Everyone loves an optimist – but, yes, it is hopeless. We are like the audience in one of those cheesy horror flicks – yell and scream all you like, but the dumb blonde is still going to walk into that room and get hacked to pieces. Except that it is not a movie. It is real. And it’s not just the dumb blonde who is going to get slaughtered. It is all of us. It is our economy. It is our standard of living. It is our financial system – the lifeblood of the nation.

The latest case of regulatory indolence was recently exposed by Andrew Maguire, a successful metals trader and whistleblower who went to the Commodity Futures Trading Commission with data that strongly suggested that a small number of criminal short sellers had rigged the markets for silver and gold. Maguire not only provided the regulators with a Dummies’ guide to how the manipulation generally worked, but also warned them of a specific crime – a dramatic take-down of the gold and silver markets – that he said would occur at an exact time on a specific date in the near future. That is, Maguire told the regulators that a massive crime was about to happen, and the crime happened precisely as he predicted it would.

With Maguire’s warning, the regulators were able to watch a crime unfold, right before their eyes, in real time. Then the regulators thanked Maguire by saying, in essence, “you’re a nuisance, go away.” This is not just appalling, but scary, because the criminal activity that Maguire exposed is much bigger than the Madoff Ponzi scheme, and more likely to result in serious damage to the American economy. Indeed, there is a strong case to be made that our national security is at stake. As Maguire stated in a recent interview with King World radio, the manipulators have likely created a massive naked short position that can easily be exploited by foreign entities who might see financial or even political gain in eviscerating the dollar.

Maguire’s email exchange with the CFTC is remarkable reading. In one email he writes:

“Thought it may be helpful to your investigation if I gave you the heads up for a manipulative event scheduled for Friday, 5th Feb. The non-farm payrolls number will be announced at 8:30 ET. There will be one of two scenarios occurring, and both will result in silver (and gold) being taken down with a wave of short selling designed to take out obvious support levels and trip stops below. While I will no doubt be able to profit from this upcoming trade, it is an example of just how easy it is to manipulate a market if a concentrated position is allowed by a very small group of traders…I sent you a slide of a couple of past examples of just how this will play out.

“Scenario 1. The news is bad (employment is worse). This will have a bullish effect on gold and silver as the U.S. dollar weakens and the precious metals draw bids, spiking them higher. This will be sold into within a very short time (1-5 mins) with thousands of new short contracts being added, overcoming any new bids and spiking the precious metals down hard, targeting key technical support levels.

“Scenario 2. The news is good (employment is better than expected). This will result in a massive short position being instigated almost immediately with no move up. This will not initially be liquidation of long positions but will result in stops being triggered, again targeting key support levels.

“Both scenarios will spell an attempt by the two main short holders to illegally drive the market down and reap very large profits.”

It would be hard to get more specific than that. As Maguire says in the same email: “The question I would expect you might ask is: Who is behind the sudden selling and is it the entity/entities holding a concentrated position? How is it possible for me to know what will occur days before it will happen? Only if a market is manipulated could this possibly occur.”

The CFTC had previously had the courtesy to call Maguire and listen to his concerns, but by the time Maguire sent the message laying out the crime, the CFTC had stopped returning his emails. The regulator showed no real interest, and let the crime happen. After the crime occurred, Maguire wrote another email:

“A final email to confirm that the silver manipulation was a great success and played out EXACTLY to plan as predicted. How would this be possible if the silver market was not in the full control of the parties we discussed in our phone interview?…I hope you took note of how and who added the short sales (I certainly have a copy)…Surely some discussions should have taken place between the parties by now. Obviously they feel they can act with impunity…”

After that, Maguire sent several more emails detailing manipulation of the gold and silver markets. He received no replies. So he wrote a final email, providing still more evidence in support of his case and stating: “I have honored my commitment to assist you and keep any information we discuss private, however if you are going to ignore my information I will deem that commitment to have expired.”

To that email, a CFTC official finally replied: “I have received and reviewed your email communications. Thank you so very much for your observations.” That was it. Thanks a lot and goodbye. No follow up questions. No acknowledgement that a crime had occurred. No apparent interest whatsoever.

Maguire was understandably peeved. As he said in his radio interview, “I kept a live commentary going on that entire scenario. How they were going to flush it down below 15, how it then went down below 15, and how then they were putting big block offers hitting all the bids to stop it getting back through the technical level of 15 so as not to trigger covering by the shorts and inviting longs to get long again. To me, you don’t get any better than that, how could anyone predict that unless they knew what was going to happen, not just saying it’s going to move in one direction, but it’s going to move in one direction then another direction – all in a matter of minutes.”

Not long after the massive crime took place, the CFTC held a public hearing on manipulation of the metals markets. Maguire was specifically barred from participating. He told King World radio that he believed one CFTC official, Bart Chilton, wanted him to attend the hearing, but Chilton is a lone “Elliot Ness” crime fighter working in an agency that is dominated by the feckless and the corrupt. “There are a lot of people at CFTC wanting to look the other way,” Maguire said.

However, the hearing (a partial transcript and video of which can be found at the excellent financial blog Zero Hedge) did yield an interesting piece of information. In the course of answering an unrelated question, Jeffrey Christian, a former Goldman Sachs staffer who is now the head of a metals trading firm called CPM Group, stated that “precious metals…trade in the multiples of a hundred times the underlying physical…” (the italics belong to me and a lot of other people whose eyes popped out of their heads when they heard this).

What Christian was saying is that every ounce of gold or silver is being sold 100 times. This would not be problematic if we were speaking of some dusty market in Central Asia with rows of traders’ stalls wherein some commodity (such as gold, silver, radios or Kalashnikovs) were being sold and resold in rapid-fire succession: there, our sensibilities about scarcity, value, and price discovery would actually grip reality. Here, however, we are talking of markets where the distinction between reality and representation has become as blurry as the last round of a game of musical chairs, enabling some sellers to offload  paper IOUs promising eventual delivery of silver and gold – promises that would be impossible to keep if some small segment of the buyers were to demand delivery of the real thing.

This is quite similar to the naked short selling of stocks, where traders sell stock that does not exist, but enter IOUs in their computers, and then “fail to deliver” what they have promised. It is hard to distinguish this from fraud (notwithstanding the Efficient Market Hypothesis of financial theory, which maintains, essentially, that it shouldn’t matter).  Christian, the fellow who inadvertently revealed the massive naked short positions in gold and silver, said that he didn’t see this as a problem because “there are any number of mechanisms for cash settlement,” and “almost all of these short positions are in fact hedges…”

This is slightly absurd. Later in his testimony, Christian himself said that it was “exactly right” to say that the hedges are nothing more than hedges of “paper on paper” – a particular sort of merry-go-around where one IOU is settled by another IOU, with these IOUs outnumbering real gold and silver by multiples of a hundred times.

As for the notion that cash settlement solves the problem, Maguire noted in his radio interview that cash settlement “is the very definition of default. If somebody wants to buy gold and silver and instead they’re given cash, that is a default.” In addition, “there are people who will not want cash – Chinese, Vietnamese, Russians – people looking for the metal, they will want to take it, and that will cause a default on the Comex [the metals exchange] because the Comex will be drained…that was the word that was used by several people making testimony [at the CFTC meeting], that the Comex would be drained…”

Maguire added: “What’s going to happen, if you’re an Asian trader, or a non-Western trader, who has no loyalty, or doesn’t care about homeland security or anything else, who says, now wait a minute, if I can establish in my mind that there is 100 ounces of paper gold, paper silver for example, for each ounce of real silver, than I have a naked short situation here that I can squeeze and they can go on the spot market which is basically a foreign exchange transaction, short dollar, long silver to any amount they want – billions, trillions — whatever they want, and they can take this market, squeeze this market, and blow it up…”

In other words, the problem isn’t just that criminal naked short sellers manipulate the metals market downwards. It is that they have created a condition where a foreign entity can merely demand delivery of real metal to induce a massive “squeeze” that sends the price of metals skyrocketing, putting huge downward pressure on the dollar. Meanwhile, says Maguire, with prices rising, “for 100 customers who show up there is only one guy who is going to get his gold or silver and there’s 99 who will be disappointed, so without any new money coming into the market, just asking for that gold and silver will create a default.”

“There are no prisoners taken in this kind of environment,” Maguire added. “All they need to establish is that it is naked, and by the admission of [former Goldman staffer] Christian at the meeting…we have a definition of physical actually being paper…They get that in their heads and its locked, it’s a done deal, then we don’t have to wait…there is a profit to be made here, and there is nothing [anybody] can do about it because it’s a foreign exchange transaction, and there are no limits on a foreign exchange transaction, and obviously foreign exchange transactions are coming to light, there [is talk] of manipulation…”

Indeed, Maguire says that he has received phone calls from wealthy individuals in Asia looking for the go ahead to exploit the naked short position. “The only question they have in their mind is can we establish that this is a naked short position, that’s the only thing they had to clarify, it’s become clear, it is now clear [that the naked short position is massive], and no doubt they do their own due diligence, but basically [the naked short position] has been admitted at the only metals meeting [the CFTC hearing] that we’ve ever had…”

Maguire says that the naked short selling scam is in the trillions of dollars, making it by far the biggest financial fraud in history. He calls it “financial terrorism” and accuses the naked short sellers of “treason” for putting national security at risk. It might be hard to believe that foreign entities are plotting to crush the U.S. economy, and perhaps they are not, but there is no doubt that loopholes in the clearing and settlement system – not just for metals, but also stocks, bonds, Treasuries, and derivatives – could quite easily be exploited by any foreign entity desiring to do harm to the U.S. economy. The only dispute is whether such a desire exists.

Maguire and Adrian Douglas of GATA, an organization that lobbies against manipulation of the metals market, took their concerns to the mainstream media and had a number interviews scheduled. However, every one of those interviews were suddenly cancelled. This is not surprising. The mainstream media has consistently shied away from stories about illegal naked short selling and market manipulation, partly because the media outlets are captured by the powers that be on Wall Street, and partly because investigative journalism is now viewed as an anachronism – a time-consuming effort that might have been suited to Woodward and Bernstein back in the 70s, but not to the downsized news rooms tasked with churning out tepid and meaningless “he said, she said” mimeographs for a population of readers who (so it is said) want their “news” fast, and don’t care a whit for in-depth reporting.

Meanwhile, just as the stock manipulators have engaged in a coordinated effort – deploying threats, ruthless smear campaigns, and slick lobbying – to keep their crimes out of the spotlight, so too will the gold and silver manipulators. Adrian Douglas of GATA notes that at the precise moment that his GATA colleague Bill Murphy began to speak at the CFTC meeting, the video camera recording the event experienced “technical problems” – problems that were fixed at the precise moment when Murphy stopped talking. Douglas concedes that this might have been a coincidence, but when this sort of thing happens often enough, a little healthy paranoia is probably a good thing. That said, everyone loves an optimist, so I’ll say the camera really went kaput.

But…ack…another coincidence: The day after Maguire gave his radio interview, he was the victim of a hit and run collision. Somebody sped out of a side alley at top speed, smashed into Maguire’s car, and then tried to escape. A high-speed chase ensued, and the perpetrator was caught by police. The British press has reported that this might have been an assassination attempt, or a threat, but as yet there has been no word from the police. Maguire was injured, but not seriously. Let’s be optimistic, and say this was an accident – assassinations and threats only happen in the movies.

But…ack…another coincidence: Shortly before somebody crashed into Maguire’s car, the CFTC caught on fire. This fire happened to be located in the one small basement room where gold and silver trading data and other pertinent documents were kept. The CFTC claims that its investigation of metals manipulation, for what it was, did not burn.  So maybe it was just an accident. Maybe some eager CFTC regulators were down there smoking cigarettes. Maybe it was stress. Maybe they’ll keep investigating. Maybe they’ll bust the criminals.

Maybe, just maybe…yes, everyone loves an optimist, so let me make this clear – the horror show that is our regulatory system is going to have a happy ending. There will be no massacre. The financial system will be just fine…really…maybe… or maybe not.

* * * * * * * *

Update: Another coincidence: GATA reported recently that there has been an attack on the King World website — the website that contains the radio interview of Maguire and his emails to the CFTC. This was an apparent attempt to shut down the website and prevent the scandal from being exposed further. The Internet company that hosts the King World website reported to King World the following: Your hosting account is the target of a distributed denial of service attack…Computers were attacking your account.”

Steps were taken to protect the website, which is once again up and running.

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The Growing Gap Between Reality and the Media


Following is a very partial list of people who have said abusive short selling must be stopped.

Then Secretary of Treasury Paulson

Former Chairman of SEC Harvey Pitt

Then SEC Chair Christopher Cox

Then Senator Hillary Clinton

Presidential Candidate John McCain

George Soros

The members of the American Chamber of Commerce

Charlie Munger, Vice Chairman Berkshire Hathaway

John Mack, CEO Morgan Stanley

Dick Fuld, then CEO Lehman Brothers

Members of the North American Securities Administrators Association

Robert Shapiro, former Undersecretary of Commerce

Harvey McGrath, former chairman of Man Group, world’s biggest listed hedge fund

___________________

Following is a partial list of mainstream media outlets that have yet to deliver a single comprehensive story about abusive short selling:

The Wall Street Journal

The New York Times

The Columbia Journalism Review

BusinessWeek Magazine

The Chicago Tribune

The Los Angeles Times

Fortune Magazine

The Washington Post

CNBC Television

CNN Television

____________________

This week, Eddie Lampert, the hedge fund manager and Chairman of Sears, became the latest to speak out against the problem. Here’s what he had to say…

“…the level of “naked” short selling of our shares was significant. The activity can be measured by the number of shares sold short as disclosed twice monthly by the NYSE and Nasdaq as well as by the reported number of instances of failure to deliver securities by short sellers to purchasers of Sears Holdings stock….

…the SEC has taken further actions to enforce “naked” short selling rules that had been in place, but not enforced, for a significant period of time. This is an important protection for shareholders and for property rights. The sale of property (shares in a corporation) that a seller does not own and can’t deliver (naked short selling) is an affront to property owners, and a destroyer of confidence and trust. Much of the commentary around short selling ignores this simple fact.

While I understand (and often appreciate) the urge to critically evaluate possible regulation, it is interesting that there has been protest by those on the short side with regard to some of the rules that have been suggested. For example, the reinstatement of the uptick rule, which would require any short sale to occur at or above the last sale price on the stock exchange. Such a rule had been in place for over 70 years (to prevent “bear raids” in which short sellers aggressively sold stock at ever lower levels, undermining confidence) until it was repealed in 2007. It has been suggested that, because stocks are now traded in decimals rather than in 1/8 point increments, such a rule is obsolete or unnecessarily difficult to implement. However, what the opponents fail to point out is that companies who repurchase their own shares are advised to adhere to a rule that forbids those companies from initiating a plus tick when repurchasing shares. Why policymakers would favor an asymmetric application of a rule like this in favor of short sales and against company repurchases is a mystery.

Similarly, the SEC has required short sales of securities to be reported periodically beginning in the second half of 2008. Short sellers have prevailed on the SEC to allow this disclosure to be done privately on the basis of a claimed need to protect their investment strategies. While I respect this privacy right, investors who purchase and own stocks, however, are afforded no such privacy in their holdings. In fact, holders of securities are required to publicly file their holdings on a quarterly basis. Such public disclosures have been known to attract the interest of short sellers when institutional investors and hedge funds have found themselves under performance or redemption pressures. Again, it is a mystery as to why those who are owners of publicly traded companies are required to disclose their holdings while those who sell short those very same securities are permitted to keep their positions private…”

* * * * * * * *

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Naked Hunting Season to Resume Tomorrow


In a few hours, the SEC will lift its ban on short-selling of 900 stocks. That is well and good, except that it appears that hedge funds will also be permitted to resume abusive naked short selling – offloading stock that they do not possess in order to dilute supply and drive down prices.

Given that naked short selling precipitated the collapse of Lehman Brothers, which triggered global panic, it seems fair to say that the resumption of naked short selling could precipitate the collapse of another big bank, which will fuel still more panic, and then we will really be screwed.

Say what you will about Lehman’s balance sheet, that company was not going out of business until its stock price hit rock bottom, making it impossible to raise capital, and triggering a run on the bank. The stock price hit rock bottom because it was bombarded by naked short selling and false rumors.

Some financial media have been cheering the imminent lifting of the short-selling ban. According to these journalists, the ban did not prevent the stock market turmoil of the last couple weeks. Therefore, lifting the ban should not make things worse and short-selling is good for the markets and blah blah blah.

The media never cease to astound on this issue. The fact that markets have been bad does not mean they wouldn’t have been a whole lot worse without the ban. And if short-selling is good for markets, this is fully besides the point. The point is that naked short selling is most definitely not good for the markets, and, as of tomorrow, that very not-good-for-the-markets activity is going to be allowed to resume with the full acquiescence of the SEC and the financial media.

Look, on September 16, Morgan Stanley was trading around $26. On September 17, it hit a low of $11. The stock was slashed in half in less than a day. That tends to happen when a company is under a full-scale attack by naked short sellers.

On the day after Morgan Stanley was slashed in half, the SEC banned short selling. It is fair to say that if the SEC had not acted, Morgan Stanley would not be with us today.

After the SEC banned short selling, hedge funds stopped circulating false rumors about the companies they had been attacking. Today, in anticipation of the short selling ban coming to an end, hedge funds began circulating false rumors about Morgan Stanley – the most damaging being that Mitsubishi had pulled out of an agreement to inject $9 billion of capital into the bank.

What happens tomorrow when those rumor-mongering hedge funds resume naked short selling?

As one prominent economist said, forebodingly, “We will see.”

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The Week the World Said "Naked Short Selling"


Make no mistake: what you witnessed this week was not some natural process – an economy “souring,” a bubble “bursting.” This was not the “invisible hand” at work. This was not even capitalism.

This was the premeditated, systematic destruction of market value by an elite crowd of Wall Street cronies who no doubt cackled with delight in the cleverness of their mischief-making. This was criminal behavior on an ungodly scale – the unprecedented looting of America.

Do you think I’m overstating this? Consider that the hedge funds who did this employed precisely the same tactics that precipitated the stock market crash of 1929 and the Great Depression that followed.

One of these tactics, as almost everybody now finally realizes, is called “naked short selling.” It involves hedge funds and their brokers selling stock that they do not possess – phantom stock – to dilute supply and drive down prices.

Often, the short-selling saboteurs engage in other shenanigans – whispering scurrilous rumors, oozing innuendo, orchestrating bogus class action lawsuits, deploying armies of Internet message boards to foment negativity, paying seedy “independent” financial research shops to publish distorted analysis, hiring thugs to harass executives and their families, conducting corporate espionage, and instructing government cronies to launch dead-end investigations.

You never heard about this from the mainstream financial media. You never heard it because the market saboteurs were writing the media’s talking points. Some reporters were merely addicts, dependent on the dealers of distortion for negative stories. Other reporters were genuinely corrupt. They thought the market machinations were good fun. “I wanna play, too,” they said. They reveled in taking down companies, and then they asked their short-selling accomplices for jobs.

Our nation’s most influential financial journalists knew that naked short selling was rife. They knew that hundreds of companies had been victimized. They had all the data and they had every reason to believe that billions of phantom shares floating around the system could not be good. But they said naked short selling never happens. They said only bad CEOs and crazy people complain about short seller crimes. They whitewashed the biggest scandal of our lifetimes, and then our markets crumbled.

It was the darkest moment in the history of American journalism.

* * * * * * * *

In July, the SEC issued an “emergency order” to prevent naked short selling from destroying the financial system. The order required short sellers of stock in 19 financial companies to actually obtain real stock before selling it.

This was hardly intrusive, but the media, copying straight from the hedge fund lobby’s script, said that the SEC should leave the short sellers alone. The emergency order had hurt “market efficiency,” the journalists wrote, though common sense would suggest that a market cannot efficiently set prices when it is bloated by phantom supply. The emergency order decreased “liquidity,” the reporters wrote, though they provided no credible data to support this claim, and failed to explain how a liquid market in phantom stock benefits anyone other than a few hedge fund billionaires.

Even worse, some reporters argued that the SEC should not crack down on naked short selling because short sellers are “vital” sources of negative information to the media. What if some of these “vital” sources are manipulating markets? Criminals, apparently, are untouchable, so long as they dish dirt to reporters. The abomination riles all the more when you know (as I do, having studied thousands of these dirt-strewn stories) that the majority of them contain insinuation, omissions, and outright falsehoods.

At any rate, the financial media convinced the SEC to let its emergency order expire. Even as the markets nosedived, journalists, including CNBC’s Charlie Gasparino, were calling the emergency order “ridiculous,” and the SEC cowered. Within a few weeks Lehman Brothers was gone, Merrill Lynch was gone, Fannie Mae and Freddie Mac were nationalized, and American International Group, a company with a trillion dollars in assets, was trading for a dollar a share and soliciting handouts from the Fed.

On Wednesday of this week, the SEC rushed out new rules that purported “zero tolerance” for naked short selling. According to the SEC, there would now be a “hard” close out rule, requiring hedge funds to deliver real stock within three days of selling it.

Even if the SEC were to enforce a three day settlement, it wouldn’t do much, because the manipulators work like this: A hedge fund tells his broker to sell a million shares of XYZ. The broker doesn’t have any shares, but he sells them anyway. That is phantom stock and for three days it dilutes supply, and eats away at the financial system. When settlement day comes, the broker asks a second broker to sell him a million shares of XYX. The second broker doesn’t have any shares, but he sells a million shares of XYZ (the price now much lower) to the first broker, who uses the phantom stock to settle his initial sale of phantom stock.

When the second broker has to settle, he calls the first broker…and the phantom stock shuffle continues until the falling price makes it impossible for the company to raise capital. Then it’s bankruptcy, the stock is zero, and nobody has to deliver anything.

In any case, “Oooh, weee…‘zero tolerance.’ Really scary.” For years, hedge funds have habitually violated stock delivery requirements, and the SEC has done nothing. Big words didn’t scare anybody. When the SEC announced its new rules, the hedge fund lobby cheered, the media reported the cheers, and the manipulators went hog wild.

By Thursday afternoon, it was looking like Goldman Sachs, Morgan Stanley, and countless smaller banks were on death row. Call this “liquidity.” Call it “market efficiency.” Call it what you like, but it wasn’t good. The meltdown was so severe that traders on Wall Street genuinely believed that Al Queda was taking down the financial system.

More likely, it was the small clique of terrorist hedge fund managers who are most beloved by our financial media. Alas, the SEC panicked. To forestall the end of the world, it decided on Thursday night to ban all short selling of stocks in 700-plus financial companies.

It is a shame that it had to come to that. Short-selling is a legitimate practice, and lots of people do it the legal way. Proper short selling probably keeps the markets honest. If the SEC had cracked down on illegal short selling long ago, the cataclysm would have been averted.

At any rate, maybe now would be a good time for the media to take a closer look at the naked short selling scandal. Stephen Moore, who works for the Wall Street Journal editorial page, said on CNBC that naked short selling caused this week’s turmoil. Why has the Journal not published an editorial expressing outrage?

The Journal’s editorial page, the finest in the country, rightly abhors government interventions, but this is not about free markets. It is about preserving property rights – the basic capitalist tenet that people must own what they sell. It is about stopping criminals.

Aside from the Journal’s editorial page, there is a world of media that has not been compromised by short sellers – a world of good reporters who live far from Wall Street and could be covering this scandal from multiple angles. They need to do so quickly. The SEC will lift its current ban. And if it doesn’t start prosecuting people – if we don’t get a permanent, market-wide, and properly enforced rule requiring short sellers to pre-borrow real stock – then it will once again be open season for hedge fund terrorism, and where our towering financial system once stood, there will be nothing but a gaping, smoldering hole.

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The Week the World Said “Naked Short Selling”


Make no mistake: what you witnessed this week was not some natural process – an economy “souring,” a bubble “bursting.” This was not the “invisible hand” at work. This was not even capitalism.

This was the premeditated, systematic destruction of market value by an elite crowd of Wall Street cronies who no doubt cackled with delight in the cleverness of their mischief-making. This was criminal behavior on an ungodly scale – the unprecedented looting of America.

Do you think I’m overstating this? Consider that the hedge funds who did this employed precisely the same tactics that precipitated the stock market crash of 1929 and the Great Depression that followed.

One of these tactics, as almost everybody now finally realizes, is called “naked short selling.” It involves hedge funds and their brokers selling stock that they do not possess – phantom stock – to dilute supply and drive down prices.

Often, the short-selling saboteurs engage in other shenanigans – whispering scurrilous rumors, oozing innuendo, orchestrating bogus class action lawsuits, deploying armies of Internet message boards to foment negativity, paying seedy “independent” financial research shops to publish distorted analysis, hiring thugs to harass executives and their families, conducting corporate espionage, and instructing government cronies to launch dead-end investigations.

You never heard about this from the mainstream financial media. You never heard it because the market saboteurs were writing the media’s talking points. Some reporters were merely addicts, dependent on the dealers of distortion for negative stories. Other reporters were genuinely corrupt. They thought the market machinations were good fun. “I wanna play, too,” they said. They reveled in taking down companies, and then they asked their short-selling accomplices for jobs.

Our nation’s most influential financial journalists knew that naked short selling was rife. They knew that hundreds of companies had been victimized. They had all the data and they had every reason to believe that billions of phantom shares floating around the system could not be good. But they said naked short selling never happens. They said only bad CEOs and crazy people complain about short seller crimes. They whitewashed the biggest scandal of our lifetimes, and then our markets crumbled.

It was the darkest moment in the history of American journalism.

* * * * * * * *

In July, the SEC issued an “emergency order” to prevent naked short selling from destroying the financial system. The order required short sellers of stock in 19 financial companies to actually obtain real stock before selling it.

This was hardly intrusive, but the media, copying straight from the hedge fund lobby’s script, said that the SEC should leave the short sellers alone. The emergency order had hurt “market efficiency,” the journalists wrote, though common sense would suggest that a market cannot efficiently set prices when it is bloated by phantom supply. The emergency order decreased “liquidity,” the reporters wrote, though they provided no credible data to support this claim, and failed to explain how a liquid market in phantom stock benefits anyone other than a few hedge fund billionaires.

Even worse, some reporters argued that the SEC should not crack down on naked short selling because short sellers are “vital” sources of negative information to the media. What if some of these “vital” sources are manipulating markets? Criminals, apparently, are untouchable, so long as they dish dirt to reporters. The abomination riles all the more when you know (as I do, having studied thousands of these dirt-strewn stories) that the majority of them contain insinuation, omissions, and outright falsehoods.

At any rate, the financial media convinced the SEC to let its emergency order expire. Even as the markets nosedived, journalists, including CNBC’s Charlie Gasparino, were calling the emergency order “ridiculous,” and the SEC cowered. Within a few weeks Lehman Brothers was gone, Merrill Lynch was gone, Fannie Mae and Freddie Mac were nationalized, and American International Group, a company with a trillion dollars in assets, was trading for a dollar a share and soliciting handouts from the Fed.

On Wednesday of this week, the SEC rushed out new rules that purported “zero tolerance” for naked short selling. According to the SEC, there would now be a “hard” close out rule, requiring hedge funds to deliver real stock within three days of selling it.

Even if the SEC were to enforce a three day settlement, it wouldn’t do much, because the manipulators work like this: A hedge fund tells his broker to sell a million shares of XYZ. The broker doesn’t have any shares, but he sells them anyway. That is phantom stock and for three days it dilutes supply, and eats away at the financial system. When settlement day comes, the broker asks a second broker to sell him a million shares of XYX. The second broker doesn’t have any shares, but he sells a million shares of XYZ (the price now much lower) to the first broker, who uses the phantom stock to settle his initial sale of phantom stock.

When the second broker has to settle, he calls the first broker…and the phantom stock shuffle continues until the falling price makes it impossible for the company to raise capital. Then it’s bankruptcy, the stock is zero, and nobody has to deliver anything.

In any case, “Oooh, weee…‘zero tolerance.’ Really scary.” For years, hedge funds have habitually violated stock delivery requirements, and the SEC has done nothing. Big words didn’t scare anybody. When the SEC announced its new rules, the hedge fund lobby cheered, the media reported the cheers, and the manipulators went hog wild.

By Thursday afternoon, it was looking like Goldman Sachs, Morgan Stanley, and countless smaller banks were on death row. Call this “liquidity.” Call it “market efficiency.” Call it what you like, but it wasn’t good. The meltdown was so severe that traders on Wall Street genuinely believed that Al Queda was taking down the financial system.

More likely, it was the small clique of terrorist hedge fund managers who are most beloved by our financial media. Alas, the SEC panicked. To forestall the end of the world, it decided on Thursday night to ban all short selling of stocks in 700-plus financial companies.

It is a shame that it had to come to that. Short-selling is a legitimate practice, and lots of people do it the legal way. Proper short selling probably keeps the markets honest. If the SEC had cracked down on illegal short selling long ago, the cataclysm would have been averted.

At any rate, maybe now would be a good time for the media to take a closer look at the naked short selling scandal. Stephen Moore, who works for the Wall Street Journal editorial page, said on CNBC that naked short selling caused this week’s turmoil. Why has the Journal not published an editorial expressing outrage?

The Journal’s editorial page, the finest in the country, rightly abhors government interventions, but this is not about free markets. It is about preserving property rights – the basic capitalist tenet that people must own what they sell. It is about stopping criminals.

Aside from the Journal’s editorial page, there is a world of media that has not been compromised by short sellers – a world of good reporters who live far from Wall Street and could be covering this scandal from multiple angles. They need to do so quickly. The SEC will lift its current ban. And if it doesn’t start prosecuting people – if we don’t get a permanent, market-wide, and properly enforced rule requiring short sellers to pre-borrow real stock – then it will once again be open season for hedge fund terrorism, and where our towering financial system once stood, there will be nothing but a gaping, smoldering hole.

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At the time much of the content on DeepCapture.com was written, the Great Financial Crisis of 2008 was either on the verge of happening or had just occurred. In those days, emotions among this publication’s contributors were raw and, in an effort to get their warnings noticed and appropriate blame placed, occasionally hyperbolic language and shocking imagery were employed.

Were we to write these entries today, a different tone would most certainly prevail.

Yet, being a record of a pivotal time in our global economic history, we’ve decided to leave the rawness unedited, with the proviso that readers take the context of the creation of certain posts into account, and that those easily offended re-consider the decision to read them.