If the revised bill that passed the Senate last night passes the House, even with Congressional oversight added, might not the U.S. Treasury simply devolve into the world's largest "Dark Pool", anyway? The original version of the bill, with its proposition that the Secretary of the Treasury possess carte blanche to decide what to sell, when, to whom, and for how much, was unsettling enough. Adding Congressional "oversight" to said process does not necessarily put an end to the jitters.
The Naked Short Selling That Toppled Wall Street, by Mark Mitchell. DeepCapture.com, October 2nd, 2008.
In other words, hedge funds and brokers sold as many as 9 million shares that they did not possess (which is why they “failed to deliver” them), and they kept the market saturated with at least 1 million phantom shares for more than two weeks. WaMu’s stock price dropped by more than 30% during this period. Similar attacks, with similar effects, occurred one after another in the months leading up to June.This attack lasted long enough to put Bear Stearns on the threshold list, but by then, it was too late. The bank’s mangled remains had been swallowed by JP Morgan. Ultimately, at least 11 million shares of Bear Stearns were sold and never delivered.Wow. Just wow.Two days after Lehman was vaporized, AIG watched its stock fall to as low as one dollar. The data through June shows that AIG was repeatedly blasted with phantom stock, often in stretches of eight days (three + five), with peak failures to deliver reaching 2 million shares. It’s a safe bet that the data will show that these attacks continued, and grew in magnitude, until a price of one buck per share resulted in paralysis, and AIG had to be nationalized. But the company never appeared on the SEC’s threshold list.
After AIG, the rumor was that Citigroup would go down next. The data through June shows that Citigroup was bombarded – blast, pause, blast – with massive amounts of phantom stock. Failures to deliver peaked at 8 million shares. No doubt, the blasts continued and grew in magnitude in the days leading up to September 16, when Citigroup’s stock went into a death spiral.
"Notorious B.I.G. said it best: Either you're slinging crack rock, or you got a wicked jump shot.' Nobody wants to work for it anymore. There's no honor in taking the after school job at Mickey D's. Honor's in the dollar, kid. So I went the white boy way of slinging crack rock. I became a stock broker."
- Seth Davis, Boiler Room (2000)
These guys went the white boy way of robbing banks. They became hedge fund portfolio managers.
Originally Posted by bourbon
The best analysis I have seen so far. It was an attack!!! Who did it? See who ends up with the greatest concentration of wealth when the dust settles.
Speaking as a former Lehman employee, Lehman did not go *poof* as a result only of naked short selling. As much fun as it would to blame pirate hedge funds and evil financiers, Lehman's stock collapsed because it lost billions of dollars. Why? Because Lehman got caught holding tons of subprime MBS it could not move before the market went south. Now I was in the middle of Mojave Viper when most of this went down, but I got filled in by coworkers after the case.
Repeated quarterly losses in the billions were surprises to a marketplace that thought Lehman had sufficient cash on hand to weather a beating that Richard Fuld assured all was well over with after Bear Stearns went down. Market-manipulation is hardly to blame for a falling stock price when a company has losses on the level of Lehman, with no clarity on how much further it was on the hook and no trust left in Richard Fuld.
Last edited by tequila; 10-03-2008 at 04:38 PM.
Tequila,
Thanks for weighing in on the article. Is naked short selling really just that marginal of an issue compared to massive losses and Fuld's management?
Here's what gets me: Lehman's stock increased close to 50% during the three week July 15 SEC order that required hedge funds to borrow real stock before they sold it. The SEC let the order expire, and as Mitchell notes:
If the data comes back and affirms what Mitchell is saying, naked short selling would still not be to blame Lehman's collapse?The day after the emergency order expired, Lehman’s stock nosedived. So did a lot of other stocks that had enjoyed a temporary reprieve.
Mark my words, the data for August and September will show that soon after the order was lifted, rampant naked short selling began anew.
It will show a sustained attack on Fannie Mae and Freddie Mac, with failures to deliver exceeding one million shares, until the day the two companies were nationalized. It will show Lehman getting hammered (blast-pause-blast) until its stock was so low that there was no way it could raise capital. And it will show that in Lehman’s final days, hedge funds sold unprecedented amounts of phantom stock, knowing that the stock would never, ever have to be delivered.
Mitchell says the 2.8 billion loss in the second quarter was largely a result of reducing exposure to mortgages by "marking them down to levels dictated by Einhorn’s bogus index – the CMBX". This not the case?
Now here is a plan to get out of this mess by James Galbraith (son of John Kenneth Galbraith) I especially like the part about bringing in the FBI as part of the planissue them special golden handcuffs and special privileges for water boarding
http://www.washingtonpost.com/wp-dyn...092403033.html
Naked short selling can hasten the collapse of a corporation that has weak or terminal fundamentals. Note that nobody was doing naked short selling of, say, Wal-Mart in such a fashion as to "drive the price down." Companies like Lehman were lying motionless on thin ice, hoping for a passerby to throw them a line and drag them to shore. Short sellers just turned up the heat so the ice would melt quicker before a good samaritan (or politician with a bag of taxpayer dollars) could come along with assistance.
Especially in a market where people with giant gobs of money are searching high and low for anything that will get them a better return than the market, taking out short positions, short sales, and even naked short sales on fundamentally weak stocks (like financials, particularly the ones made most vulnerable by subprime/MBS) were all perfectly logical (omitting the question of whether it was ethical). On the other hand, I doubt many of them wasted any time betting millions or billions on the collapse of Wal-Mart or Johnson & Johnson because if they did take out speculative short positions by way of options or short selling, then even if they had a significant impact on those stock prices, it would have been very short lived and would most likely have popped right back to the original price as soon as the market saw a buying opportunity.
Naked short sellers hastened the collapse of fundamentally weak companies. The question that I think we should be asking is whether, in the long run, that is a bad thing. I don't think the answer is an obvious one and I don't think I know the answer. Would Lehman have come out of this situation intact if it could have bought a few more months of time? Or did the short sellers just rip off the band-aid and get it over with?
Haven't agreed w/Schmedlap much lately, but I agree on this one. Short sellers did not cost me my job - Richard Fuld and his subordinates did that.
Evidently the market did not buy that the CMBX index was worthless. At the least, it does not appear to be any less worthless than other measures of MBS value.
A good counterfactual from Buttonwood at the Economist: Why is naked shorting so bad, when going naked long never draws any approbation? Who's worse, a hedge fund manager shorting Lehman in the wake of massive losses, or the house flipper and mortgage broker doing all they can to inflate asset prices beyond all expectations? Who is more to blame for the current crisis?
A cautionary tale from the future
FINANCIAL authorities in America and Europe took sweeping powers yesterday to avert a financial crisis by imposing restrictions on markets. In their sights are a peculiar brand of speculators known as “long-buyers” who buy assets not to live off the income they generate but to profit from rising prices.
“Some of these people buy homes that they have no intention of living in,” said Lord Poohbah, chairman of Britain’s Financial Services Authority, “and others buy shares they plan to own for just days or weeks, rather than the prudent time period of several years.” Their actions force prices up above fundamental valuation levels, critics say, causing some British tabloid newspapers to call leading fund managers “greedy pigs”.
Particular criticism has been reserved for people dubbed “naked long-buyers”, those who try to buy homes without putting up a deposit. “Such people are in effect renters with a free call option on rising house prices,” said one financial analyst, “but they expect to be bailed out by taxpayers when house prices fall.”
Not only is this a clear case of moral hazard (the encouragement of irresponsible risk-taking) but their activities drive up house prices, putting them beyond the reach of hard-working families who have diligently saved up to put down a deposit. Also in the speculative category are “buy-to-letters” who buy a string of houses with borrowed money in the hope of making outsize gains.
....
Industry analysts said that some of the damage done by long-buyers might have been prevented had a now defunct practice called “short-selling” been permitted. By speculating on falling prices, short-sellers could in theory prevent bubbles from being formed. However, their scope to trade was always limited by regulations and the tactic was killed off during the crisis year of 2008. “It drove us out of business,” recalled George Soros, a former hedge-fund manager, speaking in Central Park yesterday, before adding, “Do you want some ketchup with that?”
Before that crisis, the standard rubric on financial products said “Warning: share prices may go down as well as up.” Afterwards, the clause “but not if the authorities have anything to do with it” was added at the end. The result was the decade-long boom in house and share prices that prompted the authorities to step in yesterday.
Asked if he was blaming speculators for the inadequacy of American monetary policy, the treasury secretary abruptly ended the news conference.
Its not up to the naked short sellers to decide. They fail to deliver, they are not investors, and they should have no impact. Maintaining this mechanism creates rampant opportunities for stock manipulation. This manipulation was rampant in the 90's in the microcap world, and it appears now to have been picked up by the hedge funds.
The Amr Elgindy case should show you the scope of this manipulation. His syndicate had 200+ members and counted a number of hedge funds amongst it. That was in 2002. Scratch beneath the surface in this case and you will also likely find more nefarious connections percolating on issues much more related to this forum.
The ban expires on the 8th. We'll see what happens then.
Last edited by bourbon; 10-06-2008 at 06:39 PM.
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