From Bob O’Brien’s “Sanity Check,” a succinct account of why the “fail to deliver” problem is a big and serious one:
• The DTCC, via Cede & Co., is the registered owner of all shares held in “Street Name,” which are all shares in margin accounts.
• Margin accounts represent the bulk of independent investor account types.
• Registered owners are free to use their “property” as collateral for loans or debt.
• It is unknown what, if any, loans or debts are collateralized by the stock “owned” by the DTCC.
• The DTCC’s “Stock Borrow Program” lends shares to be delivered to buyers, if sellers fail to deliver.
• The Stock Borrow Program is operated on the honor system, and is anonymous.
• It allows one genuine share to be lent multiple times, leaving a string of markers/IOUs in the share’s wake.
• This creates a systemic risk for the stock market, as more markers are in investor accounts, falsely represented as shares, than shares actually authorized by the companies.
• These markers are freely traded and treated by the system as real, resulting in a large secondary market of counterfeit shares – resulting in depressed stock prices.
• With paper certificates being eliminated – by the DTCC – there is no way to confirm that a share is genuine, versus a bogus marker.
• There is nothing to stop your broker from taking your money, and merely representing to you that you bought shares, without ever actually buying them. You have no way of knowing the difference, barring demanding paper certificates for your property.
• Only a handful of people on the planet understand all this.
• In the end, it is simple – Wall Street is printing shares electronically, investors are paying real money for those bogus shares, and the whole thing is predicated on the idea that few will ever understand what is being done, or bother to check.
• This represents a hidden tax on investors and the economy.
• It is, for the most part, illegal.
• It is being kept secret by the DTCC and the SEC, who are terrified of systemic collapse, and a complete loss of investor confidence, should all the facts become known.
• All the facts are becoming known.
Does this sound complicated? It’s not.
Anecdote: a few years ago, in my neighborhood, a retired lady of some means was going around badgering strangers and friends for loans. She was reputed to own a few homes, so many people obliged. Then it turned out that the titles of the houses had been promised out several times over. Which meant that the lenders hadn’t received the collateral they thought they had when they gave her their money. Which meant that if she didn’t pay, they would have nothing to go after in court. Which is precisely what happened.
That, crudely, is what naked short-selling – and indeed. the whole derivative scam – amounts to. It multiplies claims on value, thereby bleeding value from those who legitimately hold it, because they paid money for it, to others who didn’t pay anything real, but traded one “counterfeit” claim for another.
And of course, on a larger scale, that’s what the paper money regime is too. It’s a multiplication of claims on a fixed store of value, which has the effect of diluting and eventually erasing that value.
We’ve been hit by a triple quadruple whammy of essentially the same type of fraud: fractional banking, excessive creation of money, abusive derivatives, and naked short-selling.
The SEC was not aware of this problem until just recently, when the SEC’s OIG performed an audit of the Commission’s enforcement policies, procedures and process for handling naked short selling complaints and FTD problems. As you know, the SEC recently a/o July 1, 2009 changed its disclosure policy to require listing of the aggregate FTD that are 10,000 share or more. IMO, the exchanges are NOT delivering good data to the SEC, which neither has the technology, expertise or manpower to 1) investigate {i.e. audit the exchanges, BDs and MMs like Knight Equity} for the true size of FTD…to include off books transactions [cross order exec, etc] (2) perform the forensic audits necessary to follow the paper trail of money and orders…the BDs like GS have highly sophisticated trading SW allowing them to execute orders not just OTC but under the OTC and off the books. This is a massive problem, which the SEC is investigating. It’s started by examining itself and the OIG’s report acknowledges the SEC’s many shortcomings. We’re making progress. Overstock just settled OOC with one HF and look for more to come.
Your acronyms were a bit confusing…
I take it OOC is out of court and HF is hedgefund (Rocker)
Yes, I blogged that.
But that’s a relatively small case.
There needs to be a systematic laying out of what’s happened over the last two decades at least…probably three.
And while individual bloggers and sites are putting out a lot of information, it’s not coordinated in a narrative that is “unspinnable” – in other words, any revelations get spun in such a way that the big players get what they want out of it..
I am just now working on a blog post following up on the “ban the cds” issue, which is a good example of the baptists and bootleggers problem..
Activists on the left want CDSs banned for their public interest reasons. But the hedge funds want them banned for another reason…..
I’m sorry for using those confusing acronyms. I worked in the securities industry for nearly two decades and too often take it for granted that everyone is familiar with all the acronyms and ticker symbols common to that industry. And yes you’re right, OOC is “out of court” and HF “hedge fund.”
I didn’t mean to suggest we’re near to finding a solution to the massive corruption taking place in the financial industry, specifically with regards to the counterfeiting of company common shares. This is a very real problem, that coincides and correlates with the growth in HFs. And I believe there are about as many HFs around the world today as there are common stocks trading on US equity exchanges.
Based on the amount of money this industry has donated to political parties and specific campaigns and candidates, it appears the HF industry has close friends in very high places – including this White House. So I’d say it will be very tough to prosecute the guilty HF parties.
http://www.opensecrets.org/industries/indus.php?ind=f2700
However, the SEC, AG/ attorney general, FBI, state enforcement authorities, etc. can and should push the financial/securities industry for accurate data on all FTD before disaster strikes the system and we suffer a real meltdown. Furthermore, it’s time for enforcement authorities to conduct a meaningful forensic audit of all trades on US equity exchanges, including all the off exchange/cross trades that have occured over a specific time horizon – say over the last 3 to 5 years. Maybe they could start with the last 12 months. I’m talking about a real forensic accounting that considers the trading capabilities made possible by the financial industry’s high speed computers and highly sophisticated proprietary trading software.
But here again, this will be difficult because the financial/securities industry has friends in high places – especially this White House. For example Goldman Sachs, GS, was the second largest corporate donor to Obama’s presidential campaign, whereas JP Morgan, JPM, Citigroup, C, UBS and Morgan Stanley, MS, are among the top 20 donors to Obama’s campaign.
http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=N00009638
It won’t be easy, but I don’t think the SEC, Obama or enforcement authorities have much choice in this matter. If they don’t act and soon, one very important case will end up in court and exposed to the discovery process. And trust me it would be better for all if they cleaned this up outside of the courtroom. I don’t think the financial industry – securities ind, Obama, the HF industry, SEC etc. want this matter open to discovery. Regardless, I have reason to believe we can expect a breakthrough in this matter sooner, rather than later.
In fact, I have reason to believe there will be a specific event to occur soon that will serve as a major catalyst to force the securities industry to halt further illegal counterfeiting of securities.
Do tell. You’re being quite intriguing.
Personally, I want discovery. I don’t want the banks sanitizing the process.
Are you talking about a firm going under?
Or are you talking in a more general way of a meltdown..something Markopolous (I think I spelled that wrong) mentioned in August, according to a report in the NY Post.
Bigger than Bernie, was the heading, I believe.
Ok here it is:
Yes, I do believe we could see at least one financial firm, through their market making, MM, activity, in OTCBB and pink/grey/yellow sheet stocks get nailed by their exposure to FTDs and forced into bankruptcy by a massive short squeeze. And let me say, I hope so anyway.
I believe this almost happened in 2006 to TD Ameritrade, when they got caught in a short squeeze after issuing billions of phantom shares in Paivis, PAVC…you’ll have to read the rest of that story…but PAVC was an Atlanta company, which is my home town.
http://www.pennystocksignals.com/forum/index.php/topic,235.15.html
I believe PAVC went from less than a penny to well over a buck; but don’t hold me to that PPS.
And I know of a specific situation where it appears the MM is vulnerable to a potentially massive SS. IMO, this MM foolishly anticipated that a microcap company was going to be issuing more shares from it’s authorized shares, AS,(but not as yet issued into circulation)share total, (i.e. see Paivis, PAVC). The MM anticipating that this microcap would offer more shares for sale from its AS did what any capable, sociopathic and opportunistic MM would do by using their advance knowledge of market activity – their knowledge of buy/sells intentions, investment banking deals, and/or talk of… – by selling non existent, counterfeit shares, ahead of this anticipated offering – which by the way, was never offered for sale. Check Mate! There’s more to that story but we’ll have to save the rest for later.
And just for the record: some of these MMs i.e. Knight Trading, NITE, have been playing with fire and flirting with disaster through their abusive trading practices for a few years now. Knight was fined $79 million in 2004 for trading violations…and I believe they were fined in 2002 on a smaller scale, say $800,000 – but let’s call that a dry run of sorts.
http://www.encyclopedia.com/doc/1G1-126200213.html
But the fine in 2004 included a $41 million payment to institutional customers from ill gotten gains. What these guys do in a nutshell is to take advantage of their advance knowledge of buy/sell orders to place trades in their own account(or their HF clients’ ac), and from there they can play the let’s manipulate the stock price game…JMHO…and I believe it’s a matter of record where Knight is concerned.
This kind of abusive trading has been going on in the shares of small and microcap companies for several years now, because it’s sooooo easy to get away with…especially when it comes to selling non-existent, microcap shares. It’s easy because the SEC doesn’t have the manpower or the expertise to police trading in OTCBB and/or pink sheet companies. The SEC really can’t police all the exchanges and markets or quotation systems (i.e. pink sheets) for trading violations, or abusive short selling and/or any real or alleged FTD violations.
IMO, where the SEC and other enforcement authorities dropped the ball was/is by ignoring the message boards, where these MMs, HF Naked SS almost always run simultaneous internet manipulation scams, designed to bash the companies their short. These NSS scam message boards, blogs and even rag publications, with for hire writers, to slam the mgmt of their target microcaps in order to grind the share price into the dust and run the companies into extinction.
And since there are, and have been, many fraudulent public companies trading on the OTCBB and pinks, etc., the SEC hasn’t paid much, if any, attention to the thousands of complaints about abusive short selling and NSS in these small/microcap stocks – especially those trading on the BB or pinks. And this is by the SEC’s own admission. The SEC has failed to enforce its own rules, i.e. rule 3210 which prohibits FTDs from going past 13 days (see SEC OIG report on FTD and NSS).
The solution: In the ’70s and ’80’s the DTCC was required to buy back and close all the FTDs past 13 days and they did so and charged it right back to the broker dealers. We need to go back to the old system by holding the entire industry responsible for one firm’s abusive trading practices. Rules need to be supervised and enforced by use of periodic forensic audits of trading at BD, MM and exchanges. That way the chance of abuse will be greatly reduced.
Well – my opinion from the start has always been that the old ways of doing things were undone step by step in a concerted plan. I don’t for a minute think all this was fortuitous.
When I first started trading my own savings, in the hope of doing better than a pass book account, I used to frequent stock message boards..
I did see a lot of evidence of stock manipulation schemes…primarily in penny stocks.
But there was also a lot of rumor mongering about stocks like Nvdia and Foundry. The latter simply did a nose-dive that was quite remarkable, after one conference call. I don’t know if that happened to be about naked short selling though/
But at the time my interest was mainly held by the activities of market-makers, the banks – how they’d show up and trade at particular times and shake out weak hands..at least that’s what I, as a newbie, picked up from the experienced traders on the boards, when we were watching level II.
You’re absolutely right Lila –
The old ways of doing things, or all the old ways that kept us out of trouble, were virtually all undone.
The politicians, sometimes with help from key players in the financial industry, gradually changed the rules. And some of these rules were important safeguards, which had been in place since the Great Depression.
I believe the first step toward disaster was taken in the 1970’s when Jimmy Carter and Congress conspired to get rid of all the conservative old banking laws that originated from the Great Depression (see Community Reinvestment Act, CRA 1977).
http://www.ffiec.gov/CRA/history.htm
Banks weren’t supposed to take risks with the deposits: remember the old saying “if you need money the bank won’t lend you any?” Well those old rules were hard on lower income households, many of which were minorities. And do you remember the term “red lining?” Well some banks would literally draw a red line around the zip codes with a low income demographic (they just happened to be minority neighborhoods). Once the line was drawn, banks would prohibit their loan officers from making loans in those redlined areas.
The CRA was supposed to prohibit discriminatory lending policies, aka “red lining;” however, what the CRA was really prohibiting was racial discrimination, not conservative banking practices. Then Clinton gave the CRA teeth in 1995 by changing the process for examining banks. And this change IMO, made it difficult to tell the difference between racial discrimination and conservative banking practices. IMO, the CRA paved the way to the housing bubble, its bursting and the resulting banking crisis.
If the CRA was the way to a finacial disaster, then the Gramm – Leach – Bliley Act,(GLBA) aka, THE FINANCIAL SERVICES MODERNIZATION ACT OF 1999, was the vehicle that drove us all the way into a financial disaster, by leading us right into the financial meltdown/Mega-secular Bear Mkt/present day “depression-like” recession.
http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act
The repeal of Glass Steagall didn’t just happen overnight. It took about 5 years to come about, mostly through the persistent lobbying efforts of Clinton Treasury Secretary, Robert Rubin. Rubin just happened to be the very good friend indeed of former Citigroup CEO, Sanford Weil, (who was my old boss). SW desired to make his way into the billionaire boy’s club and his vehicle to achieving that success was to build a one stop financial supermarket called Citigroup. According to Weil, Citi would be a wonderful place where happy customers could trade stocks, deposit paychecks, pay bills, buy insurance, borrow money for a house or car, and have their company financed and/or taken public.
The pay off for Clinton and other politicians: these larger financials, aka financial conglomerates or supermarkets, would have the capital to greatly expand the size of the mortgage market. And that made it possible for those with lower incomes and/or no down payment to purchase their first house. It sounded great on paper but often we forget the reason(s) for having minimum thresholds for incomes and down payments. And we forget the reason for having conservative (rather than liberal) banking practices. The idea was to safeguard our nation’s banking system so that we could steer clear of those deep and prolonged recessions with their high levels of unemployment.
The icing on the cake was the repeal of uptick rule and the change in how the securities industry could handle Fail to Delivers for NSS. That made it possible for the short sellers (financial carrion eaters) to make huge profits by driving stock prices into the dust, while causing some companies (Bear Stearns, etc) to literally go out of business.
Well – yes ..
I wrote out the whole scenario when Paulson first came with his begging bowl
http://www.lewrockwell.com/rajiva/rajiva10.html
The Paulson Putsh.
I blamed the repeal of glass steagall and a few other things..
I was aware of all that because I was researching material on goldman sachs that I was prevented from putting into my book…. and then I got overtaken by events
But there are other angles. The 1970s was where all this started –
first with the delinking of the dollar from gold, and then with the change in the market that followed.
See – “Nationalization in a time of monopoly,” for my take on the subject
http://www.lewrockwell.com/rajiva/rajiva14.html
I mean the corporate raiders in the 1980s posed as activists just as the hedge funds today, like Pershing or Gotham or Greenlight, pose as activist..whereas what they really are is people who are looking to make a quick buck..and get out, leaving the company usually in much worse shape.
They are not adding value, but draining value…and taking the highest price while do it..
Funny you should mention Sanford Weill
A friend of mine wrote a book “Pirates of Manhattan” that came out the same time as Mobs did..in 2007.
He sold it off his website and it became a best seller, but no New York paper would review him..it was all word of mouth.
He talked about the banks at length but from a different angle..and did a lot of work on Citi..but just as with Mobs, he couldn’t get a hearing the NY media, although both books practically spelled out what was happening.
And now suddenly it’s all the rage to talk about the banks and funds.. how come?
Is that because the NY press has wised up and is going to reform itself and the bad guys? I doubt it..
More like they had to start talking about the stuff going on or they would lose all credibility (which they have, in any case).
So now they are talking, but they are spinning the story, because their interests lie in spinning it..since its their friends in the financial community who are the villains of the piece.
A child could see through it, as Gerald Celente rightly says.
It’s only the constant drumbeat of the mainstream press that drowns out the very clear piping up of many voices – the emperor has no clothes.
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