Wall Street executives now expect the Securities and Exchange Commission to extend its temporary limits on a certain type of short selling beyond the 19 financial companies on its initial list, the Wall Street Journal says.
However, the crackdown was problematic from the start, because, in a curious bit of regulatory apartheid, the list of 19 excluded a range of other financials, and because the SEC itself says the brand of shorting it's outlawed for these 19 stocks did not affect them to begin with.
The limits are set to expire tomorrow, but executives, lobbyists and representatives of the Managed Funds Association have reportedly been talking to the SEC over the weekend about possible approaches to extending the rules another two months and expanding the rules to cover more companies, including insurance, housing-industry and a broader range of financial concerns, the WSJ says.
The talk now is whether the SEC's temporary crackdown stopped the death spiral in stocks of financial outfits such as Lehman Brothers (LEH), Fannie Mae (FNM) and Freddie Mac (FRE), as it's believed that traders conducting a certain type of short sale covered their positions, causing the shares to form a level of support.
But when you consider the SEC's moves here, you may rightfully ask yourself in all irony:
Doesn't it seem that the government's farflung and costly attempts to stop the financial crisis are of a piece with the administration's doctrine of pre-emptive strikes, unilaterally stamping out problems before they crop up?
For example, Treasury secretary Henry Paulson says he supports an effective, open-ended taxpayer bailout of Fannie Mae and Freddie Mac to show the stock market and the world at large the US means business and will pull out the stops to save these two publicly traded companies, the thinking being that the enormous backing of the US government (taxpayers), even if it's not used, will cause their shares to stop plunging.
"If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka, and people know you've got it...you're not likely to [have to] take it out," Paulson testified recently about the government's rescue plan for Fannie and Freddie.
The SEC's crackdown on naked shorting in 19 financial companies are of a piece with Paulson's bazookanomics--because the SEC says, get this, these 19 are not under attack from naked shorts at all. And to begin with, naked short selling is not illegal.
In a short sale, a trader sells borrowed stock in a bet the share's price will decline and the stock can be resold for a profit at a lower price; the trader then simply returns the stock to the entity it borrowed the shares from and pockets the difference.
But "in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer," SEC chairman Christopher Cox explained in an op-ed piece in the WSJ that defended the SEC's crackdown to protect the 19. "For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions," he added.
However, Cox says "the SEC's emergency order is not a response to unbridled naked short selling, which so far has not occurred," in these 19 stocks, adding, "rather it is intended as a preventative step to help restore market confidence at a time when that is sorely needed."
Also, a score of banks and financial under siege by the shorts were not on the SEC's list to begin with, igniting a growing chorus of criticism that says the SEC was unfair to keep them off the list.
Not on the list are stocks that have been savagely beaten up, including Washington Mutual (WM), Wachovia (WB), MBIA (MBI), Ambac (ABK), National City (NCC), KeyCorp (KEY), Sovereign Bancorp (SOV), Corus Bank (CORS) and Bank United (BKUNA). Wamu, Ambac and MBIA have plunged to around the price of a gallon of milk or gasoline, off 80% or more over the past year.
To stop the naked shorts, the SEC's new rules forced traders to show specific agreements to borrow shares in these 19 companies before they actually started a short sale. The list includes:
BNP Paribas Securities Corp
Bank of America Corp
Barclays
Citigroup
Credit Suisse Group
Daiwa Securities Group
Deutsche Bank Group
Allianz SE
Goldman Sachs Group Inc
Royal Bank ADS
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc
Merrill Lynch & Co Inc
Mizuho Financial Group Inc
Morgan Stanley
UBS AG
Freddie Mac
Fannie Mae
To get on the list, the SEC chose "precisely those financial firms" that the Federal Reserve "has designated as eligible for access to its liquidity facilities, and for which the taxpayer could be on the hook," Cox explained.
The SEC's moves raise ironies and legitimate questions here, beyond the fact that hedge funds pounding these stocks borrowed tens of billions of dollars from the same Wall Street investment banks and commercial banks on the list to do their short sales, and that there are a large number of foreign institutions on its list.
The SEC chose these 19 because they now can borrow funds at the Federal Reserve's expanded discount window, borrowings for "which the American taxpayer is now on the line," Cox explained.
However, Wamu, Wachovia, KeyCorp and the other banks not on the list can go under, too, leaving the taxpayer on the hook for them in a taxpayer-backed bailout.
And as Mark McHugh writes on the financial analysis website Seeking Alpha, on July 11, 2008, Bespoke Investment Group reported that "the short interest of the S&P 500 was 6.0% (percentage of float)," yet, absent Freddie Mac and Fannie Mae, the other 17 stocks "have a cumulative short interest of just 1.18% (percentage of outstanding)."
He adds: "Is that really cause for concern? In my universe, 1.18% short interest is no great shakes." McHugh asks too why Goldman is on the list, "why are the "smartest guys on the street hiding under mom's apron? They should just buy puts on themselves, make billions and squeeze these cretins until their eyeballs pop; they've pulled similar stunts, right?" (http://seekingalpha.com/article/85999-the-sec-s-sacred-cow-list-where-are-wamu-and-wachovia)
The SEC's attempt to outlaw naked shorting was problematic from the start. In 2004, well-intentioned bureaucrats at the SEC tried to "attack the problem of naked shorting," Cox has said.
The new rules, enacted in January 2005, forced broker-dealers and traders "before they accept short sale orders or effectuate short sales in their own accounts, to first borrow the security to be shorted, or enter into a contract to borrow it," Cox said.
The problem was, the SEC wrote a loophole into that 2004 rule, saying broker dealers and traders were not required to have a physical agreement to borrow the shares if they had "reasonable grounds" to believe that the shares can be borrowed. "Opportunities for evasion of the rule's purpose" were born via the "reasonable grounds" loophole, Cox has noted, and the thinking is the naked shorts piled through.
So the belief is traders shorted stock in the 19 companies, including Citigroup (C), Lehman, Fannie Mae, and Bank of America (BAC) without borrowing the shares to deliver to buyers, even though the SEC's Cox says from the start that "has not occurred."
Short sales add liquidity to the market, and provide a needed correction to stop overheated trading. Shorts are often attacked for talking their books, despite the bullish bias on Wall Street and despite the fact that Wall Street tends to bruit about its long positions.
Shorts often do their homework poring through financial statements finding economic potholes that protect investors, and can provide a necessary reality check, a reality check that clearly bounced in this crisis. China has outlawed short selling, which has helped inflate the bubble in those markets.
Yes abuses occur. But the SEC itself has said in public statements that "naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules," and that in certain instances, it can replenish market liquidity.
The New York Stock Exchange has already said that the Big Board has found no evidence of widespread naked short selling.
Also, naked shorting can arise if a stock is so illiquid or has a tiny number of shares outstanding, making the attempt to find shares to borrow difficult to arrange. And underwriters of IPOs or secondary stock offerings often have an overallotment of shares they place and trade that don't technically yet exist in the offering, so they make the trades through naked short positiosn, Fox Business's news director Ray Hennessey explains.
The real problem at the SEC is its mysterious decision to remove the uptick rule in July 2007, just as the crisis in the financials was about to explode.
The uptick rule said that traders can only short a stock if the last trade of a stock is at least a fraction, or an uptick, higher than the prior trade.
The rule was an old stock market backstop, put in place in 1938. When the SEC lifted this ban, the subprime and credit crisis blew up and the rule change helped whipsaw volatility in financial stocks faster than a tractor trailer on a bungee cord.
from article:
The real problem at the SEC is its mysterious decision to remove the uptick rule in July 2007, just as the crisis in the financials was about to explode.
Gee
indeed, wonder why ?
There exists a book in and of itself on that subject
Boy oh Boy - imagine someone who knew how to play shorting with no uptick
I bet there are some recently made wealthy folks out there in the last year.
Now ... Me ? And I bet this Muriel Siebert too - would say to someone reaping a fortune from shorting ? or naked shorting ? or exloiting commodities ?
hey - is that real work ?
is that labor contributive to ones community ? I suppose it depends if you spend the money on a porsche or a new business that creates jobs ?
August 3, 2008 at 7:29 am
stan
Isn't naked shorting fraud?
I say I'm selling you something, but I'm selling you nothing. You give me money, and I give you squat. i.e. I am using your money for free. And it generates trading statistics that aren't really trades, affecting the stock price in the direction helpful to my shorting. That seems to be market manipulation.
So the difference between naked shorting a stock and buying out of the money puts is that one directly influences the price of the stock to my benefit, while the other doesn't.
Incidentally, it would only be right that with covered shorting, the owner of the shares, not the broker, gets the rent for their borrowing. If they don't, that too is criminal, as the broker is using your property to do you economic harm. You have a long position, so you want the stock to go up, but the broker is renting your property to generate sales in the market, making money from your asset by lowering the price of the stock, directly contrary to your interests.
July 31, 2008 at 1:33 pm
F-Stop
Harry is correct about Greedom.. Greedom has found a blog here that will let him post as often as he likes whether or not he has taken his meds.. And, most of those posts are not interesting to anyone but Greedom, as evidenced by the lack of feedback..
July 30, 2008 at 2:51 pm
Coolbreeze
I agree wholeheartedly with Cyberman. How nice to get a logical and honest opinion on these pages.
July 30, 2008 at 1:05 pm
cyberman
As a plain old tax paying, bailout underwriting citizen did try to get SEC to answer emails regarding their substantial errors (iterated in above comments) under 'leader' Cox. Talk about opaque trading platforms, Cox invented them in his black hole compartmentalized SEC. Guess I didn't have a need to know.
Cox according to editorial quoted by EM above claims naked shorting does not occur with the 19. Man, he, Paulson and Bush must have nightly seances with beings which got off those UFOs on the white house lawn June 15th. For Cox's edification a seance is "...a form of mediumship in which one or more people communicate with entities on another frequency...".
When in-the-know speculators found out the 19 were going to be protected from what Cox claims is not an illegal or even occurring practice, many of them shot up. (That is the stocks shot up, not the speculators - but then you never know.) If they weren't in danger from naked short selling why protect them from it? Am I getting this: These named 19 financials (but none of the others) need protection from a practice that is not occurring because stockholders have lost confidence? Which frequency was that on Mr. Chairman?
Oh yeah, this guy was confirmed by a congress that has a 9% approval rating and appointed by a President with maybe a fifth of the voters approving his 'service' to the country.
July 30, 2008 at 2:55 am
Ken Kesler
It will be very interesting to see where Herr Paulson ends up after he leaves the halls of unlimited printed money. Want to bet it is back to GS?
Ken Kesler
July 29, 2008 at 4:05 pm
Tim
Like the old cliché "Hi I am from the government and here to help." Those who desire or think micromanaging markets is a good and beneficial thing make sure you are careful what you wish for. History is full of many good intentions resulting in nasty unintended consequences.
July 29, 2008 at 3:03 pm
Harry
Why doesn't FBN limit the number of posts per day? Honestly, I want to read the comments of others, but find that I have to read through Greedom's daily running commentary that must be tied to his liberal dictionary. Geez, Greedom, if you have so much to add start a blog of your own somewhere. Blogs are hosted free in a number of places.
July 29, 2008 at 11:45 am
Don
The way I see it, Cox and Paulson are trying to protect their own. Eventually all the toxic paper will find it true value and the excrement will hit the ventilator; again.
July 29, 2008 at 9:35 am
Greedom
Rereading the first part of the article ?
I find:
"To get on the list, the SEC chose “precisely those financial firms” that the Federal Reserve “has designated as eligible for access to its liquidity facilities, and for which the taxpayer could be on the hook,” Cox explained."
end paste
The list ... ouch
on the hook ... double ouch
I'll go ahead and shift down the credit rating for the Treasury and it's 'liquidity facilities'.
Why not, on the other hand, if the world downgraded the US Dollar - oh no !
No kidding, have no seen the movie in 20 years, or or 30 ! That Race around the world movies out of the 50's - why does the pie factory scene enter my head ! Have I blown a veeeeeeeeeeeeeeeee. jk vein.
Sorry, US Dollar ? downgraded ? by the world ? couldn't help laughing.
Oh well -
all in all - zooming out - this issue with SEC and naked shorting has been stumbling for years now as I see it, I don't grant too much focus to it right now.
I like the ML news today - near 40 billion in request for - what ?
you know what ?
I'm guessing to keep that bottom line such that they can get out of the critical red.
oh well. Will be interesting.
Myself ? I just realized the scam on Wachovia - unless they have a precaution on it - $1 from your checking to your savings every purchase. Hmm... And - imagine all the NSF charges that will show by people going - why ? I forgot it was sucking out of my checking ! Just made me wonder if Wachovia was so desperate it has become true scum.
WaMu and Whackovia- TYPO intended I think are near to fall - hmm - I better look at that list above.
July 29, 2008 at 9:05 am
Greedom
What I meant by that regarding Monica Goodling and the SEC hiring her for THEIR hiring processae ?
Is as Monica [Goodling] is analog here to X where X is the part of the SEC that would make for not - the perfect storm - the an unwritten script of the anti-thesis, the perfect sail, or 'smooth sailing', which is what we've had, or had, minding my use of 'we' there - so what if english lacks a universal first person plural! ?
Oh well, fantasy.
Hmm ... I wonder though
in all of her travels.
hmm...
late 20's - has Monica ever crossed over into SEC territory in any questioning ? let's be nonsensically critical here too and ask - if not, why has she abandoned working with federal agencies pro-actively such as her dealings with the SEC. Hmm put THAAYAT way ? oh well- Monica is going to get slammed for sure on the 'Well, I didn't keep any notes'.
That's unfortunate. On the other hand, she does know enough to mandate a resignation.
That's a plus to get someone like Monica Goodling up to bat -
hmm
uh oh, I left politics forums to join financial forums and here I am.
this isn't a forum though.
But - oh well - and I've ended up on politics. Atleast by analagous reference, or as I'd rather say analog to.
Has to be someway to
Then again, sometimes there isn't.
What's ML scrambling 38 billion is it ? today ?
whoa !
double digits folks !
augh! watch - instead of over, we go double digits for 3 years!
I mean as to the tens of billions place value - 38 Billion.
lol
July 29, 2008 at 8:55 am
Greedom
The SEC needs to find someone like Monica Goodling for the hiring process.
Only replace 'God' with 'Spread' and replace abortion with doing whatever is necessary to win those extra afterlife bonus points to be later spent, in some fantasy world that no one has been able to prove even exists.
Mike - last I checked ? Many people believe in God, and many people believe that predatory naked shorting exists.
Let's flip a coin
and pray ? perhaps ? it doesn't land on it's side.
Mike - we're better of together than apart !
then again we ARE in deep black space, anchor unknown - last I checked, there is a big sun nearby. Howdy neighbor (Flanders voice).
July 29, 2008 at 8:00 am
Greedom
Once upon a time, there was a bear who lived in the woods, and the FBI actually trusted the SEC.
the end.
July 29, 2008 at 7:57 am
Greedom
No where else to post it
but it looks like Merrill Lynch & Co is coming up short today ! heh
from press...
Merrill Lynch & Co., the third- biggest US securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings ...
Wow, they're really scramblin' over there.
July 29, 2008 at 7:16 am
Thomas
It's seems clear now that they will not fix the 19 companies away from the market. Market sees this the way either they are improving market rules or they are not. Looks very sad so far.
July 28, 2008 at 11:10 pm
mark mchugh
Elizabeth,
Thanks for the mention in your article. To me, this SEC list pegs the weirdometer, yet not many people seem to want to talk about it, let alone the implications. Why is the SEC more concerned about the Primary Dealers (those who can deal directly with the Fed) than regional banks on the verge of collapse? The only thing I'm sure of is that the answer can't be comforting. That list might turn out to be an unintentional "tip sheet" for short sellers in the very near future. So what purpose did publishing it serve?
Riddle me this. If you or I had said a week ago, "Merrill's probably going to dilute it's shareholders with a huge Private Placement" the SEC would have been on us like an Earl Scheib paint job (or so they say). Merrill said it had no plans to raise additional capital, until they did it today ($8.5B). Who's the rumor-mongerer? Aren't statements like that criminal?
You can't inspire confidence in a system so obviously devoid of justice.
Sorry about the rant, but hey, anybody who quotes me, probably needs better sources;)
July 28, 2008 at 7:58 pm
Ed
It would be nice to have a comment on this topic from Ms. MacDonald and give us the benefit of her expertise.
July 28, 2008 at 7:32 pm
Crazyman's Economics
Cox's actions can be compared to a man punishing the cat because the dog chewed his shoes. With the wealth of issues the SEC needs to address in the out-of-control behavior of Wall Street, naked short-selling is way down the list.
But remember this, in my book, "Crazyman's Economics" I argue that the true role of an agency like the SEC is to protect the exchanges from the investors, not the opposite. Cox's actions give the appearance of doing something, which makes it all the more pathetic.
July 28, 2008 at 5:54 pm
RDB
Just mandate the cover of all failure to delivers and the problem would be solved.
BSC still has 16m FTDs and OSTK has been on the SHO list for 800+ days DELIVER SEC
July 28, 2008 at 3:15 pm
Mike
This is the kind of muddled pandering you get when a politician is charged with running a regulatory agency. No one has ever been able to come up with enough evidence to prove that predatory naked shorting even exists. As an incidental of heavily shorting a distressed stock - sure some of those short positions will come up fail-to-deliver, but the tin hat crowd have been whining about this mysterious cadre of market makers who knowingly, intentionally, deliberately naked short in order to purposefully drive down a targeted stock. The looney fringe of the investment world lead by one of the Chief Executive Loons - Patrick Byrne of Overstock.Com - have been blaming an unidentified bogeymen "Sith Lord" naked short mastermind for several years now. According to them, the only reason overhyped poorly performing stocks decline is because the dreaded naked shorters make it so.
And the SEC feeds the lunacy, offering the reputation of the SEC as part validation of a kooky conspiracy theory that no one has been able to prove exists - not even the SEC itself. So when the SEC stupidly states that it is banning a trading 'practice' for a special list of Companies, and in the same breath states that those companies have not been subject to a naked short 'attack' - the agency urinates away it's own credibility. Investor confidence? How can investors be confident in the SEC's ability to police the markets if this is the best they can offer? There are plenty of other ways for the SEC to deploy it's limited enforcement resources and at the same time instill the kind of "investor confidence" that it claims to be so concerned about. Observing the SEC chasing naked short soap bubbles around Wall Street does not give me the warm and fuzzies about the agency or their ability to to fulfill their mission.
July 28, 2008 at 2:38 pm
Greedom
Here is my question on naked shorting.
If 10 million shares exist.
And 30 million are in play due to naked shorting -
and in process, those naked shorters are able to drive down the price of the company to crash ?
In the morning, the company no longer exists - BUT
is it true ? that if you successfully bring down a company using a pack of naked shorters ? that the problem of the extra stocks that never existed doesn't and won't matter any more ? because the company was successfully taken down ?
So you see my point on free enterprise, and naked shorting being a threat there.
BECAUSE - it says your company, if publicily traded - with a FIXED amount of shared out there - can come under attack of people naked shorting, or borrowing MORE shares than you even have out there for your company ? and yet ? each of those ghost shares ? STILL influence the price of the stock ?
if that's true, and clear to readers, gee, almost makes you wonder - how safe is ANY company that's publicly traded.
Me ? I can't think of when naked shorting would be beneficial to the company, ever.
unless, sheesh, a company naked shorted itself - imagine that.
It drives its own price down to then buy back stock at a better price, thus regaining more control of the company again.
Wow - that's legal - and gee- what a scam !
Odd, spent some time in politics, went into economics to learn a bit - now I find questionable thinking systems in both. Perhaps I should question my own thinking that led me to politics and money for subjects to get involved in !
July 28, 2008 at 2:21 pm
Greedom
from comment by Ed:
Comment by Ed
Jul 28th, 2008 at 11:12 am
Good morning. I would like some clarification of shorting. It is my impression that “naked” shorting has been against SEC rules since the 1930’s and is illegal but proper shorting on any stock $5.00 or more is not illegal. I’ve heard experts on FBN and your competition take that position but your article would seem to contradict it.
The uptick rule-I’ve heard opinions on both sides. I think that the uptick rule was helpful to the market as it would not allow an avalanch of shorting of a stock but some experts say that with spreads currently at one or two cents on many stocks it is not pertinent and would not be effective. In my personal opinion I would like to see it reinstated.
end comment
Ed - I understand that it is legal currently.
I once ran into someone that was obsessed with this subject years ago - they left me in a state of awe that this goes on, mainly because it can take down and suck the life out of a company - just like that.
It's really a threat to free enterprise.
I mean, hey, if you're a company - and you have 10 million shares floating ?
And, doesn't matter, but maybe you hold 2 million, so 8 million are out there.
One bad encounter with a pack of naked shorters and if I'm not mistaken
on any given trading day - you could be put on the line 'as if' you had 20 million shares out there - as you don't need to borrow a real share, and the person that explained what they were so obsessed with shared with me that because you don't even have to have a real share to borrow, you run into people borrowing MORE stocks than exist.
If I understand it right, 50 million shares can be 'used' even though only 10 million exist for this sample company here. That ALONE is problematic eh ?
Heh, you know what ? this smells like the over leveraging that goes on, take Freddie and Fannie, what ? 100 billion net worth or something close to that and over 5 trillion debt ?
Sheesh, I wish "I" could manage credit and debt like that in my life - sheesh
I could make, let's see - it would take 10 100 billions to get 1 trillion, so 10 x 5 = 50 to 1... FIFTY TO ONE debt ratio there.
I could make 50k a year, and 50 x 50k - hmm 5 x 50k = 250k so, 50 MUST be the next one over, 2.5 million.
YIKES - if I lived MY life like Freddie Mac and fannie Mae - my god, if I only made 50k a yaer ? I could have 2.5 million in crapola, house, car, vacation - yikes.
And here I've been saying my below 600 credit score is keeping me from credit for the better !
Yikes, I forget about reading that it is credit that ALLOWS a corporation to FLY - to SOAR - and here I've been living without credit - and Fannie Mae shows up revealing a 50 to 1 debt/real value ratio...
I wonder what kind of ratio the US has on ITS debt - maybe I don't want to know.
People talk about profit to earnings ratio, I often like to look at debt to real value as I call it - I'm sure there is a proper name for it.
But Ed, I 'think' naked shorting allows more stocks than exist to be traded, and to my knowledge the SEC has been stalling on it for years.
I bet you can make a killing with naked shorting - if only you could own some serious major media resources.
Ed, imagine if you could buy the Wall Street Journal, imagine what kind of rumors you could spread and then naked short to exploit that - my god.... I suppose it would be insane if you had thousands of radio stations, newspaper and TV media resources to start a rumor - the power would be amazing, easy into billions of profits from naked shorting I wager.
Now, NewsCorp does have such a backbone on media distribution capabilities to pretty much start a rumor IF it wanted, hmm... integrity is the issue there I suppose.
Naked shorting + rumors = total disaster.
I'm sure there have been some real dark nakes shorting episodes on wall street in the past... would be neat to write about or investigate -that's for sure.
July 28, 2008 at 2:13 pm
Greedom
Does anyone else have any insights to offer up on why the SEC is ONLY limiting this to 19 corporations ?
perhaps the anti-thesis to naked shorting would be:
Temporarily lending someone a stock you don't own ! lol
seems I'd think you'd want to go full canopy on this SEC change for naked shorting.
First time I learned about naked shorting was someone explaining to me why all the stock they owned in a company was no longer valuable, as virtually overnight - the company was naked shorted to death.
Seems to me there needs to be a counterbalance of accountability in naked shorting.
Shorting ALONE I find questionable as to whether in a zero sum game of the universe if I really come out ahead, but hey, bet up, bet down, once Wall Street opens its doors as a casino ? you have to let people bet for or against the dice.
If people borrow what never existed, my understanding is that at one point, there can be 'as if' more shares are out there for a given company - further - that dilutes the value of the stock as far as I see. Until end of day - when people have to clean up the naked shorting mess like the end of a Dr. Suess The Cat in the Hat story.
I wonder what 'thing 1' and 'thing 2' would be for the naked shorters out there that work in teams.
Remember, teams broke vegas with blackjack out of MIT - and Ed Thorpe - the professor of mathematics at MIT who developed the technique to break blackjack - I read then moved on to study the stock market - and created the first 'hedge fund'.
So, naked shorting is not unlike a team of people going into a casino - IF they are playing together.
Tom picks up phone - calls Lucile - "Naked Short stock XYZ" Lucy calls up Brad - Brad calls up his team of naked shorters - in 3 hours ? stock XYZ starts to slide. In 3 days ? company XYZ is out of business.
Lucy ? Brad ? Tom and the naked shorters ? even IF there WERE more stocks out there than existed ? Doesn't matter -they just call in the cat in the hat - and hey - another day of trading tomorrow.
I still ask -how do the naked shorters cover themselves when they get into trouble borrowing more stock than existed.
July 28, 2008 at 2:02 pm
Greedom
from article:
"The New York Stock Exchange has already said that the Big Board has found no evidence of widespread naked short selling."
end clip
Isn't it true though naked shorting doesn't necessarily have to have any records ?
July 28, 2008 at 11:30 am
Greedom
from article:
"BNP Paribas Securities Corp
Bank of America Corp
Barclays
Citigroup
Credit Suisse Group
Daiwa Securities Group
Deutsche Bank Group
Allianz SE
Goldman Sachs Group Inc
Royal Bank ADS
HSBC Holdings Plc ADS
JPMorgan Chase & Co
Lehman Brothers Holdings Inc
Merrill Lynch & Co Inc
Mizuho Financial Group Inc
Morgan Stanley
UBS AG
Freddie Mac
Fannie Mae
To get on the list, the SEC chose “precisely those financial firms” that the Federal Reserve “has designated as eligible for access to its liquidity facilities, and for which the taxpayer could be on the hook,” Cox explained.
"
end clip
Sheesh Liz MacDonald!
you know ? does this mean anyone on that list ? we can presume to be in dire straights ?
Or 'access to liquidity funds' doesn't necessarily mean you need it.
Would be neat to see which of those companies have pulled what on the liquidity lines.
Subscribe to Comments
Greedom
from article: The real problem at the SEC is its mysterious decision to remove the uptick rule in July 2007, just as the crisis in the financials was about to explode. Gee indeed, wonder why ? There exists a book in and of itself on that subject Boy oh Boy - imagine someone who knew how to play shorting with no uptick I bet there are some recently made wealthy folks out there in the last year. Now ... Me ? And I bet this Muriel Siebert too - would say to someone reaping a fortune from shorting ? or naked shorting ? or exloiting commodities ? hey - is that real work ? is that labor contributive to ones community ? I suppose it depends if you spend the money on a porsche or a new business that creates jobs ?
stan
Isn't naked shorting fraud? I say I'm selling you something, but I'm selling you nothing. You give me money, and I give you squat. i.e. I am using your money for free. And it generates trading statistics that aren't really trades, affecting the stock price in the direction helpful to my shorting. That seems to be market manipulation. So the difference between naked shorting a stock and buying out of the money puts is that one directly influences the price of the stock to my benefit, while the other doesn't. Incidentally, it would only be right that with covered shorting, the owner of the shares, not the broker, gets the rent for their borrowing. If they don't, that too is criminal, as the broker is using your property to do you economic harm. You have a long position, so you want the stock to go up, but the broker is renting your property to generate sales in the market, making money from your asset by lowering the price of the stock, directly contrary to your interests.
F-Stop
Harry is correct about Greedom.. Greedom has found a blog here that will let him post as often as he likes whether or not he has taken his meds.. And, most of those posts are not interesting to anyone but Greedom, as evidenced by the lack of feedback..
Coolbreeze
I agree wholeheartedly with Cyberman. How nice to get a logical and honest opinion on these pages.
cyberman
As a plain old tax paying, bailout underwriting citizen did try to get SEC to answer emails regarding their substantial errors (iterated in above comments) under 'leader' Cox. Talk about opaque trading platforms, Cox invented them in his black hole compartmentalized SEC. Guess I didn't have a need to know. Cox according to editorial quoted by EM above claims naked shorting does not occur with the 19. Man, he, Paulson and Bush must have nightly seances with beings which got off those UFOs on the white house lawn June 15th. For Cox's edification a seance is "...a form of mediumship in which one or more people communicate with entities on another frequency...". When in-the-know speculators found out the 19 were going to be protected from what Cox claims is not an illegal or even occurring practice, many of them shot up. (That is the stocks shot up, not the speculators - but then you never know.) If they weren't in danger from naked short selling why protect them from it? Am I getting this: These named 19 financials (but none of the others) need protection from a practice that is not occurring because stockholders have lost confidence? Which frequency was that on Mr. Chairman? Oh yeah, this guy was confirmed by a congress that has a 9% approval rating and appointed by a President with maybe a fifth of the voters approving his 'service' to the country.
Ken Kesler
It will be very interesting to see where Herr Paulson ends up after he leaves the halls of unlimited printed money. Want to bet it is back to GS? Ken Kesler
Tim
Like the old cliché "Hi I am from the government and here to help." Those who desire or think micromanaging markets is a good and beneficial thing make sure you are careful what you wish for. History is full of many good intentions resulting in nasty unintended consequences.
Harry
Why doesn't FBN limit the number of posts per day? Honestly, I want to read the comments of others, but find that I have to read through Greedom's daily running commentary that must be tied to his liberal dictionary. Geez, Greedom, if you have so much to add start a blog of your own somewhere. Blogs are hosted free in a number of places.
Don
The way I see it, Cox and Paulson are trying to protect their own. Eventually all the toxic paper will find it true value and the excrement will hit the ventilator; again.
Greedom
Rereading the first part of the article ? I find: "To get on the list, the SEC chose “precisely those financial firms” that the Federal Reserve “has designated as eligible for access to its liquidity facilities, and for which the taxpayer could be on the hook,” Cox explained." end paste The list ... ouch on the hook ... double ouch I'll go ahead and shift down the credit rating for the Treasury and it's 'liquidity facilities'. Why not, on the other hand, if the world downgraded the US Dollar - oh no ! No kidding, have no seen the movie in 20 years, or or 30 ! That Race around the world movies out of the 50's - why does the pie factory scene enter my head ! Have I blown a veeeeeeeeeeeeeeeee. jk vein. Sorry, US Dollar ? downgraded ? by the world ? couldn't help laughing. Oh well - all in all - zooming out - this issue with SEC and naked shorting has been stumbling for years now as I see it, I don't grant too much focus to it right now. I like the ML news today - near 40 billion in request for - what ? you know what ? I'm guessing to keep that bottom line such that they can get out of the critical red. oh well. Will be interesting. Myself ? I just realized the scam on Wachovia - unless they have a precaution on it - $1 from your checking to your savings every purchase. Hmm... And - imagine all the NSF charges that will show by people going - why ? I forgot it was sucking out of my checking ! Just made me wonder if Wachovia was so desperate it has become true scum. WaMu and Whackovia- TYPO intended I think are near to fall - hmm - I better look at that list above.
Greedom
What I meant by that regarding Monica Goodling and the SEC hiring her for THEIR hiring processae ? Is as Monica [Goodling] is analog here to X where X is the part of the SEC that would make for not - the perfect storm - the an unwritten script of the anti-thesis, the perfect sail, or 'smooth sailing', which is what we've had, or had, minding my use of 'we' there - so what if english lacks a universal first person plural! ? Oh well, fantasy. Hmm ... I wonder though in all of her travels. hmm... late 20's - has Monica ever crossed over into SEC territory in any questioning ? let's be nonsensically critical here too and ask - if not, why has she abandoned working with federal agencies pro-actively such as her dealings with the SEC. Hmm put THAAYAT way ? oh well- Monica is going to get slammed for sure on the 'Well, I didn't keep any notes'. That's unfortunate. On the other hand, she does know enough to mandate a resignation. That's a plus to get someone like Monica Goodling up to bat - hmm uh oh, I left politics forums to join financial forums and here I am. this isn't a forum though. But - oh well - and I've ended up on politics. Atleast by analagous reference, or as I'd rather say analog to. Has to be someway to Then again, sometimes there isn't. What's ML scrambling 38 billion is it ? today ? whoa ! double digits folks ! augh! watch - instead of over, we go double digits for 3 years! I mean as to the tens of billions place value - 38 Billion. lol
Greedom
The SEC needs to find someone like Monica Goodling for the hiring process. Only replace 'God' with 'Spread' and replace abortion with doing whatever is necessary to win those extra afterlife bonus points to be later spent, in some fantasy world that no one has been able to prove even exists. Mike - last I checked ? Many people believe in God, and many people believe that predatory naked shorting exists. Let's flip a coin and pray ? perhaps ? it doesn't land on it's side. Mike - we're better of together than apart ! then again we ARE in deep black space, anchor unknown - last I checked, there is a big sun nearby. Howdy neighbor (Flanders voice).
Greedom
Once upon a time, there was a bear who lived in the woods, and the FBI actually trusted the SEC. the end.
Greedom
No where else to post it but it looks like Merrill Lynch & Co is coming up short today ! heh from press... Merrill Lynch & Co., the third- biggest US securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings ... Wow, they're really scramblin' over there.
Thomas
It's seems clear now that they will not fix the 19 companies away from the market. Market sees this the way either they are improving market rules or they are not. Looks very sad so far.
mark mchugh
Elizabeth, Thanks for the mention in your article. To me, this SEC list pegs the weirdometer, yet not many people seem to want to talk about it, let alone the implications. Why is the SEC more concerned about the Primary Dealers (those who can deal directly with the Fed) than regional banks on the verge of collapse? The only thing I'm sure of is that the answer can't be comforting. That list might turn out to be an unintentional "tip sheet" for short sellers in the very near future. So what purpose did publishing it serve? Riddle me this. If you or I had said a week ago, "Merrill's probably going to dilute it's shareholders with a huge Private Placement" the SEC would have been on us like an Earl Scheib paint job (or so they say). Merrill said it had no plans to raise additional capital, until they did it today ($8.5B). Who's the rumor-mongerer? Aren't statements like that criminal? You can't inspire confidence in a system so obviously devoid of justice. Sorry about the rant, but hey, anybody who quotes me, probably needs better sources;)
Ed
It would be nice to have a comment on this topic from Ms. MacDonald and give us the benefit of her expertise.
Crazyman's Economics
Cox's actions can be compared to a man punishing the cat because the dog chewed his shoes. With the wealth of issues the SEC needs to address in the out-of-control behavior of Wall Street, naked short-selling is way down the list. But remember this, in my book, "Crazyman's Economics" I argue that the true role of an agency like the SEC is to protect the exchanges from the investors, not the opposite. Cox's actions give the appearance of doing something, which makes it all the more pathetic.
RDB
Just mandate the cover of all failure to delivers and the problem would be solved. BSC still has 16m FTDs and OSTK has been on the SHO list for 800+ days DELIVER SEC
Mike
This is the kind of muddled pandering you get when a politician is charged with running a regulatory agency. No one has ever been able to come up with enough evidence to prove that predatory naked shorting even exists. As an incidental of heavily shorting a distressed stock - sure some of those short positions will come up fail-to-deliver, but the tin hat crowd have been whining about this mysterious cadre of market makers who knowingly, intentionally, deliberately naked short in order to purposefully drive down a targeted stock. The looney fringe of the investment world lead by one of the Chief Executive Loons - Patrick Byrne of Overstock.Com - have been blaming an unidentified bogeymen "Sith Lord" naked short mastermind for several years now. According to them, the only reason overhyped poorly performing stocks decline is because the dreaded naked shorters make it so. And the SEC feeds the lunacy, offering the reputation of the SEC as part validation of a kooky conspiracy theory that no one has been able to prove exists - not even the SEC itself. So when the SEC stupidly states that it is banning a trading 'practice' for a special list of Companies, and in the same breath states that those companies have not been subject to a naked short 'attack' - the agency urinates away it's own credibility. Investor confidence? How can investors be confident in the SEC's ability to police the markets if this is the best they can offer? There are plenty of other ways for the SEC to deploy it's limited enforcement resources and at the same time instill the kind of "investor confidence" that it claims to be so concerned about. Observing the SEC chasing naked short soap bubbles around Wall Street does not give me the warm and fuzzies about the agency or their ability to to fulfill their mission.
Greedom
Here is my question on naked shorting. If 10 million shares exist. And 30 million are in play due to naked shorting - and in process, those naked shorters are able to drive down the price of the company to crash ? In the morning, the company no longer exists - BUT is it true ? that if you successfully bring down a company using a pack of naked shorters ? that the problem of the extra stocks that never existed doesn't and won't matter any more ? because the company was successfully taken down ? So you see my point on free enterprise, and naked shorting being a threat there. BECAUSE - it says your company, if publicily traded - with a FIXED amount of shared out there - can come under attack of people naked shorting, or borrowing MORE shares than you even have out there for your company ? and yet ? each of those ghost shares ? STILL influence the price of the stock ? if that's true, and clear to readers, gee, almost makes you wonder - how safe is ANY company that's publicly traded. Me ? I can't think of when naked shorting would be beneficial to the company, ever. unless, sheesh, a company naked shorted itself - imagine that. It drives its own price down to then buy back stock at a better price, thus regaining more control of the company again. Wow - that's legal - and gee- what a scam ! Odd, spent some time in politics, went into economics to learn a bit - now I find questionable thinking systems in both. Perhaps I should question my own thinking that led me to politics and money for subjects to get involved in !
Greedom
from comment by Ed: Comment by Ed Jul 28th, 2008 at 11:12 am Good morning. I would like some clarification of shorting. It is my impression that “naked” shorting has been against SEC rules since the 1930’s and is illegal but proper shorting on any stock $5.00 or more is not illegal. I’ve heard experts on FBN and your competition take that position but your article would seem to contradict it. The uptick rule-I’ve heard opinions on both sides. I think that the uptick rule was helpful to the market as it would not allow an avalanch of shorting of a stock but some experts say that with spreads currently at one or two cents on many stocks it is not pertinent and would not be effective. In my personal opinion I would like to see it reinstated. end comment Ed - I understand that it is legal currently. I once ran into someone that was obsessed with this subject years ago - they left me in a state of awe that this goes on, mainly because it can take down and suck the life out of a company - just like that. It's really a threat to free enterprise. I mean, hey, if you're a company - and you have 10 million shares floating ? And, doesn't matter, but maybe you hold 2 million, so 8 million are out there. One bad encounter with a pack of naked shorters and if I'm not mistaken on any given trading day - you could be put on the line 'as if' you had 20 million shares out there - as you don't need to borrow a real share, and the person that explained what they were so obsessed with shared with me that because you don't even have to have a real share to borrow, you run into people borrowing MORE stocks than exist. If I understand it right, 50 million shares can be 'used' even though only 10 million exist for this sample company here. That ALONE is problematic eh ? Heh, you know what ? this smells like the over leveraging that goes on, take Freddie and Fannie, what ? 100 billion net worth or something close to that and over 5 trillion debt ? Sheesh, I wish "I" could manage credit and debt like that in my life - sheesh I could make, let's see - it would take 10 100 billions to get 1 trillion, so 10 x 5 = 50 to 1... FIFTY TO ONE debt ratio there. I could make 50k a year, and 50 x 50k - hmm 5 x 50k = 250k so, 50 MUST be the next one over, 2.5 million. YIKES - if I lived MY life like Freddie Mac and fannie Mae - my god, if I only made 50k a yaer ? I could have 2.5 million in crapola, house, car, vacation - yikes. And here I've been saying my below 600 credit score is keeping me from credit for the better ! Yikes, I forget about reading that it is credit that ALLOWS a corporation to FLY - to SOAR - and here I've been living without credit - and Fannie Mae shows up revealing a 50 to 1 debt/real value ratio... I wonder what kind of ratio the US has on ITS debt - maybe I don't want to know. People talk about profit to earnings ratio, I often like to look at debt to real value as I call it - I'm sure there is a proper name for it. But Ed, I 'think' naked shorting allows more stocks than exist to be traded, and to my knowledge the SEC has been stalling on it for years. I bet you can make a killing with naked shorting - if only you could own some serious major media resources. Ed, imagine if you could buy the Wall Street Journal, imagine what kind of rumors you could spread and then naked short to exploit that - my god.... I suppose it would be insane if you had thousands of radio stations, newspaper and TV media resources to start a rumor - the power would be amazing, easy into billions of profits from naked shorting I wager. Now, NewsCorp does have such a backbone on media distribution capabilities to pretty much start a rumor IF it wanted, hmm... integrity is the issue there I suppose. Naked shorting + rumors = total disaster. I'm sure there have been some real dark nakes shorting episodes on wall street in the past... would be neat to write about or investigate -that's for sure.
Greedom
Does anyone else have any insights to offer up on why the SEC is ONLY limiting this to 19 corporations ? perhaps the anti-thesis to naked shorting would be: Temporarily lending someone a stock you don't own ! lol seems I'd think you'd want to go full canopy on this SEC change for naked shorting. First time I learned about naked shorting was someone explaining to me why all the stock they owned in a company was no longer valuable, as virtually overnight - the company was naked shorted to death. Seems to me there needs to be a counterbalance of accountability in naked shorting. Shorting ALONE I find questionable as to whether in a zero sum game of the universe if I really come out ahead, but hey, bet up, bet down, once Wall Street opens its doors as a casino ? you have to let people bet for or against the dice. If people borrow what never existed, my understanding is that at one point, there can be 'as if' more shares are out there for a given company - further - that dilutes the value of the stock as far as I see. Until end of day - when people have to clean up the naked shorting mess like the end of a Dr. Suess The Cat in the Hat story. I wonder what 'thing 1' and 'thing 2' would be for the naked shorters out there that work in teams. Remember, teams broke vegas with blackjack out of MIT - and Ed Thorpe - the professor of mathematics at MIT who developed the technique to break blackjack - I read then moved on to study the stock market - and created the first 'hedge fund'. So, naked shorting is not unlike a team of people going into a casino - IF they are playing together. Tom picks up phone - calls Lucile - "Naked Short stock XYZ" Lucy calls up Brad - Brad calls up his team of naked shorters - in 3 hours ? stock XYZ starts to slide. In 3 days ? company XYZ is out of business. Lucy ? Brad ? Tom and the naked shorters ? even IF there WERE more stocks out there than existed ? Doesn't matter -they just call in the cat in the hat - and hey - another day of trading tomorrow. I still ask -how do the naked shorters cover themselves when they get into trouble borrowing more stock than existed.
Greedom
from article: "The New York Stock Exchange has already said that the Big Board has found no evidence of widespread naked short selling." end clip Isn't it true though naked shorting doesn't necessarily have to have any records ?
Greedom
from article: "BNP Paribas Securities Corp Bank of America Corp Barclays Citigroup Credit Suisse Group Daiwa Securities Group Deutsche Bank Group Allianz SE Goldman Sachs Group Inc Royal Bank ADS HSBC Holdings Plc ADS JPMorgan Chase & Co Lehman Brothers Holdings Inc Merrill Lynch & Co Inc Mizuho Financial Group Inc Morgan Stanley UBS AG Freddie Mac Fannie Mae To get on the list, the SEC chose “precisely those financial firms” that the Federal Reserve “has designated as eligible for access to its liquidity facilities, and for which the taxpayer could be on the hook,” Cox explained. " end clip Sheesh Liz MacDonald! you know ? does this mean anyone on that list ? we can presume to be in dire straights ? Or 'access to liquidity funds' doesn't necessarily mean you need it. Would be neat to see which of those companies have pulled what on the liquidity lines.