Post by sandi66 on Oct 15, 2008 9:38:13 GMT -5
Deutsche Bank Sold Massive Amounts of Phantom Stock
October 14th, 2008 by Mark Mitchell
A couple of days before Lehman fell and all hell broke loose on Wall Street, Floyd Norris, the chief business correspondent of The New York Times, published a blog (headline: “Short Sale Conspiracies”) wherein he implied that I was mentally insane for suggesting that Deutsche Bank Securities had been caught selling “massive amounts of phantom stock.”
I promise to take this up with my psychiatrist, but first let me tell you a bit more about the peculiar case that led the New York Stock Exchange to hand Deutsche Bank Securities the largest fine in history for violations of SEC rules designed to prevent the creation of what the chairman of the SEC has called “phantom stock.”
The NYSE’s disciplinary order states that Deutsche Bank’s traders “effected an unquantified but significant number of short sales…without having borrowed the securities.” Indeed, the traders sold the shares “without having any reasonable grounds to believe that the securities could be borrowed for delivery when due…”
This is a clear-cut case of abusive naked short selling – traders selling stock without bothering to even check whether the stock could be obtained. In other words, Deutsche Bank’s traders were selling phantom stock, and it appears that they were doing this systematically over the course of the 22 month time period (ending in October 2006) that the NYSE investigated.
I asked NYSE spokesman Scott Peterson how much stock Deutsche Bank sold without knowing that the stock could be borrowed. He said, “We’re not saying how much, but let me put it this way: It was A LOT.” (The emphasis was his.)
Interestingly, however, the NYSE pointedly did not include the words “naked short selling” anywhere in its written disciplinary action. And the Big Board’s spokesman went to great lengths to suggest that Deutsche Bank was not engaged in naked short selling. “This is a case of failure to locate stock,” the spokesman said. “We’re being careful not to call it ‘failure to deliver’ stock.”
Mr. Peterson referred me to a section of the NYSE’s disciplinary order where it says that “according to [Deutsche Bank’s] delivery records,” there were “only two failures to deliver.”
So Deutsche Bank systematically failed to even locate the stock that it sold, but the NYSE isn’t calling it “naked short selling,” and Deutsche Bank managed to deliver the stock in a timely fashion in all but two instances.
Does this seem strange to you? It should.
SEC rules give short sellers three trading days to borrow and deliver real shares. If the stock is not produced within three days, it is called a “failure to deliver.” If a company’s shares “fail to deliver” in excessive quantities, the SEC puts the company on the so-called “threshold” list of publicly listed firms that are likely victims of improper naked short selling.
When I pressed Mr. Peterson, the NYSE spokesman, he conceded that there were not “only two cases of failure to deliver.” In fact, Deutsche Bank routinely failed to deliver specific securities–all of which appeared on the SEC’s threshold list. When I asked how much stock Deutsche Bank failed to deliver, Mr. Peterson said, again, “a LOT.”
So what was this “only two cases of failure to deliver”? It turns out that there were only two instances (among the sample of questionable trades for which it was charged) where Deutsche Bank still had not delivered the stock after thirteen days. Surely the NYSE must have known that failures to deliver of three to thirteen days are considered by the SEC to be improper naked short sales. At the time of the Deutsche case (the rules have since been changed slightly) day thirteen was the point at which the SEC would hand the delinquent naked short sellers a pathetically light penalty, forcing them to forfeit their short positions by buying back (rather than borrowing) shares.
In practice, this 13-day rule only encouraged stock manipulation. Some traders, correctly reckoning that the SEC would do nothing, simply left stock undelivered for weeks or months at a time. But a great deal of abusive naked short selling involved traders who sold phantom stock and (obviously) failed to deliver it on day three, and then absorbed the “penalty” on day 13 – purchasing (rather than borrowing) the stock and delivering it.
As soon as they closed out their “short” positions (which were fake positions since they never intended to borrow the stock), the traders would immediately sell another batch of phantom stock and leave that undelivered until day 13. By the end of each of these 13 day periods, the phantom shares had, of course, diluted supply and watered down the price (at which point it was hardly a “penalty” to have to buy back the stock).
A great number of the companies that appear on the SEC’s “threshold” list have been subjected to precisely this pattern of abuse. And if I understand the NYSE spokesman correctly, this is what Deutsche Bank was up to – short selling phantom stock with no intention of borrowing shares, waiting to buy (rather than borrow) the cheaper shares at day thirteen, and then selling more phantom stock, targeting the same threshold-listed company, the very next day.
Deutsche Bank did this week after week for at least two years.
Predictably, the SEC has not gone after anyone in the Deutsche Bank case. Instead, it leaves the NYSE to render its “largest ever” fine – a mere $500,000, which is many millions, if not billions, of dollars less than what the bank earned from its illegal activity.
And the question remains: Why is the NYSE failing to call this illegal activity by its proper name: “naked short selling”?
When the NYSE levied its fine at the end of August, the scandal of naked short selling was beginning to receive nationwide attention. Indeed, the SEC had just lifted a temporary emergency order designed to prevent the crime – three weeks after stating that abusive naked short selling had the potential to topple the American financial system.
Moreover, Deutsche Bank had recently become embroiled in a multi-billion dollar lawsuit filed by shareholders alleging that Deutsche and several other banks were involved in a “conspiracy to engage in illegal naked short selling of Taser International Inc. and to create, loan and sell counterfeit shares of Taser stock.”
Clearly, Deutsche Bank had reason to keep its involvement in naked short selling under wraps. I asked Mr. Peterson whether the NYSE had cut a deal with Deutsche Bank, whereby Deutsche agreed to pay the fine, and the NYSE agreed to portray its case as something other than a clear-cut instance of abusive naked short selling.
Mr. Peterson told me to put my question in writing. I did this, and waited for several weeks for a response. No response was forthcoming.
Another interesting question is whether Deutsche Bank’s prime brokerage (which services hedge fund clients) was involved in the naked short selling. If it was, this would suggest that the bank was helping its hedge fund clients manipulate stocks, including, perhaps, Taser International, whose shareholders had filed that multi-billion dollar lawsuit.
The NYSE disciplinary actions makes it seem like only Deutsche Bank’s proprietary traders (who trade for the bank, not for any hedge fund clients) had broken the rules. When I asked Mr. Peterson about this, he said, yes, the prime brokerage was not involved.
However, the NYSE’s disciplinary action said, in legalese, with no explanation, that at least two of the five Deutsche Bank proprietary trading desks investigated by the NYSE “failed to adhere to the independent trading unit aggregation requirements.” This was a reference to SEC “unit aggregation” rules, outlined in Regulation SHO, which prohibit prime brokerage units and proprietary trading units from coordinating their short-selling activities.
In other words, it seems possible that Deutsche Bank’s proprietary trading unit was washing naked short positions for its prime brokerage, which had placed phantom stock sales on behalf of market manipulating hedge fund clients.
I asked Mr. Peterson if this was the case. He said to put the question in writing. I did this, and waited a few weeks for a response. No response was forthcoming.
Apparently, Mr. Norris, the chief financial correspondent of the New York Times, spoke to the NYSE, because he regurgitates its party line, almost verbatim. He says the case against Deutsche Bank is “largely about the failure to locate shares before they were sold short…But there do not seem to be many cases of sustained failures to deliver.”
He goes on to improperly define “failures to deliver” as occurring on day 13. He buys into the suspect claim that Deutsche Bank’s prime brokerage wasn’t involved. And he implies that the case could be a matter of “record keeping violations,” apparently unaware that these “record keeping violations” were in fact brazen failures to deliver of unborrowable stock – typically lasting right up to day 13, when the traders “penalized” themselves by buying back the shares, no doubt at a steep discount to the price at which they had sold them.
Mr. Norris concludes, “I don’t know if Mr. Mitchell’s suggestion [that Deutsche Bank sold massive amounts of phantom stock] is nutty or prescient, but I do not see how it is supported by what the Big Board says it found.”
Of course, what the Big Board says it found might be quite different from what the Big Board did find. That a prescient nut case has to point this out to the presumably sane chief financial correspondent of the New York Times speaks volumes about the media’s coverage of the naked short selling scandal and the state of America’s public discourse.
* * * * * * * *
Posted in 9) The Deep Capture Campaign, The Mitchell Report | 7 Comments »
Naked Shorts Frolic While Financial System Fries
October 10th, 2008 by Mark Mitchell
“Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings, prospects are sound.”
- Fox-Pitt analyst David Trone in a research note, today
Here we go again. A giant bank has some weaknesses, but it is, in all respects, a going concern — except that short sellers are peddling rumors and phantom stock, so the share price is plummeting. With the share price in peril, the rating agencies (perhaps over vigilant after taking so much criticism from short sellers and the media) put the bank’s debt ratings on review for a downgrade.
Meanwhile, short sellers corner the market for the bank’s credit default swaps, and point to the value of the CDS as evidence that the bank is doomed. They feed the media with analyses and bogus indexes that mark the bank’s assets to nothing. They spread the news that the bank’s counterparties and trading partners could bail.
The clients and partners stay with the bank. Up until now they have no reason not to.
But then, there’s more naked short selling, the hedge funds flooding the market with stock they do not possess – phantom stock. Maybe the hedge funds send a fax to CNBC with one last rumor. Over the course of a day or two, the stock price is slashed in half.
Then, suddenly, the stock is in the single digits.
As a result of the low stock price – not as result of the balance sheet – the bank’s partners and clients freak out. This time, they really do pull their money.
End of bank.
And if there are one or two more like this — end of story. The financial system will be fried.
We’ve seen precisely the same scenario with Bear Stearns, Lehman, Merrill Lynch, Washington Mutual, and IndyMac. A variant of this scenario took down AIG, Fannie Mae, Freddie Mac, and perhaps 200 other companies before them.
Morgan Stanley could be gone by next week.
We have new data for September that shows that there was plenty of short selling of Morgan Stanley (and other companies) even during the SEC’s ban on short selling, which ended Wednesday at midnight. Some hedge funds ignored the ban, and the SEC did nothing.
Worse, in place of the ban, the SEC has offered only tepid new rules (cheered by the short seller lobby) that do little to prevent the sale of phantom stock. Under these rules, short sellers do not have to borrow real stock before they sell it. They merely have to “locate” the stock. The SEC doesn’t say how it’s supposed to know whether a short seller has actually located real stock as opposed to telling his broker, “yeah, I located it, it’s in your mother’s wig” (which is pretty much how these conversations go).
Furthermore, the SEC gives hedge funds three days to deliver the stock they sell. This would be fine if they were required to possess real stock before selling. But since they are not, a hedge fund can offload a large block of phantom stock and let it eat away at the financial system for at least three days.
Sometimes, the hedge funds settle the trade with another block of phantom stock, transferred to them by a friendly broker. But even if they fail to deliver the stock, the SEC stipulates no serious penalties. Meanwhile, it shows no inclination to actually prosecute anyone for the jailable crime of short-side market manipulation.
I’m willing to bet anybody a sizeable amount of money that when the SEC releases its “failures to deliver” numbers for October, they will suggest unbridled illegal naked short selling of Morgan Stanley during this past week, even on days when the ban on all short selling was in place. The data will show that naked short selling rose to unprecedented levels just before somebody floated Wednesday’s false rumor that Morgan Stanley was going to lose its $9 billion deal with Mitsubishi.
And the data will show that after the ban was lifted, the law-breaking shorts went nuclear – with failures to deliver of well over a million shares every day. Ultimately, many millions of Morgan Stanley’s shares will be sold and never delivered, just as hedge funds have yet to deliver more than 10 million shares of Bear Stearns that they sold during that bank’s final days last March.
As I write this, Morgan’s stock price is in the single digits, trading around 7 bucks, down an astounding 70% in the 36 hours since the short selling ban was lifted. A death spiral like that does not happen naturally. Because of the short-battered stock price – and only the stock price (again, this has nothing to do with the balance sheet) — Moody’s today put Morgan’s long-term debt ratings on review for a downgrade.
I suspect another 15% off the stock price, and one more well-placed rumor, will do the trick. There will be a run on the bank. Morgan will be gone. And the global financial fire will blaze still hotter.
It is beyond surreal that our most prestigious financial media continue to allow this to happen. It is beyond comprehension that journalists – in possession of the evidence, and presumably in possession of their faculties – continue to spout the line, originally formulated by short-sellers and now woven into conventional wisdom – that this crisis is only about bad mortgages and bad managers and bad balance sheets.
One can argue that, in the long run, the world is better off without half of Wall Street – without its ponzi schemes and paper profits, the sickening salaries and arrogance. Certainly, anyone with a Shakespearean state of mind will appreciate the fates of Morgan Stanley, Lehman, and Bear – all of which eagerly pimped their dodgy prime brokerage services to the very short sellers who destroyed them.
But it does not require Shakespearean nuance to see that this crisis is not just about scandalous banks. It is about criminals destroying banks that are tawdry, yes, but possessing of some virtue, and capable, if left unmolested, of carrying on and contributing to society – perhaps even staving off a global calamity.
Moreover, these same criminals are destroying many other companies, most of which are run by honest people who labor far from the insalubrious alleyways of southern Manhattan. The SEC maintains a list of companies whose stock has failed to deliver in excessive quantities. As I explained in an earlier dispatch, many victims of naked short selling (including some of the big banks) do not appear on that list. But surely it is a scandal that more than 300 companies, many of them financial firms that have nothing to do with Wall Street, do appear on the list.
Surely, it is an even bigger scandal that around 100 of those companies have appeared on the list chronically, day after day, for months on end, and though the sheriff posts the names of these rape victims on its wall, it has yet to prosecute a single rapist. The SEC tells us that a billion shares remain undelivered on any given day — and yet it doesn’t bother to find out which hedge funds sold the phantom stock.
It might be too late, but if Washington and the financial media really want to save the world, they ought to start by demanding that hedge funds borrow real stock before they sell it. And what the heck: Maybe some newspaper could offer the radical suggestion that the SEC should tell hedge funds that they can either go to jail or close out all unsettled trades – today.
If one hedge fund manager were to get cuffed, all the others with outstanding “failures to deliver” might scramble to buy real stock so they can settle. The markets might soar. The innocent victims might get some relief. And the delinquents on Wall Street would get some time to clean up their acts.
Meanwhile, would anyone care to guess which company the naked short sellers will take down after Morgan Stanley?
And would anyone like to share a bunker with canned goods and weapons?
www.deepcapture.com/
October 14th, 2008 by Mark Mitchell
A couple of days before Lehman fell and all hell broke loose on Wall Street, Floyd Norris, the chief business correspondent of The New York Times, published a blog (headline: “Short Sale Conspiracies”) wherein he implied that I was mentally insane for suggesting that Deutsche Bank Securities had been caught selling “massive amounts of phantom stock.”
I promise to take this up with my psychiatrist, but first let me tell you a bit more about the peculiar case that led the New York Stock Exchange to hand Deutsche Bank Securities the largest fine in history for violations of SEC rules designed to prevent the creation of what the chairman of the SEC has called “phantom stock.”
The NYSE’s disciplinary order states that Deutsche Bank’s traders “effected an unquantified but significant number of short sales…without having borrowed the securities.” Indeed, the traders sold the shares “without having any reasonable grounds to believe that the securities could be borrowed for delivery when due…”
This is a clear-cut case of abusive naked short selling – traders selling stock without bothering to even check whether the stock could be obtained. In other words, Deutsche Bank’s traders were selling phantom stock, and it appears that they were doing this systematically over the course of the 22 month time period (ending in October 2006) that the NYSE investigated.
I asked NYSE spokesman Scott Peterson how much stock Deutsche Bank sold without knowing that the stock could be borrowed. He said, “We’re not saying how much, but let me put it this way: It was A LOT.” (The emphasis was his.)
Interestingly, however, the NYSE pointedly did not include the words “naked short selling” anywhere in its written disciplinary action. And the Big Board’s spokesman went to great lengths to suggest that Deutsche Bank was not engaged in naked short selling. “This is a case of failure to locate stock,” the spokesman said. “We’re being careful not to call it ‘failure to deliver’ stock.”
Mr. Peterson referred me to a section of the NYSE’s disciplinary order where it says that “according to [Deutsche Bank’s] delivery records,” there were “only two failures to deliver.”
So Deutsche Bank systematically failed to even locate the stock that it sold, but the NYSE isn’t calling it “naked short selling,” and Deutsche Bank managed to deliver the stock in a timely fashion in all but two instances.
Does this seem strange to you? It should.
SEC rules give short sellers three trading days to borrow and deliver real shares. If the stock is not produced within three days, it is called a “failure to deliver.” If a company’s shares “fail to deliver” in excessive quantities, the SEC puts the company on the so-called “threshold” list of publicly listed firms that are likely victims of improper naked short selling.
When I pressed Mr. Peterson, the NYSE spokesman, he conceded that there were not “only two cases of failure to deliver.” In fact, Deutsche Bank routinely failed to deliver specific securities–all of which appeared on the SEC’s threshold list. When I asked how much stock Deutsche Bank failed to deliver, Mr. Peterson said, again, “a LOT.”
So what was this “only two cases of failure to deliver”? It turns out that there were only two instances (among the sample of questionable trades for which it was charged) where Deutsche Bank still had not delivered the stock after thirteen days. Surely the NYSE must have known that failures to deliver of three to thirteen days are considered by the SEC to be improper naked short sales. At the time of the Deutsche case (the rules have since been changed slightly) day thirteen was the point at which the SEC would hand the delinquent naked short sellers a pathetically light penalty, forcing them to forfeit their short positions by buying back (rather than borrowing) shares.
In practice, this 13-day rule only encouraged stock manipulation. Some traders, correctly reckoning that the SEC would do nothing, simply left stock undelivered for weeks or months at a time. But a great deal of abusive naked short selling involved traders who sold phantom stock and (obviously) failed to deliver it on day three, and then absorbed the “penalty” on day 13 – purchasing (rather than borrowing) the stock and delivering it.
As soon as they closed out their “short” positions (which were fake positions since they never intended to borrow the stock), the traders would immediately sell another batch of phantom stock and leave that undelivered until day 13. By the end of each of these 13 day periods, the phantom shares had, of course, diluted supply and watered down the price (at which point it was hardly a “penalty” to have to buy back the stock).
A great number of the companies that appear on the SEC’s “threshold” list have been subjected to precisely this pattern of abuse. And if I understand the NYSE spokesman correctly, this is what Deutsche Bank was up to – short selling phantom stock with no intention of borrowing shares, waiting to buy (rather than borrow) the cheaper shares at day thirteen, and then selling more phantom stock, targeting the same threshold-listed company, the very next day.
Deutsche Bank did this week after week for at least two years.
Predictably, the SEC has not gone after anyone in the Deutsche Bank case. Instead, it leaves the NYSE to render its “largest ever” fine – a mere $500,000, which is many millions, if not billions, of dollars less than what the bank earned from its illegal activity.
And the question remains: Why is the NYSE failing to call this illegal activity by its proper name: “naked short selling”?
When the NYSE levied its fine at the end of August, the scandal of naked short selling was beginning to receive nationwide attention. Indeed, the SEC had just lifted a temporary emergency order designed to prevent the crime – three weeks after stating that abusive naked short selling had the potential to topple the American financial system.
Moreover, Deutsche Bank had recently become embroiled in a multi-billion dollar lawsuit filed by shareholders alleging that Deutsche and several other banks were involved in a “conspiracy to engage in illegal naked short selling of Taser International Inc. and to create, loan and sell counterfeit shares of Taser stock.”
Clearly, Deutsche Bank had reason to keep its involvement in naked short selling under wraps. I asked Mr. Peterson whether the NYSE had cut a deal with Deutsche Bank, whereby Deutsche agreed to pay the fine, and the NYSE agreed to portray its case as something other than a clear-cut instance of abusive naked short selling.
Mr. Peterson told me to put my question in writing. I did this, and waited for several weeks for a response. No response was forthcoming.
Another interesting question is whether Deutsche Bank’s prime brokerage (which services hedge fund clients) was involved in the naked short selling. If it was, this would suggest that the bank was helping its hedge fund clients manipulate stocks, including, perhaps, Taser International, whose shareholders had filed that multi-billion dollar lawsuit.
The NYSE disciplinary actions makes it seem like only Deutsche Bank’s proprietary traders (who trade for the bank, not for any hedge fund clients) had broken the rules. When I asked Mr. Peterson about this, he said, yes, the prime brokerage was not involved.
However, the NYSE’s disciplinary action said, in legalese, with no explanation, that at least two of the five Deutsche Bank proprietary trading desks investigated by the NYSE “failed to adhere to the independent trading unit aggregation requirements.” This was a reference to SEC “unit aggregation” rules, outlined in Regulation SHO, which prohibit prime brokerage units and proprietary trading units from coordinating their short-selling activities.
In other words, it seems possible that Deutsche Bank’s proprietary trading unit was washing naked short positions for its prime brokerage, which had placed phantom stock sales on behalf of market manipulating hedge fund clients.
I asked Mr. Peterson if this was the case. He said to put the question in writing. I did this, and waited a few weeks for a response. No response was forthcoming.
Apparently, Mr. Norris, the chief financial correspondent of the New York Times, spoke to the NYSE, because he regurgitates its party line, almost verbatim. He says the case against Deutsche Bank is “largely about the failure to locate shares before they were sold short…But there do not seem to be many cases of sustained failures to deliver.”
He goes on to improperly define “failures to deliver” as occurring on day 13. He buys into the suspect claim that Deutsche Bank’s prime brokerage wasn’t involved. And he implies that the case could be a matter of “record keeping violations,” apparently unaware that these “record keeping violations” were in fact brazen failures to deliver of unborrowable stock – typically lasting right up to day 13, when the traders “penalized” themselves by buying back the shares, no doubt at a steep discount to the price at which they had sold them.
Mr. Norris concludes, “I don’t know if Mr. Mitchell’s suggestion [that Deutsche Bank sold massive amounts of phantom stock] is nutty or prescient, but I do not see how it is supported by what the Big Board says it found.”
Of course, what the Big Board says it found might be quite different from what the Big Board did find. That a prescient nut case has to point this out to the presumably sane chief financial correspondent of the New York Times speaks volumes about the media’s coverage of the naked short selling scandal and the state of America’s public discourse.
* * * * * * * *
Posted in 9) The Deep Capture Campaign, The Mitchell Report | 7 Comments »
Naked Shorts Frolic While Financial System Fries
October 10th, 2008 by Mark Mitchell
“Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings, prospects are sound.”
- Fox-Pitt analyst David Trone in a research note, today
Here we go again. A giant bank has some weaknesses, but it is, in all respects, a going concern — except that short sellers are peddling rumors and phantom stock, so the share price is plummeting. With the share price in peril, the rating agencies (perhaps over vigilant after taking so much criticism from short sellers and the media) put the bank’s debt ratings on review for a downgrade.
Meanwhile, short sellers corner the market for the bank’s credit default swaps, and point to the value of the CDS as evidence that the bank is doomed. They feed the media with analyses and bogus indexes that mark the bank’s assets to nothing. They spread the news that the bank’s counterparties and trading partners could bail.
The clients and partners stay with the bank. Up until now they have no reason not to.
But then, there’s more naked short selling, the hedge funds flooding the market with stock they do not possess – phantom stock. Maybe the hedge funds send a fax to CNBC with one last rumor. Over the course of a day or two, the stock price is slashed in half.
Then, suddenly, the stock is in the single digits.
As a result of the low stock price – not as result of the balance sheet – the bank’s partners and clients freak out. This time, they really do pull their money.
End of bank.
And if there are one or two more like this — end of story. The financial system will be fried.
We’ve seen precisely the same scenario with Bear Stearns, Lehman, Merrill Lynch, Washington Mutual, and IndyMac. A variant of this scenario took down AIG, Fannie Mae, Freddie Mac, and perhaps 200 other companies before them.
Morgan Stanley could be gone by next week.
We have new data for September that shows that there was plenty of short selling of Morgan Stanley (and other companies) even during the SEC’s ban on short selling, which ended Wednesday at midnight. Some hedge funds ignored the ban, and the SEC did nothing.
Worse, in place of the ban, the SEC has offered only tepid new rules (cheered by the short seller lobby) that do little to prevent the sale of phantom stock. Under these rules, short sellers do not have to borrow real stock before they sell it. They merely have to “locate” the stock. The SEC doesn’t say how it’s supposed to know whether a short seller has actually located real stock as opposed to telling his broker, “yeah, I located it, it’s in your mother’s wig” (which is pretty much how these conversations go).
Furthermore, the SEC gives hedge funds three days to deliver the stock they sell. This would be fine if they were required to possess real stock before selling. But since they are not, a hedge fund can offload a large block of phantom stock and let it eat away at the financial system for at least three days.
Sometimes, the hedge funds settle the trade with another block of phantom stock, transferred to them by a friendly broker. But even if they fail to deliver the stock, the SEC stipulates no serious penalties. Meanwhile, it shows no inclination to actually prosecute anyone for the jailable crime of short-side market manipulation.
I’m willing to bet anybody a sizeable amount of money that when the SEC releases its “failures to deliver” numbers for October, they will suggest unbridled illegal naked short selling of Morgan Stanley during this past week, even on days when the ban on all short selling was in place. The data will show that naked short selling rose to unprecedented levels just before somebody floated Wednesday’s false rumor that Morgan Stanley was going to lose its $9 billion deal with Mitsubishi.
And the data will show that after the ban was lifted, the law-breaking shorts went nuclear – with failures to deliver of well over a million shares every day. Ultimately, many millions of Morgan Stanley’s shares will be sold and never delivered, just as hedge funds have yet to deliver more than 10 million shares of Bear Stearns that they sold during that bank’s final days last March.
As I write this, Morgan’s stock price is in the single digits, trading around 7 bucks, down an astounding 70% in the 36 hours since the short selling ban was lifted. A death spiral like that does not happen naturally. Because of the short-battered stock price – and only the stock price (again, this has nothing to do with the balance sheet) — Moody’s today put Morgan’s long-term debt ratings on review for a downgrade.
I suspect another 15% off the stock price, and one more well-placed rumor, will do the trick. There will be a run on the bank. Morgan will be gone. And the global financial fire will blaze still hotter.
It is beyond surreal that our most prestigious financial media continue to allow this to happen. It is beyond comprehension that journalists – in possession of the evidence, and presumably in possession of their faculties – continue to spout the line, originally formulated by short-sellers and now woven into conventional wisdom – that this crisis is only about bad mortgages and bad managers and bad balance sheets.
One can argue that, in the long run, the world is better off without half of Wall Street – without its ponzi schemes and paper profits, the sickening salaries and arrogance. Certainly, anyone with a Shakespearean state of mind will appreciate the fates of Morgan Stanley, Lehman, and Bear – all of which eagerly pimped their dodgy prime brokerage services to the very short sellers who destroyed them.
But it does not require Shakespearean nuance to see that this crisis is not just about scandalous banks. It is about criminals destroying banks that are tawdry, yes, but possessing of some virtue, and capable, if left unmolested, of carrying on and contributing to society – perhaps even staving off a global calamity.
Moreover, these same criminals are destroying many other companies, most of which are run by honest people who labor far from the insalubrious alleyways of southern Manhattan. The SEC maintains a list of companies whose stock has failed to deliver in excessive quantities. As I explained in an earlier dispatch, many victims of naked short selling (including some of the big banks) do not appear on that list. But surely it is a scandal that more than 300 companies, many of them financial firms that have nothing to do with Wall Street, do appear on the list.
Surely, it is an even bigger scandal that around 100 of those companies have appeared on the list chronically, day after day, for months on end, and though the sheriff posts the names of these rape victims on its wall, it has yet to prosecute a single rapist. The SEC tells us that a billion shares remain undelivered on any given day — and yet it doesn’t bother to find out which hedge funds sold the phantom stock.
It might be too late, but if Washington and the financial media really want to save the world, they ought to start by demanding that hedge funds borrow real stock before they sell it. And what the heck: Maybe some newspaper could offer the radical suggestion that the SEC should tell hedge funds that they can either go to jail or close out all unsettled trades – today.
If one hedge fund manager were to get cuffed, all the others with outstanding “failures to deliver” might scramble to buy real stock so they can settle. The markets might soar. The innocent victims might get some relief. And the delinquents on Wall Street would get some time to clean up their acts.
Meanwhile, would anyone care to guess which company the naked short sellers will take down after Morgan Stanley?
And would anyone like to share a bunker with canned goods and weapons?
www.deepcapture.com/