How bizarre then, that on Wall Street, repository of the hopes, dreams and what’s left of the hard earned cash and retirement savings of American investors, the most basic of rules enacted to protect the fairness, honesty and integrity of the process are routinely ignored and dishonored.

Like it’s predecessor, the Obama administration has thus far assiduously avoided examination, pursuit or punishment of those most responsible for plunging us and the rest of the world into a financial calamity that did not have to happen— and from which many believe we will never recover.

In fact, in the name of “avoiding” financial Armageddon, they’ve bent over backwards to provide cash and cover for, if not actively participate in, a thoroughly corrupt status quo that selectively eschews the rule of law to enable manipulation of a broad range of markets that hugely profit the most greedy and lawless among us– to the permanent detriment of everybody else.  That might not be the intention at the very top, but the scoreboard still reads: Wall Street 10, Public minus 10 plus interest, payable forever.

A seminal element of the enormous problems we face today is little known or understood by the general public and most investors: the government’s abject failure, via the Securities and Exchange Commission, the agency charged with protecting investors and the integrity of the markets, to enforce the most basic, rudimentary business axiom: that when a buyer pays, the seller must deliver that which was sold– (obliquely: he who sells what isn’t his’n, must make good or go to prison).

Congress passed the Securities Exchange Acts of 1933 and `34 to restore greatly diminished public confidence in our capital markets and mandated the SEC: “having due regard for the public interest, the protection of investors, and the safeguarding of securities, to facilitate the establishment of a national system for the prompt and accurate clearance and settlement of transactions in securities.”

But incredibly, the SEC has done just the opposite by empowering the Wall Street owned and operated black box Depository Trust and Clearing Corporation to create a Three card Monte style, bait and switch, non-settlement, non-delivery of securities system that facilitates the unlimited sale of securities that the seller is never required by anybody to actually deliver, so that the transaction is never properly “settled.”  Known as naked short selling or failure to deliver, the scam has the same effect as counterfeiting because by definition and design, it dilutes the actual value of real shares by  overpowering the natural laws of supply and demand.

The government’s long toleration of this fraud at the very core of the system has enabled Wall Street banks, broker-dealers and hedge funds running all kinds of hot, dirty and foreign money along with their own, to reap huge, often tax free profits, by selling and never delivering unlimited quantities of phantom stock, options, bonds, and even US Treasuries, with total impunity.  Over the years, the practice has destroyed countless companies and crushed the hopes and dreams of millions of investors worldwide.  Yet the SEC, self-proclaimed as “the investors first line of defense against securities fraud” and “the pre-eminent gold standard of enforcement of securities laws,” has not brought a single enforcement action to stop it or punish the perpetrators.  Is it any wonder the bad guys have come to feel invulnerable?

Even more incredible (and more profitable for Wall Street insiders), the “Stock Borrow Program” of the Depository Trust’s National Securities Clearing Corporation (NSCC) subsidiary allows the exact same parcel of shares to be loaned and reloaned over and over again to create an ever-metastasizing cancer of freely tradable “security entitlements.”  These illusions of ownership overhang the market (just like naked shorted shares) artificially depressing share prices,  They are not backed by an equal number of duly authorized certificates, and lack the full bundle of ownership rights a buyer thinks they are getting with their purchase (ie. voting rights, having dividends taxed at preferential rates, etc.).   Most investors looking at their monthly statements have no idea they may not reflect actual shares bought, received and held in their account, but only IOUs from their trusty brokers, who consistently violate the duty of fair dealing owed their clients by failing to insist on delivery of shares they were paid a commission to purchase for them.  That’s because to keep the scam going, the SEC-approved system quietly provides incentives for them not to.

For at least the past dozen years, evidence of gross conflicts of interest, fraud and derelictions of duty and principle up and down the political/financial food chain, have been abundant, but ignored.  We are now living with the consequences.  Deregulation and non-enforcement of statutes, rules and regulations designed to provide a measure of integrity, fairness and stability to banking and the capital markets (ie. limits on leverage, usury laws, separation of commercial from investment banking), and basic investor protections like those mentioned above, have been systematically ditched. Honest accounting standards that used to prohibit cooking the books, offshore special purpose vehicles, and performing auditing services while simultaneously giving tax avoidance advice were simply bought off.  Time was, assets had to be marked to their actual fair market value (“mark to market”)  instead of numbers totally contrived to enable insolvent banks to illude otherwise.

Basic principles of insurance law which require an insurable interest (ownership or risk of commensurate loss) in that which you insure (especially regarding someone else’s life or property), were legislatively trashed to enable rapacious, ethically bereft speculator banks and hedge funds to erect a new and extremely lucrative swindle using a kind of debt insurance product they called credit default swaps (CDS); so named, because by their rightful name, bond insurance, they would violate every state’s insurance laws and be void as against public policy without ownership of the underlying bonds—which was certainly not in the predators game plan.  Parlaying never having to actually buy or own the underlying bonds along with the ability to broadly manipulate and malign their market price downward, made 40-1 leveraged CDS bets almost sure winners; outcomes dictated from the sidelines by greedy gamblers with little or no risk of commensurate loss.  And they’re still at it today, unregulated, and operating in almost total secrecy; a Quadrillion Dollar Derivatives Death-Star that may well some day implode all.

Getting away with so many fraud-based practices for so long has emboldened the wrongdoers to almost obsessively believe they can get away with anything.  Years of successfully bilking the public without fear of being caught or punished has imbued them with the kind of blinding arrogance that boldly shoves 3 pages at Congress and says with a straight face: Give us the dough ($700 billion)– ours to do with as we will, free from liability or accountability—or else. And now they’re being rewarded for it with the biggest profits and bonuses ever.  Why?

Why were all the safeguards so intentionally set in place in 1933 and 1934 abandoned?  Because those empowered to make and enforce our laws— sworn to be good stewards of the public interest— allowed themselves to be seduced and inducted to serve private interests, not the least of which their own, courtesy of campaign contributions, lobbyist largess, lucrative job prospects, and other co-optive emoluments known anywhere else in the world as bribes. When will we learn that it’s not about politics, ideology or principle?  It’s about the money!  But drop me a line the next time you hear any corporate or mainstream media pro daring to talk or write about it in those terms.  Somehow, as obvious and pernicious a role as it plays in our political process, discussing venal motive is off limits, part of the pretense that our elected officials actually represent the best interests of the people who voted for them (as distinguished from those who bankroll them).

The Wall Street banksters, of course, are not the only corrosive anti-social force at work here.  Other divisions of the corporate kleptocracy Army of Avarice that dictate our national policy and exploit our national wealth (big oil, insurance, agra, pharma, health care, telecom, and defense) also spend generously to keep feasting at the public trough.  It’s just that Wall Street’s misdeeds (even to the dismay of their co-predators) have brought us to the edge of a full-scale long term national/international disaster.

So one has to wonder whether the announcement of a new federal Financial Fraud Enforcement Task Force to combat financial crime is to be taken any more seriously than Peking University economics students took Treasury Secretary Geithner’s assurance that “Chinese assets [invested in US dollars] are very safe.”  Their raucous laughter came from knowing what more and more of the world now knows– that assets invested in US dollars are not so safe at all.

Of course, TBTB do not want any of that nonsense getting around.  They definitely don’t want people knowing the true magnitude of our financial problems, or that many savvy, independent economists, financial experts and market observers believe America is not only broke– but in great peril as a nation if we continue on the present course.  As they watch the steadily sinking value of the dollar, they foresee a time not too distant when real joblessness will be 30% or more; when the value of your house will drop another 30%, same as your pension or 401k; a time when governments are taking in far less than needed to cover Social Security, Medicare, Medicaid, education, transportation, police and yes, even national defense, requiring drastic cuts in all government services, federal and state, along with markedly increased taxes of all kinds, in a climate of rising interest rates, energy and commodity prices, and alas, civil unrest.  In order to pay our creditors $700 billion plus in annual interest on a $12 trillion and counting national debt, they see Americans being required to turn in a portion of what’s left of their retirement plans in exchange for long-term, low yield US government bonds.  In short, they see us being screwed blue, now and later, condemned to a steadily deteriorating standard of living that for most, will turn the American Dream into a nightmare.

Our leaders don’t want us to know that today’s crisis was the inevitable result of massive unchecked fraud by mortgage lenders, auditors, investment banks, ratings agencies, securitizers, regulators and insurance companies like AIG, which wrote credit default swaps both they and the purchasers knew there were far too insufficient reserves to cover—and that could only be paid off by a taxpayer funded bailout.

They don’t want us to know that the so-called stress tests the banks underwent last Fall were an exercise in wink, wink, nod-nod misrepresentation; or about the bloated valuations of hundreds of billions in toxic assets the privately owned Federal Reserve continues to unlawfully purchase from their too big to fail bankster buddies.  The banks were supposed to loan the proceeds out to ease the alleged credit impasse and help stimulate the economy.  Instead, what they haven’t used to artificially inflate the equities market or invest abroad, they’ve mostly redeposited with the FED, who then, fairy godmother-like, has gifted them back risk-free 3% interest in a round-trip razzle dazzle that seamlessly and shamelessly transfers even more taxpayer dollars into bankers’ bonus-bloated pockets.

They don’t want us to know that most big banks, if their assets were marked to current fair market value, and government handouts removed, would in fact, be insolvent; that Fannie, Freddie, the FDIC, and the all important Pension Benefit Guaranty Corporation (PBGC), insuring the pensions of some 34 million private sector workers and retirees, are also insolvent—as are most pension funds across America.

They don’t want the public to see the future too clearly because they fear the truth would be too much for us to handle, and cause panic they are unready to cope with, along with deep resentment at the government for allowing things to get so bad (let alone for their failing to curtail wrongdoing after it’s been brought to their attention).  So they distract, dissemble and offer promises of reform, saying: Hey, It’s okay. We dodged the bullet.  Things will be difficult, but in the end, we’ll come shining through because were America, and we can do anything!

Except pay the bill.  The fact of the matter, the undeniable, irrefutable arithmetic is that we are not going to be able to pay the bill as it comes due and keep the country reasonably free from soaring misery and discontent.

US Senator Byron Dorgan speaks of “modern-day bank robbers” deploying “anything goes” capitalism in a system they’ve rigged so they “always win” by wielding “unfair advantage over average consumers and taxpayers”— with “no accountability.”   Americans “watching selfishness prevail over the public interest” he says, is not only “injuring the economy” but “undermining the public’s trust in government.“ (where many of the Teabaggers are coming from).

For those who follow the subject closely, selfishness is PC for plain old stealing.  But then Wall Street has long considered Main Street “the dumb money.” theirs, almost by right, and certainly by tradition, for the taking.  Not surprisingly, they created a culture of corruption that’s proven itself bad to the bone.  What other industry has literally dozens of words and phrases characterizing unethical, illicit conduct?  (Backdating, Channel stuffing, Cherry picking, Churning, Cookie jar reserves, Cooking the books, Dummy accounts, Earnings management, Flipping, Fomenting, Free-riding, Front running, Insider trading, Late trading, Lulling, Market timing, Marking the close, Matching orders, Naked options, Naked short selling, Off balance sheet, Painting the tape, Ponzi scheme, Puffing, Pump and dump, Pyramid scheme, Round-tripping, Scalping, Selling away, Short and distort, Spinning, Spring loading, Tipping, Touting, Trading ahead, etc., etc., etc.)  God’s work, indeed.

Instead of facing reality now, telling the people the truth about what’s occurred, demanding accountability, enforcing the laws made to protect you and me, and taking steps to prevent wrongdoers from continuing to profit from their misdeeds (a classic principle of jurisprudence), our government, aided by a thoroughly captured, moribund mainstream media that’s forgotten how to speak truth to power, keeps trying to shove the dirt under the rug.  Extend and pretend.  They say one thing and do another, hide the truth, avoid transparency, and engage in even more lies and deceit.  Do they not understand that the false expectations they are perpetuating will only evoke greater outrage as people more and more realize they have been played for suckers and left to founder in despair?  And that none of this would have happened if the people in charge had upheld their oaths and acted to insure that “liberty and justice for all” were more than just words.

The below commentary by Karl Denninger, winner of Accuracy In Media’s 2009 Reed Irvine Award for Grassroots Journalism, is a harrowing prediction of the cataclysm that lies imminently ahead for America, unless our government takes immediate steps to stop Wall Street/ international gangsta banker speculator manipulator terrorists from further shorting, distorting, counterfeiting, defrauding and looting our country (and the rest of the world) to death.   

Denninger’s views on the underlying causes of our financial calamity (massive government-enabled-complicit lying, cheating and stealing) have long been unequivocally forewarned by numerous others, most notably at www.deepcapture.com and www.thesanitycheck.com but consistently deprecated, dismissed and/or altogether ignored by both government and our sadly misnomered “free” press and media.

As Denniger say: “it all goes back to Washington DC being unwilling  to lock up the crooks”– to which I’ll add, or to simply enforce the banking and securities laws and regulations already on the books, that were specifically enacted to prevent exactly the kind of criminal activities that have brought us today to the brink of utter disaster.

If the public only knew how grossly they have been systematically betrayed, misled, lied to and stolen from (and one day they surely will)–     the identities of all those who looked the other way (or worse) and helped bring about the destruction of their jobs, pensions and hopes for a decent future– what do you suppose their reaction would/will be?    

The truth is out there– and rather easy to discern for anyone interested.  Are  you?   

What’s Dead (Short Answer: All Of It)  3/5/09 by Karl Denninger

Ok tinfoilers, this is not what you think it is; I’m sure many of you came here and started to read because you thought I was going to rant about fractional reserves or the lack of “sound money.”

Sorry, no dice.

No, I’m going to talk about the inherent fraud over the last five or so years in the housing (and other lending) markets, and it is NOT where you think it is.

It is, in fact, in both the accounting treatment and assumptions that were in fact made by both borrowers and lenders – simply put, they are nowhere near the same.

Let’s start with a proposition: A “mortgage” is a loan made against real property with the original intent that the borrower will pay as agreed under an amortization schedule to maturity, interrupted only by significant life events such as relocation, unemployment leading to bankruptcy, divorce or serious medical illness.

With that assumption we can model the performance of a mortgage under all economic conditions, since we can draw upon history to get a fairly good idea of what unemployment rates might be, we know what relocation rates tend to look like, serious uninsured medical illnesses have an actuarial component and the like.

With that modeling in the bag we can then configure up a securitized structure that provides whatever level of protection is desired against these events, and from there yields will flow (more for the riskier sides, of course.)

Now let’s add, however, what was actually sold to people during the last four or five years.

The premise that the “homeowner” was sold had nothing to do with the above concepts.  Instead, that “homeowner” was sold the following by both bank and non-bank mortgage companies:

1. You do not need to have “skin” in the game; we will loan you 100% of the “current market value” of the house.
2. You are not presumed to be interested in paying this original note to maturity.  In fact, we fully expect you to come back here in two years or so and refinance the note – at or before when the payments reset.
3. We know (2) will happen because we’re giving you a “teaser rate” and/or we have negative amortization features in the loan which are subject to caps; both of these events, when (not if) they expire, will cause an immediate and dramatic rise in your required payments.
4. To make (3) worse, we’re qualifying you on the initial payment amount, not the fully-amortized reset/recast schedule.
5. And to make (4) even worse, we’re not verifying that you can even make the initial payment; we’re going to take your word for it.

Now dice and slice up loans made under those five principles and try to model the outcome.

Good luck.

See a loan made to someone on the premise that it will be refinanced and for which there is no equity cushion provided by a significant down payment is entirely Dependant on one thing – the market price of the underlying asset must continually increase at a rate that exceeds the negative amortization, if any, plus all costs of the refinance.

The problem isn’t so much the making of these loans – it is the misrepresentation of what they are.  Balloon mortgages, which in fact is what these constitute, have been a part of the lending landscape forever.  They were, in fact, what blew up in the 1930s – they were the “preferred” mortgage in the “Roaring 20s”.

But everyone knows that those loans blew up in the 1930s, and they were prevalent in the Roaring 20s.  That is, anyone with a brain.  Thus, you couldn’t have sold mortgage-backed securities packaged up out of balloon notes without a significant extra yield premium.

So most lenders quite simply lied.

But not all.

Look at Berkshire’s 2008 Letter (just issued, recapping the 2008 performance of Berkshire Hathaway).  There is a very interesting piece in there about the financing performance of Clayton Homes, a Berkshire company that makes “manufactured housing”:

Clayton’s 198,888 borrowers, however, have continued to pay normally throughout the housing crash, handing us no unexpected losses. This is not because these borrowers are unusually creditworthy, a point proved by FICO scores (a standard measure of credit risk). Their median FICO score is 644, compared to a national median of 723, and about 35% are below 620, the segment usually designated “sub-prime.” Many disastrous pools of mortgages on conventional homes are populated by borrowers with far better credit, as measured by FICO scores.

Yet at yearend, our delinquency rate on loans we have originated was 3.6%, up only modestly from 2.9% in 2006 and 2.9% in 2004. (In addition to our originated loans, we’ve also bought bulk portfolios of various types from other financial institutions.) Clayton’s foreclosures during 2008 were 3.0% of originated loans compared to 3.8% in 2006 and 5.3% in 2004.

Why?

Quite simple, really.  Even though Clayton’s customers have crappy credit on average, they were forced to put down a meaningful amount of money from savings, and cannot borrow it somewhere else.  They bought with an amortized payment, not one that will turn into a hydra in a couple of years and choke you – just before consuming you whole.  They did not assume they could refinance and Clayton refused to lend to people on that basis; rather, they assumed that they would pay as agreed, from start to finish, based on current income, not based on some pie-in-the-sky future wish.

As a consequence Clayton’s securitized mortgages have performed reasonably well.  The reason is simple – the company actually promised to its securitized buyers the same thing they sold to its borrowers and was able to model the actual credit risk involved from “life events” - statistical models that actually are valid.

It appears that The Huffington Post has picked up on some of “The Bezzle”; in this article from the 23rd which I had previously missed:

“Whatever happened to the law (Title 12, Sec. 1831o) mandating that banking regulators take “prompt corrective action” to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.”

Yep, but it is not policies that were in play here, it was willful inaction that then “compelled” the disaster-capitalism nonsense.

Let’s look at what’s in Title 12 Ch16-Sec1831:

“(3) Critical capital

Got it?

This is really pretty simple – there must be a leverage limit and the OTS, OCC and FDIC must enforce that limit to insure that banks do not fall into being undercapitalized.

Further, no bank may make a capital distribution (pay a dividend) or pay a management bonus if before or after doing so it would be undercapitalized.

Where has this supervision been?

Note that Geithner and President Obama have continued this nonsense, and Geithner is one of the people personally culpable for ignoring the law in the first place.

What will stop this blatant lawlessness?

Certainly not Congress.  Ben Bernanke was before Congress this last week and guess what: Not one question about the law compelling him (and the other regulators) to act before banks become insolvent.

Now President Obama has released his budget which provides for even more bailouts – a potential $750 billion “second round.” 

Yet the law under which we are supposed to operate in this country makes clear that this sort of policy decision is directly contrary to statute; instead, the law by its black letter requires banks to be taken into receivership before they become insolvent.

And oh by the way, the regulators are not allowed (by that law) to ignore off-balance sheet obligations either.  Uh uh – they are required to take action before the insolvency occurs irrespective of how – and they did not.

In fact the banks have self-declared their non-compliance with that statute as noted in The Ticker right here (“Our Tier 1 Ratio Is Strong!”) once again last night!

This “self-declaration of insolvency” in fact goes back to Washington Mutual’s original 1Q 2007 report that set me off and started me writing Tickers back in April of 2007!

We are in fact talking about what amounts to nearly two years of this nonsense to date, and through the fall of 07 into the early part of 08 the MLEC garbage (and friends after it went down in flames) makes clear that regulators, including Treasury and The Fed knew exactly what the state of these firms was and willfully ignored it.

There is not a policy “decision” allowed here guys and dolls – this is black letter statutory language that compels a certain set of actions – statutory language put in place after the last time we were here (the S&L crisis) that was intended to prevent the damage ($150 billion) that was done to our nation the last time!

This time around we’re at $750 billion with another $750 in “placeholders” in the budget – that is, fully ten times as much damage, and yet the black letter law of the land says that this approach is directly contrary to the statute.

This goes back to my speech Thursday night – the underlying reason we have seen a market collapse is not due to economic recession.

Recessions are not “abnormal”; they come about due to the human condition – people are both too ebullient and too fearful.  “Animal spirits” include both reaching for a brass ring and cowering in the corner, contrary to the Wall Street myth that such is only a “positive” thing.

No, we have seen this collapse because “The Bezzle” has reached into literally every corner of our financial system and government and nobody has been held to account.

When the S&L crisis happened only a few people went to jail, even though thousands committed felonies.  When the Internet Bubble blew up only a few went to jail even though it is trivially easy to identify thousands who flatly lied about growth metrics – and that’s just one place they were lying in their annual and quarterly reports. 

As we have continued to tolerate “The Bezzle” it has become clear to people in all financial areas that they can lie and get away with it.  That the odds of being caught, say much less prosecuted, are so trivial that it’s definitely worth the risk.

Would you risk going to a cushy federal prison for five years if you could make $100 million dollars and the odds of getting caught were 1 in 10,000? How about if the odds are the same but the profit is only $100,000?  In both cases many people would and did; home “buyers” overstating incomes are the second case, and sellers of money who intentionally misrepresented what they were selling (up and down the line) fall into the first.  Indeed, the FBI’s own statements on this matter is that if you were engaged in “fraud for housing” (that is, you robbed a bank in order to live in a house) they aren’t interested in coming after you.  It is only the serial fraudsters who were engaged in fraud for pure monetary profit across many transactions that they’re arresting – and then, only if you’re the borrower.

Now contrast that with robbing a bank the “old fashioned” way (with a gun.)  You might get away with $100,000.  But the odds of getting caught are much higher than 1 in 10,000 – in fact, they’re probably at least 1 in 4, and maybe worse.  If you do get caught you’re going to do 20 years in a nasty place where prison rape is considered a sport and what’s worse, if you’re in a state like Florida, you will get a mandatory, no-early-release extra 10 on your sentence if a firearm is involved.

While people do still rob banks with a gun there are far more people who “robbed the bank” using a pen and piece of paper instead during the last five years – some of them “home buyers”, some of them mortgage brokers and some of them bankers both on and off Wall Street.

Now let’s mark this disconnect a bit more.

There is absolutely a price on human life.  Doubt that?  Go visit a hospital.  People with no hope can and do obtain a million dollars or more of free (to them) medical care.  OJ Simpson was sued after he won acquittal for the murder of his ex-wife and ordered to pay money damages, establishing that there is a value on human life, and we can and do reduce that value to dollars in our justice system.

So why is it that we refuse to apply the same standard when it comes to sentences?  Nicole Brown Simpson’s children, Sydney and Justin, were awarded $12.5 million dollars after OJ Simpson lost his civil case.

So we have a “reasonable boundary” for a human life – $12.5 million dollars.  Other verdicts have found larger and smaller amounts, but this makes a nice, public and well-documented figure.

Does this not provide all the evidence you need that should someone manage to steal (in aggregate) through fraud more than $12.5 million dollars that they should get, at minimum, “20 to life” in prison?  That is, a sentence equal to the least stringent for homicide?

How many of these fraudsters would have committed these offenses, and how many would in the future if this was the penalty?  Commit a fraud worth $12.5 million or more, bye-bye.  Oh, and we’ll take the $12.5 million from you (since you stole it) to pay for your imprisonment too!

This – up and down the line – from the intentional lack of prosecution to willful refusal to follow the law to utter stupidity in criminal sanction - is the essence of “The Bezzle” and it is why capital has fled.

It also, however, points out an essential truth about any future recovery in our economy and banking system - it won’t happen until “The Bezzle” is muzzled to a significant degree.

It is too much to expect that we will ever get rid of “The Bezzle” entirely.  That’s simply not going to happen – there will always be cheats, liars and frauds.

However, until those who commit such crimes and blatantly ignore the black letter of the law are held to account on a consistent basis, thereby destroying the belief that this sort of criminal activity is “free of material risk”, there can be no meaningful recovery of economy progress.

We can either demand and obtain this change in policy and attitude now as Americans, or the market will do it for us by continuing to tank and forcing these firms and examples into the open where they are destroyed.  The unfortunate reality, however, is that the latter course – refusing to face this and allowing the inevitable market implosion to do that which we refuse to through law enforcement – will also take down tens of thousands of sound companies who also see their capital base removed while their obligations remain.

Bluntly put – Congress and The Administration must, right here and now, compel these regulators to follow the law or remove them from their positions of power. 

This had to be done two years ago and it still needs to be done. 

There is no way to stop the bleeding in our capital markets – both credit and equity – until this occurs.  It will happen; we are only choosing the means and where we want to confine the risk to.

If we continue down the path we are on now we are risking the meltdown of the United States Federal Government; Fed President Plosser said the following:

An agreement with the Treasury to switch U.S. government bonds for these less-liquid non-traditional assets on the Fed’s balance sheet would help the central bank focus on conducting traditional monetary policy.

“With Treasuries back on the balance sheet, the Fed will be able to drain reserves in a timely fashion with minimal concerns about disrupting particular credit allocations or the pressures from special interests,” said Plosser, who is not a voting member on the Fed’s policy-setting committee this year.

You got that?  The Fed knows that it is holding a bunch of crap and is threatened by the “value” (or lack thereof.)  If they shove that off onto Treasury then the detonation of over $1 trillion in bad debt will occur on the government’s balance sheet, which will (1) cause a dramatic move upward in Treasury interest rates, (2) translate into all other forms of debt and (3) result in exactly the same collapse that happened in the 1930s - but it will be far worse in degree, since we are far more in debt now than then.

As things stand today I have no confidence whatsoever that The Obama Administration has any intention to act according to law any more than George Bush’s Administration did.

As a consequence until and unless the government’s position and actions change my “base case” economic forecast must remain bearish and over time continue to grow more bearish; without the 2/3rds of all capital that is private in our economy, even with supplanting of that capital from the government (to the extent it is able) I believe we are looking at a potential 30% contraction in GDP from top to bottom and unemployment reaching north of 20% on U-6 (broad form), with the very real possibility of a 20% headline number.

We are headed for an Economic Depression worse than the 1930s at Warp Speed folks, and it is not going to happen because of “fundamentals” or even because “the credit markets froze up.”

No, it is going to happen because both the Bush and Obama administrations are intentionally, with malice aforethought, ignoring the black-letter law of the land for the purpose of covering up their own malfeasance and misfeasance, and neither political party or the American People will get off their fat asses and demand that it be stopped.

Your job, prosperity and wealth are on the line America – right here, right now.

This is not some abstract failure in the market – this is a series of actions that have been taken with the full intention of screwing you, by both Democrats and Republicans, so that a handful of robber barons masquerading as capitalists do not have to face the music for their acts.

How bad can it get?  Have a look at these charts folks over at Calulated Risk.  They’re sobering – and if the lawlessness does not stop we are just getting started.

While the SEC is incompetent, the securities industry’s self-policing organization, the Financial Industry Regulatory Authority, is “very corrupt,” Markopolos charged. That organization was headed until December by Mary Schapiro, President Barack Obama’s new SEC chief.”

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And it isn’t just FINRA (which might as well stand for “FINANCIAL INDUSTRY NEVER REPORTS ACCURATELY”).

The sad and simple truth is that Congress, the SEC and most financial “journalists” have been captured/bribed, rendered complicit/compliant and/or brain dead by the big bucks banking, securities and hedge fund industry.

Why?  So that Wall Street insiders (banks, broker-dealers, market makers, options market makers and hedge funds) could keep stealing trillions via the unlimited sale and non-delivery (read: COUNTERFEITING) of massive amounts of stocks, bonds, precious metals, and now, even US Treasury obligations (not to mention the companies, jobs, retirement plans, scientific advancements and lives destroyed by their contumacious, sociopathically self-interested behavior).

Where else other than in the American securities markets can you make billions from the sale of stuff you never have to deliver?

Mandated by Congress to be the investing public’s “first line of defense against securities fraud,” the SEC leadership over the past 10 years has repeatedly betrayed its duty to the American people; not only by consistently ignoring tons of evidence of criminal activity brought to its attention ala Madoff, but by delegating its fiduciary duty to protect the investing public to the Depository Trust & Clearing Corporation, a secretive, non-transparent entity wholly owned and operated by Wall Street insiders, that acts only to protect and enhance the interests of its Wall Street owners– and which has willfully and deceptively enabled the defrauding of investors with a duplicitous 3 card monty style bait and switch non-settlement system that rapes the investing public, rewards the rapists, and is a root cause of the financial disaster confronting the world today.

If ever the RICO drums should be beating within earshot of the DOJ and the White House, it is now.

             I usually harken to George Friedman’s latest Stratfor Geopolitical Intelligence report because the analysis is typically well thought out, clearly articulated and often insightful.  But when he recently wrote: “Recessions occur when, as is inevitable, inefficiencies and irrationalities build up in the financial and economic system,” he sounded like just another Wall Street apologist aping the mainstream financial media penchant for using weasel words like inefficiencies and irrationalities to characterize the deeds of wrongdoing that have finally brought the world’s finances it its knees.

             In eschewing its once noble calling to speak truth to power as the Fourth Estate, today’s captured corporate media has become our 21st century fifth column, abusing the public trust from within by either failing to investigate and accurately report evidence of massive unlawful conduct, or on the rare occasions it does, by sugarcoating criminal deeds with words more aptly suited to boyish pranks– shenanigans, hijinx, mischief, monkeyshines and foolishess– rather than call a spade a spade and honestly label them the acts of consummate lying, cheating and stealing they are.   Irrational exuberance and moral risk, indeed.

              Friedman also doesn’t seem to realize that the crisis now decapitating the world’s economies didn’t have to happen– would not in fact have happened if those charged with protecting the financial system and the investing public— namely Congress in general and the Securities and Exchange Commission in particular— had simply done their jobs, upheld their oaths, and seen to the enforcement of laws already on the books, instead of consistently looking the other way; or worse still, directly aiding their campaign contributors, benefactors, patrons, employers and future employers by contemptible acts of public disdain such as repealing Glass Steagel, allowing Reg Sho’s grandfathering of billions in counterfeit shares, scuttling the systemic market protections provided by the uptick rule, and encouraging $62 Trillion in credit default swaps, insurance contracts in all but name, that would be void as against public policy for lack of “insurable interests” if called by their rightful name, as the courts should some day do.

             While today’s crisis had lots of chefs, the cake could never have been baked if certain of those in government had not unflinchingly aided the finance and banking industries in zero-sum gaming the system.  Cloaked in the Gekkoesque doublespeak of deregulation, innovation, self governance and market efficiency, they fostered a free market system in which the only thing free about it was that insider participants (read banks, hedge funds, broker dealers and their minions) felt free to pillage and plunder at will; a system steeped in secrecy, cooked books, phony opinions, reckless ratings, ludicrous leverage, off balance sheet conduits, and zero accountability; a greedy, arrogant, amoral, some say sociopath culture of corruption, unfettered by the fear of ever being caught, having to admit wrongdoing, or suffer any meaningful punishment. 

             And why not, knowing their misdeeds would also be zealously overlooked or glossed over by a feckless financial media that dutifully ignored or proclaimed wrongs like naked shorting, stock counterfeiting, failure to deliver and options market maker fraud, mere mirages, while sucking up to billionaire short-seller hedge fund finaglers and ridiculing people like Overstock CEO Patrick Byrne, who valiantly tried to sound the warning.   

             This collective dereliction of duty (some might say treason, given the harm that has– and is yet to befall us) further emboldened the wheeler dealers in an already historically suspect system to make market manipulation and fraud not just the occasional aberration, but the very modus operandi and profit leitmotif.  Of late, they’ve even gone so far as to naked short the gold and silver markets along with $2 trillion in US Treasuries! 

            Over the past ten years, increasing numbers of financial experts, economists, academics and market reform advocates like Byrne, Bob O’Brien, Dave Patch, Robert Shapiro and Susan Trimbath, along with tens of thousands of individual investors who’ve seen their retirement savings swiped in broad daylight, have repeatedly complained, cajoled and pleaded with Congress, the SEC and their industry owned and controlled accomplices at the ironically named Depository Trust Clearing Corporation to stop the carnage—  but to no avail.  (The DTCC’s latest attack on investors which they call dematerialization, seeks to do away with all paper stock certificates, the only true evidence of share ownership, to be replaced by a “trust us” electronic record, known only to the  DTCC).  

            While a rare few in Congress— notably Senators Grassley (IA), Specter (PA), and Sanders (VT)— seem to comprehend just how crooked, unfair and untrustworthy our markets and their regulators have become, one wonders how those who’ve charted the SEC’s course over the past 8 years could have any doubts about it!   As the agency explicitly created to first and foremost, uphold and protect the integrity of the markets and the best interests of the investing public, they have, with unceasing devotion, in the eyes of most informed observers, done the exact opposite– enabling wrongdoers to operate with almost total impunity.  A bold faced license to steal. 

            As with the O.J. murder trial years back, there is a mountain of evidence of wrongdoing, but the jury in this case, Congress, the SEC, and the financial media have remained steadfastly deaf, dumb and blind to it.  

            The NY Times just reported that  both the SEC and FBI seemed “taken by surprise” by former Nasdaq lead market maker and NASD Chairman Bernard L. Madoff’s alleged $50 billion fraud, while harmed investors are incredulous that the premier regulatory body and protector of the investing public could have missed such a towering Ponzi scheme.  Authors of the NY Times “Your Money” column added their tin dime claiming “Thankfully, outright fraud is pretty rare,” evidencing once again that at the paper of record, journalism itself is in a state of permanent recession. 

How the SEC has violated its statutory duty and betrayed the public trust by blatantly failing to enforce laws on the books– and by further enabling massive market manipulation and fraud that has enriched Wall Street predators at the expense of everybody else– and brought the entire world to its knees.

The coup de grace is the announcement by the Depository Trust Company, subsidiary of the odious Wall Street  owned and operated Depository Trust and Clearing Corporation, that subject to SEC approval, they are moving forward with plans to enable unlimited stock counterfeiting by eliminating all paper stock certificates– the only real evidence of the delivery of real shares.   No stock certificates, no paper trail– no way to ever know whether you ever got what you paid for– or merely an IOU from some naked short seller counterfeiter. 

Too bad we don’t have an honest, free financial press anymore to question the calculated criminal looting of America’s market integrity and economic well being.   What a country.  

“Crisis of Convenience for Roiling SEC – October 30, 2008   by David Patch

“Settlement failures by June 2008 had now reached a daily average value of over $10 Billion”

To say that support for the Securities and Exchange Commission is at an all time low would be an understatement. With Congressional Investigations into the agencies handling of critical investigations and recent reports out of the Office of Inspector General, investors are left guessing as to what exactly the agency is doing to police our markets. Heck, even a presidential candidate has suggested that the SEC Chairman should be fired and it was his party that hired him.

What most want to understand is, has the SEC gone rogue in actually aiding the white collar criminals that lurk out there?

With claims by the OIG that the SEC’s Director of Enforcement was engaged in inappropriate communications regarding an insider trading investigation into the politically connected CEO of Morgan Stanley, and has likewise been accused of having inappropriate communications with the General Counsel of JP Morgan regarding a Bear Stearns investigation it is not a far stretch to think something is remiss.

Question is, how deep does it go? How far have some within the agency gone to protect wealthy and powerful individuals?

Consider this decade old issue of abusive short selling. I say decade old because it was 1998 that the SEC first presented a concept release on short sale reforms whereby nearly 3000 comment letters suggested an abuse existed in the short sale process.

A decade later, the issue is temporarily resolved in what has become a crisis of convenience for the SEC. What do I mean by that? Let’s look at the facts and begin with a picture worth a 1000 words.  [chart omitted]

This chart illustrates the level of threshold companies on the Regulation SHO Threshold security list since inception in January 2005.

Anybody see a trend? A correlation?

What we can timeline together since 1998 is that in October of 2003 the SEC proposed Regulation SHO where the Division of Market Regulation admits that abusive short selling [naked shorts] could be used to generate market leverage necessary to manipulate our markets. They put this right in the language of the proposal. These naked shorts as they are now identified would show up in the markets as failures to deliver within the continuous net settlement system.

By December 2004, as the first reforms were coming into play, we also catch wind of a conference call that was held by the now deceased Bear Stearns in which the General Counsel of Bear Stearns admitted that regulators had been approaching them for years voicing concern over the increased level of failures in the market. According to the General Counsel these fails were being attributed to “prime brokers, executing brokers and clients not following already established rules [in the short sale process]“.

To address the surmounting level of fails in the system the SEC did not merely create reforms but created loopholes to protect those that were not following already established rules. The first identifiable loophole in regulation SHO was the grandfather clause.

According to a document by the SEC’s Division of Market Regulations, and in response to an inquiry by Congressman John Tierney, “SHO does not require the close-out of fails to deliver that existed before a stock became a threshold security (known as “grandfathered” securities) because the Commission was concerned about creating volatility through short squeezes if existing positions had to be closed out quickly. “

So by the illustrated chart, not only did the grandfather clause not require the closeouts of pre-existing fails to deliver, the grandfather clause became a tool used to increase the market levels of fails to deliver in the system. And to whose benefit did this become; those that would have suffered had the agency demanded that these trades settle.

With the market still chugging along, the agency was under attack as the fails to deliver grew exponentially from an average daily dollar value in January 2005 of $3 Billion to over $8.5 Billion by March 2008.

March 2008 was the month Bear Stearns skirted bankruptcy through an emergency sale to an opportunistic JP Morgan. It was this opportunistic sale, in the midst of inappropriate communications between the SEC and JP Morgan General Counsel regarding an on-going Bear Stearns investigation that has again questioned the integrity and alliances of SEC director Linda Thomsen. Again with Bear Stearns.

By November 2007 the Agency had removed the grandfather clause from the short sale policies but by then the levels had accumulated to dangerous levels representing severe liabilities to the market place. And with the short sellers moving to the next loophole of opportunity, the options market and the options market making exemption, the SEC witnessed little relief from the abusive trading patterns. Settlement failures by June 2008 had now reached a daily average value of over $10 Billion.

What the SEC needed now that the pressure was on was a crisis. A means in which the trend could be turned and the unhealthy fails settled.

Open curtain, scene 3, the crash of 2008.

The Bankruptcy of Lehman, the near fall of Morgan Stanley, and a precipitous drop of the Dow Jones to near 8000 and a federal bailout as panic overcame the markets. What a distraction.

As the dust settles and the smoke dissipates few have noticed the playfield in the back right corner of this stage. The playfield of those who carried this tremendous burden of failed deliveries.

As the chart illustrates, the peak level of securities on the threshold security list happened to coincide with the day the SEC first enacted an emergency order that restricted the short selling in 17 financial institutions along with Freddie Mac and Fannie Mae.

Since the June 2008 temporary ban was put into place, as the market went into a free fall so too did the level of threshold securities. It only started to rise again when Morgan Stanley was under attack in September but a second ban again turned that trend around. Then again, the market turned as well.

Ultimately this economic crisis has become a crisis of convenience for the SEC. The failed trades they have tried so desperately to eradicate from the markets have temporarily disappeared. These trades can easily cover quickly since failed trades in a free falling market can always be covered efficiently for a profit. It is only when a trade that should not have been executed can’t be covered for a profit that creates the market inefficiencies.

But what does that say about our market rules, our market regulators, and the possibility of collusion amongst market participants? Why does it take a market crisis to clean up failed trades and what happens when the crisis subsides?

Shouldn’t the market run this efficiently during normalized times or can we expect more ‘crisis of convenience’ events to transpire over the years in order to periodically cleanse away the sins of those that have been allowed to get away with theft?

Now I am not saying that the SEC orchestrated this crisis, although the OIG found cause to think they had the opportunity to thwart it long ago. That opportunity would have come with an SEC investigation into the accounting of assets by —you guessed it— Bear Stearns.

I am finding it rather peculiar however that while the SEC was willing to allow this abuse to accumulate in order to prevent appreciation in the markets to the very advantage of every shareholder, that the SEC did very little to prevent the abuses that drove our markets down in a frenzied panic. Abuses such as short and distort schemes, rumor mongering, and bear raids.

For those interested, Linda Thomsen will be speaking November 6, 2008 at Fordam Law School in New York City. In the advertisements for her speech Ms. Thomsen is quoted as saying “Abusive short-selling, market manipulation and false rumor-mongering for profit by any entity cuts to the heart of investor confidence in our markets. Such behavior will not be tolerated. We will root it out, expose it, and subject guilty parties to the full force of the law.”

I can only laugh at such hypocrisy as I lay witness to the decade of abuse that has taken place where the SEC’s Division of Enforcement has done nothing but protect those that engaged in the very abuses she speaks of. Ms. Thomsen herself a central figure in two OIG Investigations where one has already concluded seeking some form of discipline against the Director.

Maybe somebody in the audience will challenge her on the agencies performance to date and challenge her on the profits reaped under this crisis by those abusive short sellers and rumor mongers she has failed to take actions against.”

http://www.investigatethesec.com/drupal-5.5/StockgateToday  Copyright 2008

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Physical Certificates Take a Step Closer to Extinction via Depository Trust Company 

Dematerializing Assets

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 ”Wall Street was ripping off investors and the Division of Trading and Markets deceived the public so as to aid the Division of Enforcement in not taking up appropriate cases against those that willfully violated the securities laws.”

As sent to the SEC, Members of the Media, and aides to several key Congressmen. by David Patch

Friends,

According to a link on the SEC’s Website that directs you to “Key Points about Regulation SHO” the SEC presents to the public this theory:

3. Do all failures to deliver reflect improper activity that should be closed out?
A “fail to deliver” occurs when a broker-dealer fails to deliver securities to the party on the other side of the transaction on settlement date. There are many justifiable reasons why broker-dealers do not or cannot deliver securities on settlement date. A broker-dealer may experience a problem that is either unanticipated or is out of its control, such as (1) delays in customers delivering their shares to a broker-dealer, (2) the inability to obtain borrowed shares in time for settlement, (3) issues related to the physical transfer of securities, or (4) the failure of a broker-dealer to receive shares it had purchased to fulfill its delivery obligations. Fails to deliver can result from both long and short sales.
Regulation SHO was designed to target potentially problematic failures to deliver. Prevention of fails is the goal of the locate requirement. Regulation SHO requires broker-dealers to identify a source of borrowable stock before executing a short sale in any equity security with the goal of reducing the number of situations where stock is unavailable for settlement. But, because the locate is usually done three days before settlement, the stock may not be available from the source at the time of settlement, possibly resulting in a fail.
Regulation SHO also requires some fail positions to be closed out. When a broker-dealer has a fail position in a “threshold security,” and that fail position has persisted for 13 consecutive settlement days, the broker-dealer must take immediate steps to close-out the fail by purchasing securities of like kind and quantity. Even market makers that have such persistent fails in threshold securities must close-out their positions.
http://www.sec.gov/spotlight/keyregshoissues.htm

I point out the use of the term “justifiable” in the initial paragraph in rationalizing why a fail to deliver exists.

Now between the period of January 2005 to June 2008 the markets experienced a continuous rise in fails to deliver with very little response by the market regulators. Utilizing excuses 1 – 4 above the regulators rationalized that failures to deliver were simply justified difficulties attributed to such problems as lost certificates by granny or delays in delivering shares by legitimate clients. Between January 2005 and June 2008 the dollar value of fails to deliver shares increased 3-fold ($3 Billion to Over $10 Billion) as calculated mark-to-market in daily aggregate fails to deliver.

But then came June 2008 and the economic market crash. There also came that emergency ban of short sales on a paltry 19 publicly traded securities; few if any being qualified as Regulation SHO securities. June 2008 became the turning point for Regulation SHO. Suddenly, as if by miracle, those lost certificates no longer became lost, granny found every last one of them. The inability for a client to deliver securities on time diminished. And Borrowed shares available for settlement could suddenly be found.

With no new regulations between June 2008 and October 2008 investors must ask why the sudden and rapid decline in the number of issuers on the Reg SHO list? What suddenly changed in the market systems to suddenly make settlement an efficient process in which excuses 1-4 no longer seem to be of concern? (Ref: Reg SHO Threshold Security Performance Chart http://www.deepcapture.com/there-was-that-so-hard/ )

The answer is simple, nothing beyond the fact that the market completely crashed between June 2008 and present allowing those massive Fails to deliver to be closed out at a significant profit. Consider that the Dow Jones rand in near 13,000 in June 2008 but fell to Near 8,000 in October. The very period in time when an equally significant decline in fails to deliver were settled.

Had the excuses 1-4 been real, the fails to deliver in a declining market would have been just as significant as that in a flat or bull market. Lost certificates are lost certificates and delays by clients in delivering shares are delays in any market. Without any regulations that altered the short sale process relative to stock locates and unavailable shares to borrow even that excuse would have existed in a declining market but, as if by miracle, none of this happened. Failed trades were easily settled after failure if necessary because the buy-ins could be executed at or below the value executed at the time of trade. So long as a trade could be settled for profit it was settled and when a market collapses settling short sales that failed was as easy as the trade itself.

This type of evidence supports the long standing contention that the ONLY reason fails to deliver persisted for such long and persistent periods of time is purely based on economics. It was not cost effective for these failed trades to be settled and so they were not. That my friends is fraud under no uncertain terms. Failing to comply with securities laws because a profit can not be made is collusion by the industry and is intent to manipulate.

I urge the Commission to address this specific issue publicly and explain how the markets could suddenly become efficient in settling trades when nothing changed except a bear raid. The public has demanded a turnaround in the settlement problems since 2005 and nothing happened until our markets crashed. Are we to believe this is purely by coincidence that the day the market started to crash was likewise the day that stocks could suddenly settle more efficiently? Where are those lost certificates that were highly touted as cause for threshold companies before this market crash?

Ultimately, I believe that this document published on the SEC Website was a blatant attempt at deceiving the investing public as to the truth behind this problem. Wall Street was ripping off investors and the Division of Trading and Markets deceived the public so as to aid the Division of Enforcement in not taking up appropriate cases against those that willfully violated the securities laws. This diversion from the truth delayed the public outcry over where the enforcement cases were.

The language is the SEC’s and the evidence is for all the public to see as Regulation SHO threshold lists are published daily.

David Patch
http://www.investigatethesec.com

Who is the SEC Really Protecting?   The #1 serious question that should– but has never been asked by flimflam Floyd– nor all too many of his “financial journalist” compatriots.  Certainly not by no accountability Joe.

Because our financial crisis is rooted in systemic corruption and government enabled lying, cheating and stealing, the public now, desperately, more than ever, needs honest, accurate, informed analysis and commentary like the following —  not the superficial dross and misdirection usually floated by most of the truth-phobic financial media.  

Hopefully, this will be something to think about next time you check what used to be your retirement nest eggs.

from: http://aaronmorgangroup.typepad.com/aaron_morgan_group_blog/

October 19, 2008

Selective Transparency: Who is the SEC Really Protecting?

            In deference to SEC Chairman Christopher Cox, his October 19, 2008 “Swapping Secrecy for Transparency” Op-Ed opinion does address issues of concern as they relate to the credit-default-swap markets.  Let’s hope he is a little more successful with this initial statement of intent than he was with respect to the public dissemination of short positions of larger hedge fund and investment concerns.  A portion of his most recent editorial statement follows:

“Congress needs to fill this regulatory hole by passing legislation that would not only make credit-default swaps more transparent but also give regulators the power to rein in fraudulent or manipulative trading practices and help everyone better assess the risks involved. 

Congress could require that dealers in over-the-counter credit-default swaps publicly report both their trades and the value of those trades. This would make the market more transparent, and make it easier for everyone engaged in credit-default swaps to assess their value. It would also provide regulators with the information they need to uncover unfair or fraudulent practices and to monitor risk. 

Then, the Securities and Exchange Commission should be given explicit authority to issue rules against fraudulent, deceptive or manipulative acts and practices in credit-default swaps. 

Finally, Congress could provide support for federal regulators to mandate the use of one or more central counterparties — financially stable clearance and settlement organizations — and exchange-like trading platforms for the credit-default swaps market. As it is now, it is often impossible even to know who stands on the other side of a swap contract, and this increases the risk involved. We at the S.E.C. are already working with the Federal Reserve, the Commodity Futures Trading Commission and industry participants to accomplish these goals on a voluntary basis, using the authority we currently have. 

Because of the truly global nature of the over-the-counter derivatives market, we will need to work closely with governments in other major markets. The climate for such cooperation is good, because the cross-border impacts of the current market problems are obvious to all. 

Transparency is a powerful antidote for what ails our capital markets. When investors have clear and accurate information, and when they can make informed decisions about where to put their resources, money and credit will begin to flow again. By giving regulators the authority they need to bring the credit derivatives market into the sunshine, we can take a giant step forward in protecting our financial system and the well-being of every American.”

          Cox recently had the opportunity to bring the issue of “naked short selling” out of the “darkness” and into the “sunshine” but the opaque curtains that enshroud this illegal practice remain.  Selective transparency does not work and suggests that Wall Street brokerages, the DTCC and hedge fund behemoths still call the shots regardless of the initial intentions of the SEC.  Like the E.F. Hutton commercial of years gone by, “when the hedge fund consortium talks, the SEC listens.”

On or about the middle of September of 2008 it appeared that Cox was heading in the right direction with his statement suggesting the direct dissemination of information that would reveal short positions at large investment concerns but something got in his way.  A review of SEC press releases and statements made over the last month coupled with a correlative analysis of the number of securities on the SHO List and respective closing prices of the DJIA and NSDQ tells the story better than words ever could.

http://www.sec.gov/news/press/2008/2008-209.htm

         Chairman Cox’s diatribe began in earnest on September 17, 2008 when, in addition to announcing initiatives to investigate fraud and manipulations in the nation’s securities markets, he included the following paragraphs:

“In order to ensure that hidden manipulation, illegal naked short selling, or illegitimate trading tactics do not drive market behavior and undermine confidence, the SEC today took several actions to address short selling abuses,” Chairman Cox continued. “In addition to these initiatives, which will take effect at 12:01 a.m. ET on Thursday, I am asking the Commission to consider on an emergency basis a new disclosure rule that will require hedge funds and other large investors to disclose their short positions. Prepared by the staffs of the Division of Investment Management and the Division of Corporation Finance, the new rule will be designed to ensure transparency in short selling. Managers with more than $100 million invested in securities would be required to promptly begin public reporting of their daily short positions. The managers currently report their long positions to the SEC.”

Chairman Cox continued, “Director Thomsen and the Division of Enforcement will also expand their ongoing investigations by undertaking a series of additional enforcement measures against market manipulation. The Enforcement Division will obtain disclosure from significant hedge funds and other institutional traders of their past trading positions in specific securities. Those institutions will also be required immediately to secure all of their communication records in anticipation of subpoenas for these records.”

            Like many others, we thought this was a promising development that would clearly identify those who perpetrated these frauds bringing transparency to the system for all who were subjected to the naked short selling manipulation.  It almost seemed too good to be true and unfortunately, within a short period of time, it was. 

http://www.sec.gov/news/press/2008/2008-210.htm

“We announced emergency plans for a rule to ensure public disclosure of short selling positions of hedge funds and other institutional money managers.”

            I could not believe what I was reading.  The SEC was following through with its recent pronouncement and was going to make “public” the short selling positions of hedge funds and other institutional money managers.  Unfortunately, my rekindled enthusiasm and reaffirmation of good versus evil as to who the SEC really protected was to be short lived.  Before the markets opened on Monday, September 22 the investment and hedge fund managers, after what must have been one hell of a weekend country club bridge tournament, regained control of the process as exhibited in a rare Sunday, September 21 press release from the SEC.

http://www.sec.gov/news/press/2008/2008-217.htm

            The cracks in the intentions of the SEC armor began to appear as stated:

“In addition to making technical amendments, the revised order also provides that the information disclosed by investment managers on new Form SH will be nonpublic initially, but will be made available to the public via the Commission’s EDGAR website two weeks after it is electronically filed with the Commission.

The amended order will take effect at 12:01 a.m. EDT on Monday, Sept. 22, 2008.

Under the order, covered institutional money managers will be required to report any new short selling in all equity securities, except options, that are admitted for trading on a national securities exchange or quoted on the automated quotation system of a registered securities association. If any new short sales are effected on September 22 through September 27, the managers are required to submit a report on new Form SH to the Commission on Sept. 29, 2008. These managers are already required to report their long positions in these securities on Form 13F.

The Commission may extend the emergency order beyond its current effective period of 10 business days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration.”

http://www.sec.gov/news/press/2008/2008-235.htm

            The winds of change stopped blowing in the direction of public disclosure in early October.  The SEC continually modified its language and subsequently the public’s ability to review the required Form SH filings with language as follows:

“The Commission notes that short selling plays an important role in the market for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities, and importantly, limiting upward market manipulations. In addition, there are circumstances in which short selling can be used as a tool to mislead the market. For example, short selling can be used in a downward manipulation whereby a manipulator sells the shares of a company short and then spreads lies about a company’s negative prospects. This harms issuers and investors as well as the integrity of the market. This kind of manipulative activity is particularly problematic in the midst of a loss in market confidence.

Specifically, the emergency orders cover the following:

      Temporary requirement that institutional money managers report to the SEC their new short sales of certain publicly traded securities. This order will also be extended, to 11:59 p.m. ET on Oct. 17, 2008, but the Commission intends that the order will continue in effect beyond that date without interruption in the form of an interim final rule. The Commission will seek comments on all aspects of the anticipated rulemaking. Disclosure under the emergency order will be made only to the SEC.”
 

http://www.sec.gov/rules/other/2008/34-58724.pdf

            The nails in the coffin of the Form SH disclosure to the public were firmly hammered in on October 2^nd with the following language:

“The Commission believes that the nonpublic submission of Form SH may help prevent artificial volatility in securities as well as further downward swings that are caused by short selling, while at the same time providing the Commission with useful information to combat market manipulation that threatens investors and capital markets.  Also, the Commission has considered further reasons to maintain the information as nonpublic in the current market environment, and is concerned that publicly available Form SH data could give rise to additional, imitative short selling that was not intended by the Commission’s Order.  Accordingly, the Commission has determined that Forms SH filed under the Order, including those that were due on September 29, 2008 will remain nonpublic to the extent permitted by law without the filer needing to submit a confidential treatment request.”

        This Order, pursuant to Section 12(k)(2)(C) of the Exchange Act, terminated at 11:59 PM on Friday, October 17, 2008.

        The title of this article, “Selective Transparency:  Who is the SEC Really Protecting” relates to the action, or inaction as it may be, as it relates to providing critical information to the public.  Before concluding with opinion as to why Forms SH remained in the control of the SEC and were never disclosed to the public, take a look at the following chart which illustrates the date and number of securities remaining on the SHO List with recent correlative market closing prices for the DJIA and NSDQ.

            It does not take a rocket scientist to see what transpired between September 17, 2008 and October 17, 2008.  Christopher Cox had a pretty good idea when he suggested public disclosure of both the short positions and the entities that controlled those positions that were of a certain size or investment management structure.  His proclamation never made it through the weekend before the real powers that be, major Wall Street firms, the DTCC, prime brokers, major hedge funds and institutions, and possibly the investment clients they represent came knocking on his door requesting the public window be closed.

            Step back and take a look at the chart.  The number of securities on the SHO List has declined dramatically, from a high of 443 on September 22, 2008 to only 74 on October 17, 2008.  The DJIA and NSDQ dropped by approximately 20% during this period as well. 

Now ask yourself a question; why did the number of securities drop precipitously during this period?  Was it because the entities that were naked short securities located bona fide shares to meet the T+3 requirements of their open transactions?  I don’t think so.  Do you think perhaps, since the stock market and the securities that comprise it essentially crashed, that the entities that employed the illegal manipulative techniques of naked short selling just covered their shares at a huge profit?  Yes I think that is exactly what happened. 

        The last thing any of these hedge fund and investment entities wanted, especially at this most critical time, was transparency.  The dissemination of this information would have etched a more negative image of this illegal practice of these hedge fund moneyed market participants.  It also would have provided a direct conduit for civil legal action against the perpetrators of naked short selling resulting in the DTCC, the prime brokers and other responsible parties being subject to subpoenas that would open up their transaction books to the public.  There actually might have been viable platforms created that “redistributed” the privatized wealth, the absolute last thing these Robber Barons of today’s financial markets would ever want to happen.  Quite frankly, it is time that it happens.  The information is there and it is time to storm the gates of the SEC and get the transparency we all deserve.

         There is much more to this story but only so much that anyone reading a blog of this nature has the time to take in and understand.  As you have come to know this site, we dig a little deeper than just reporting the news as it relates to the problem.  We “connect the dots” and will continue to do so.  It was never the fact that securities appeared on the SHO List that created the problem.  It was the fact that naked short selling of securities was ever allowed to take place, despite the rules and regulations that prohibited this action that give rise to the list becoming a necessity.

            The solution to preventing naked short selling is simple; require a firm “locate” number before being able to enter a short sale.  

While this may solve the naked short selling problem more issues remain.  For example, the exploitation of naked short selling has created a plethora of “phantom” shares that grossly overstate the actual number of shares in existence.  How the number of shares in existence is reduced and again accurately relate to the actual number of shares issued and outstanding will be addressed in subsequent articles.