Cataclysm- Unless Washington Stops The Crooks Now!

March 5, 2009

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 and 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


Just so you have a short list of what’s at stake if Washington DC doesn’t change policy here and now (which means before the collapse in equities comes, which could start as soon as today, if the indicators I watch have any validity at all.  For what its worth, those indicators are painting a picture of the Apocalypse that I simply can’t believe, and they’re showing it as an imminent event – like perhaps today imminent.)
  • All pension funds, private and public, are done.  If you are receiving one, you won’t be.  If you think you will in the future, you won’t be.  PBGC will fail as well.  Pension funds will be forced to start eating their “seed corn” within the next 12 months and once that begins there is no way to recover.
  • All annuities will be defaulted to the state insurance protection (if any) on them.  The state insurance funds will be bankrupted and unable to be replenished.  Essentially, all annuities are toast.  Expect zero, be ecstatic if you do better.  All insurance companies with material exposure to these obligations will go bankrupt, without exception.  Some of these firms are dangerously close to this happening right here and now; the rest will die within the next 6-12 months.  If you have other insured interests with these firms, be prepared to pay a LOT more with a new company that can’t earn anything off investments, and if you have a claim in process at the time it happens, it won’t get paid.  The probability of you getting “boned” on any transaction with an insurance company is extremely high – I rate this risk in excess of 90%.
  • The FDIC will be unable to cover bank failure obligations.  They will attempt to do more of what they’re doing now (raising insurance rates and doing special assessments) but will fail; the current path has no chance of success.  Congress will backstop them (because they must lest shotguns come out) with disastrous results.  In short, FDIC backstops will take precedence even over Social Security and Medicare.
  • Government debt costs will ramp.  This warning has already been issued and is being ignored by President Obama.    When (not if) it happens debt-based Federal Funding will disappear.  This leads to….
  • Tax receipts are cratering and will continue to.  I expect total tax receipts to fall to under $1 trillion within the next 12 months.  Combined with the impossibility of continued debt issue (rollover will only remain possible at the short duration Treasury has committed to over the last ten years if they cease new issue) a 66% cut in the Federal Budget will become necessary.  This will require a complete repudiation of Social Security, Medicare and Medicaid, a 50% cut in the military budget and a 50% across-the-board cut in all other federal programs.  That will likely get close.
  • Tax-deferred accounts will be seized to fund rollovers of Treasury debt at essentially zero coupon (interest).  If you have a 401k, or what’s left of it, or an IRA, consider it locked up in Treasuries; it’s not yours any more.  Count on this happening – it is essentially a certainty.
  • Any firm with debt outstanding is currently presumed dead as the street presumption is that they have lied in some way.  Expect at least 20% of the S&P 500 to fail within 12 months as a consequence of the complete and total lockup of all credit markets which The Fed will be unable to unlock or backstop.  This will in turn lead to….
  • The unemployed will have 5-10 million in direct layoffs added within the next 12 months.  Collateral damage (suppliers, customers, etc) will add at least another 5-10 million workers to that, perhaps double that many.  U-3 (official unemployment rate) will go beyond 15%, U-6 (broad form) will reach 30%. 
  • Civil unrest will break out before the end of the year.  The Military and Guard will be called up to try to stop it.  They won’t be able to.  Big cities are at risk of becoming a free-fire death zone.  If you live in one, figure out how you can get out and live somewhere else if you detect signs that yours is starting to go “feral”; witness New Orleans after Katrina for how fast, and how bad, it can get.

The good news is that this process will clear The Bezzle out of the system.

The bad news is that you won’t have a job, pension, annuity, Social Security, Medicare, Medicaid and, quite possibly, your life.

It really is that bleak folks, and it all goes back to Washington DC being unwilling to lock up the crooks, putting the market in the role it has always played – that of truth-finder, no matter how destructive that process is.

Only immediate action from Washington DC, taking the market’s place, can stop this, and as I get ready to hit “send” I see the market rolling over again, now down more than 3% and flashing “crash imminent” warnings.  You may be reading this too late for it to matter.

from: from:


Off the wires, no link.“DJ reports GE Capital credit default swaps worsen even as GE released a statement emphasizing its strong cash position. The CDS are most recently quoted at 17.5 points up front, from 16.5 points up front earlier today, according to Phoenix Partners Group. That means investors must pay $1.75 mln up front, plus a $500,000 annual fee, to protect $10 mln of GECC senior bonds against default for five years.”That means the first year cost is $1.75 + $500k, or $2.25 million.That’s 22.5% first year cost to insure $10 million against default!This means that the market is saying that the odds of GE going bankrupt within the next twelve months is greater than one in five, and that assumes zero recovery. 

If the bonds would recover more than 80% in the event of a default then it is implying more than a 100% risk of default, which is obviously impossible.

This is occurring despite GE’s CFO appearing this morning on CNBC making the case quite clearly that there is no risk of default under any materially possible scenario.  In other words, his assertion is that the odds of default are zero.

One of two things must be true:

  1. GE’s CFO is lying and must be indicted for doing so.
  2. This so-called “market segment” (CDS) has become so ridiculously overlevered, unsupervised and able to cause failures that it is now within days or even hours of CAUSING GE to fail – not due to GE’s own internal problems, but due to positive feedback that the CDS market is capable of and is generating on the initiative and as a consequence of the action of participants in that market.

Either way a major change needs to occur right here and now, lest we find ourselves with no pensions, no Social Security, no Medicare, no annuities and no government.



The Underlying Fraud In Banking 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.


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

(A) Agency to specify level
(i) Leverage limit Each appropriate Federal banking agency shall, by regulation, in consultation with the Corporation, specify the ratio of tangible equity to total assets at which an insured depository institution is critically undercapitalized.
(ii) Other relevant capital measures The agency may, by regulation, specify for 1 or more other relevant capital measures, the level at which an insured depository institution is critically undercapitalized.
(B) Leverage limit range
The level specified under subparagraph (A)(i) shall require tangible equity in an amount—
(i) not less than 2 percent of total assets; and
(ii) except as provided in clause (i), not more than 65 percent of the required minimum level of capital under the leverage limit.
(C) FDIC’s concurrence required
The appropriate Federal banking agency shall not, without the concurrence of the Corporation, specify a level under subparagraph (A)(i) lower than that specified by the Corporation for State nonmember insured banks.

And later on in the same law….

(1) Capital distributions restricted
(A) In general
An insured depository institution shall make no capital distribution if, after making the distribution, the institution would be undercapitalized.

(2) Management fees restricted
An insured depository institution shall pay no management fee to any person having control of that institution if, after making the payment, the institution would be undercapitalized.

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 GovernmentFed 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.


The Growing Gap Between Reality and the Media


February 26th, 2009 by Mark Mitchell

Following is a very partial list of people who have said abusive short selling must be stopped.

Then Secretary of Treasury Paulson

Former Chairman of SEC Harvey Pitt

Then SEC Chair Christopher Cox

Then Senator Hillary Clinton

Presidential Candidate John McCain

George Soros

The members of the American Chamber of Commerce

Charlie Munger, Vice Chairman Berkshire Hathaway

John Mack, CEO Morgan Stanley

Dick Fuld, then CEO Lehman Brothers

Members of the North American Securities Administrators Association

Robert Shapiro, former Undersecretary of Commerce

Harvey McGrath, former chairman of Man Group, world’s biggest listed hedge fund


Following is a partial list of mainstream media outlets that have yet to deliver a single comprehensive story aboutabusive short selling:

The Wall Street Journal

The New York Times

The Columbia Journalism Review

BusinessWeek Magazine

The Chicago Tribune

The Los Angeles Times

Fortune Magazine

The Washington Post

CNBC Television

CNN Television


This week, Eddie Lampert, the hedge fund manager and Chairman of Sears, became the latest to speak out against the problem. Here’s what he had to say…

“…the level of “naked” short selling of our shares was significant. The activity can be measured by the number of shares sold short as disclosed twice monthly by the NYSE and Nasdaq as well as by the reported number of instances of failure to deliver securities by short sellers to purchasers of Sears Holdings stock….

…the SEC has taken further actions to enforce “naked” short selling rules that had been in place, but not enforced, for a significant period of time. This is an important protection for shareholders and for property rights. The sale of property (shares in a corporation) that a seller does not own and can’t deliver (naked short selling) is an affront to property owners, and a destroyer of confidence and trust. Much of the commentary around short selling ignores this simple fact.

While I understand (and often appreciate) the urge to critically evaluate possible regulation, it is interesting that there has been protest by those on the short side with regard to some of the rules that have been suggested. For example, the reinstatement of the uptick rule, which would require any short sale to occur at or above the last sale price on the stock exchange. Such a rule had been in place for over 70 years (to prevent “bear raids” in which short sellers aggressively sold stock at ever lower levels, undermining confidence) until it was repealed in 2007. It has been suggested that, because stocks are now traded in decimals rather than in 1/8 point increments, such a rule is obsolete or unnecessarily difficult to implement. However, what the opponents fail to point out is that companies who repurchase their own shares are advised to adhere to a rule that forbids those companies from initiating a plus tick when repurchasing shares. Why policymakers would favor an asymmetric application of a rule like this in favor of short sales and against company repurchases is a mystery.

Similarly, the SEC has required short sales of securities to be reported periodically beginning in the second half of 2008. Short sellers have prevailed on the SEC to allow this disclosure to be done privately on the basis of a claimed need to protect their investment strategies. While I respect this privacy right, investors who purchase and own stocks, however, are afforded no such privacy in their holdings. In fact, holders of securities are required to publicly file their holdings on a quarterly basis. Such public disclosures have been known to attract the interest of short sellers when institutional investors and hedge funds have found themselves under performance or redemption pressures. Again, it is a mystery as to why those who are owners of publicly traded companies are required to disclose their holdings while those who sell short those very same securities are permitted to keep their positions private…”

* * * * * * * *






Worldwide Economic Disaster Imminent Unless US Stops CDS Speculators Goldman, Morgan, and Others

January 28, 2009
A very important, well reasoned piece by The Institutional Risk Analyst at:  

suggests worldwide economic/financial disaster is imminent unless and until the US government cuts off CDS speculators like Goldman, Morgan, and others who have tens of trillions in monstrously leveraged negative CDS bets– but no underlying risk interest, so can’t deliver a bond.  The piece doesn’t quite say so, but the monstrous leverage is certainly tantamount to abusive naked shorting of the underlying debt/business– not to mention the self-perpetuating, self-fulfilling power it wields.

It makes several references to insurance industry standards– and argues for CDS protection to be available only to those with an underlying [sic. insurable] interest, (evidenced by being able to deliver the bond, the default of which, you were supposedly hedging with the CDS.)   

The piece refers to a powerful “CDS Mafia”– but refrains from mentioning that these gumbas ran roughshod over long-standing insurance laws by prestidigitating a market innovation that’s allowed them to walk away with billions in profits and destruction wrought–  but which would clearly be against public policy and therefore unenforceable, if called bond “insurance”– instead of a Credit Default Swap. 

a few excerpts:
“commercial banks, insurance companies and commercial companies, [are] all…targets for the CDS Mafia and the unlimited leverage they use as weapons against us all to generate speculative gains.”

 “The Fed and Treasury must immediately force the CDS market onto exchanges and go back to the pre-Delphi bankruptcy model to require physical delivery of the underlying bonds in order for purchasers of protection to collect their insurance payments.”

It’s about time this critical reality got some public “leverage.”   

Captured Congress, SEC and Financial Media Enabled Economic Meltdown

December 14, 2008

             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

November 8, 2008

The 3 below commentaries tell all:  

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.”  Copyright 2008


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


Dematerializing Assets

On November 5th, 2008 LibBerte says:
[From DeepCpature Blog Comments — Unreal! Says:
November 5th, 2008 at 9:16 am ]…

Good idea! Let’s take away the only means available for an investor to make sure that what he bought did indeed get delivered and explain it away as increasing “efficiencies” in the system. You had to know this was coming after the SEC admitted that there were so many delivery failures in the system that they couldn’t be bought-in en masse without “market volatility” issues and therefore they needed to be “grandfathered in”. After “grandfathering in” didn’t work out due to the public backlash then burying the bodies in the desert becomes the next best cover up. This cannot be allowed to happen until after all preexisting archaic delivery failures are purged from the system.

Physical Certificates Take a Step Closer to Extinction
by Edward C. Kelleher
The Depository Trust Company, (DTC), a DTCC subsidiary, has announced it will no longer issue physical certificates for withdrawals-by-transfer (WTs) for more than 5,500 issues beginning January 1, 2009.

DTC plans to eliminate WTs of physical certificates for all issues that participate in DTC’s Direct Registration System (DRS). Instead, DTC will process these WTs in DRS statement form. This change is pending approval by the Securities and Exchange Commission (SEC). (About 1,550 additional issues are eligible for, but not participating in, DRS and do not offer the investor the opportunity to receive a DRS statement.)

If permitted by an issuer, investors may take their DRS statement to their transfer agent and exchange it for a physical certificate.

Electronic ownership
DTC’s DRS is a book-entry system that enables investors to register their shares electronically with the issuing company or its transfer agents. Instead of a paper certificate, investors receive a statement of their holdings. In 2008, all the major and regional exchanges in the United States mandated that DRS become a listing requirement for all issues. (DTC is the only registered clearing agency operating a DRS.)

“Eliminating the issuance of physical certificates by DTC in withdrawals-by transfer transactions is part of our overall dematerialization effort aimed at eliminating all paper certificates [evidence] in the securities industry,” said Patrick Kirby, DTCC managing director, Asset Services.

“With the exception of equity securities, virtually all investment instruments in the U.S. including municipal bonds, options and futures and U.S. treasury and agency securities have adopted the book-entry format, helping to eliminate paper and dematerialize the securities industry,” said Kirby.

Paper costs
Both the industry and the government continue to encourage dematerialization. The SEC has recognized that paper certificates are “inefficient” and increase “risk.” According to a 2008 survey by the Securities Industry and Financial Markets Association (SIFMA), more than 1.2 million certificates are reported lost, destroyed or stolen annually, costing the industry about $65 million to replace.

Today, there are more than 7,500 issues eligible for DRS and more than 375 of these issues no longer offer the option of a physical certificate. DRS-eligible issues now account for 88% of all WTs submitted to DTC, and more and more investors are choosing book-entry ownership as opposed to physical certificates.

Ready to dematerialize
“DTC’s customers are committed to going paperless,” said Kirby. “In July 2008, for example, more than 44% of all WTs were processed as DRS statements rather than as physical certificates. That compares with just 20% processed as DRS statements a year ago.

Cost is a driving factor in the move to DRS statements. Today, a WT that calls for a physical certificate costs approximately $125 more than a WT in a DRS statement, which costs about $6. In keeping with the plan established by DTCC’s Board of Directors and its Operating Committee, fees for processing physical certificates will continue to increase in coming years.

Non-participating issuers
For issues that are DRS-eligible but not yet participating, DTC plans to eliminate certificate withdrawals for these issues as of July 1, 2009. “We’ll continue to work with these issuers and encourage them to begin participating in DRS, but we’ll also work with the exchanges and regulators to strengthen the exchange listing requirements mandating that listed issues actively participate in DRS,” said Kirby.
For the small number of issues that have not converted by July 1, 2009, WTs will be processed through DTC’s Exception/Rush WT process.

“With these steps, we believe that WT volume should drop to fewer than 150 certificate transactions per day by the second half of 2009. Over time, this will also lead to a sharp drop in deposits of physical certificates. As that decline takes hold, we will move to curtail remaining services that support processing physical securities,” Kirby said.



 “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


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.

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 )

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


Who is the SEC Really Protecting?

October 27, 2008


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.



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.

         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.

            The very next day Cox made another statement, the most important sentence of this release is as follows:

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.

            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.”

            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.”

            The nails in the coffin of the Form SH disclosure to the public were firmly hammered in on October 2nd 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. 

Remember, this all took place under the watchful eye of the SEC and they knew which hedge fund and investment entities were short which securities.  The SEC would have known which hedge fund and investment entities were able to secure legal “locate” numbers versus those that simply closed out their naked shorts in the marketplace.  The initial Form SH order was due prior to the markets opening on September 29, 2008.  More than 431 securities remained on the SHO List at that time and the markets had not yet begun to crash.  Was there coincidence in all that transpired in the markets or was there something more?  We have a couple theories that need a few more weeks of development to be completed but it is apparent that someone did not want the public to know the cards they were holding.  Thus, transparency was available to privileged few who again, prospered while the public-at-large remained susceptible to their manipulations.  In any case, it is obvious that the information that would answer these questions is available and it is time the public was able to access it.

        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.

Destroying Companies For Profit: Naked Shorting Explained as Never Before

October 25, 2008
As the American financial cancer metastasizes globally, savaging the well being of countless millions here and abroad, likely for years to come, it should never be forgotten that none of this had to happen; would not in fact have happened– without institutionalized disdain for the universal precept: thou shalt not steal.  

Lest anyone claim otherwise, at the heart of the matter is not mere “error”–  but nothing less than outright theft–  along with the grievous failure of those charged with protecting society against such crimes to do their job.  Whether by mis or malfeasance, those entrusted with and relied upon to safeguard the public interest– have mainly done the opposite.

Elected officials responsible for Congressional oversight turned a blind eye or pimped for even lower standards of transparency, integrity and accountability.  Accountants (of all people) ignored obvious conflicts of interest to help cook the books or hide a set offshore.  Professedly independent analysts issued false opinions that misled and defrauded investors, but made their hedge fund patrons fabulously rich.  Ratings agencies, the purest of the pure, forgot their job descriptions and allowed their favors to be purchased and/or dictated by their own customers.  Morally hazardous CDO and CDS “innovators” seduced captured regulators and others to recklessly ignore the text-book sine qua non of “insurable interest,” enabling unconscionably leveraged debt insurance obligations to be owned and manipulated by people with no “insurable interest” in the underlying companies; naked shorting at it’s most sophisticated and systemically disastrous. 

And could any of this have happened if the see-no-evil decision-makers at the Securities and Exchange Commission, ostensibly the public’s first and almost only line of defense against manipulation and fraud (thanks to the courts), had not betrayed their oaths and the public trust.  How?  By consistently disabling and or failing to enforce existing anti fraud and manipulation laws, to the cheers of the owners of the loathsome, conflict-ridden Depository Trust and Clearing Corporation (an oxymoron if their ever was one), thereby empowering the banking and securities industry to believe they could get away with virtually anything.  Which, alas, for all too many years, they surely have.

Another group played their own shameful part in the tragedy–  as noted in this seminal video, which performs the public service they should have– and could have– but didn’t. 

Destroying Companies For Profit:  understand Naked Shorting as never before   

Institutionalization of Lying, Cheating and Stealing Under Ruse of “more efficient markets”

October 11, 2008


It came as no surprise today to read long-time naked shorting denier and hedge fund shill Joe Nocera’s NY Times “woe is me” piece asking “so why didn’t we know any better?”   What a joker, that Nocera, (along with the editor who allows him to continually misinform and misdirect, especially as to the real causes and culprits of our financial meltdown.)

While those causes are in fact complex and diverse, they are all uniquely interrelated in origin.  There should be no mistaking the fact that the tragedy that has engulfed the world didn’t have to happen– would never have happened had the Wall Street/DC banking power structure not captured control of the system and decided to institutionalize lying, cheating and stealing under the ruse of “more efficient markets.” 

It would also not have happened if the once proud free press had not thoroughly capitulated and allowed the truth, known and spoken by many, to be repeatedly scorned, derided and ignored by Nocera and his wolves in sheep’s clothing cohorts.

Be there any uncorrupted journalists left, here are some more truths to be ignored to their– and our collective peril.  


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?


* * * * * * * *

If you’d like to place that bet on the Morgan Stanley data (I’ll give 2:1 odds that it will show short sellers offloading massive amounts of phantom stock , with more than a million “failures to deliver” every day) feel free to contact me.


* * * * * * * *

Posted in 9) The Deep Capture CampaignThe Mitchell Report | 10 Comments »

Roddy Boyd Sucks It Like He’s Paying the Rent

October 10th, 2008 by Patrick Byrne

In the adult novelty & video arcade shop that is our New York financial establishment, one of the mop-and-bucket spooge-boys is Roddy Boyd, formerly of the New York Post (for folks who move their lips when they read Entertainment Weekly), and currently, of Fortune Magazine (also known as “People Magazine for Capitalists”). I have met Roddy on occasion, and a more seedy and furtive character would be difficult to name. I once knew a one-eyed Chinese guy named “Chaney” who ran a Bangkok pawn shop/mail-drop who turned out to be working for Taiwanese, Chinese, and Soviet intelligence, simulatenously, but by appearances anyway, Chaney was a model of probity and fair-dealing when compared to Mr. Boyd.

Admittance into Roddy’s New York financial journalism spooge-bucket-brigade is conditional upon acceptance of The Fundamental Principle and First Corollary of that illustrious fraternity:

The Fundamental Principle – Hedge funds can do no wrong, particularly if they belong to a small constellation whose brightest lights are Stevie Cohen, Dan Loeb, David Einhorn, Jim Chanos, David Rocker & Marc Cohodes.

The First Corollary –  If any corporation or individual appears to have been wronged by activities of any of these hedge funds, using methods up to and including stock counterfeiting and manipulation, blackmail and intimidation, use of private eyes and internal moles, inciting endless and expensive  investigations that go nowhere, and so on and so forth, it must only be because they deserved it (for proof, see The Fundamental Principle).

Today Fortune Magazine’s Roddy Boyd gives fine illustration of these rules in an article on  Copper River Partners (née Rocker Partners). This is the same Copper River/Rocker Partners whose exploits are chronicled throughout DeepCapture, and who have been frequent beneficiaries of reportorial lotion-jobs from Karen Richardson, Roddy Boyd, Herb Greenberg, and Jim Cramer, and have been long-time recipients of  Bethany McLean’s highly-regarded regulars-only service. (Full disclosure: Copper River is also on the business end of a Marin County lawsuit filed by, in which I played modest role.)

In today’s think-piece, Roddy treats us to such insights as:

  • “But for noted short-sellers Copper River Management, a $1 billion hedge fund based in Larkspur, Cal., the month turned into a perfect storm. A devastating combination of counter-party failure, sudden regulatory edicts and margin calls conspired to turn the fund’s performance on its ear, leading to a 55% loss in just two weeks.” Translation: In the last two weeks Copper River lost over half of its billion dollars, not through any decisions made there: instead, counter-party failure, regulators, and those pesky margin calls “conspired” to create “a perfect storm” that lost the half-billion dollarts.
  • In case the point was lost that none of this had to do with the quality of Copper River’s investments, Roddy Boyd writes it out. He really does, in those words: “What’s worse for Copper River is that the battering had nothing to do with the quality of its investments.”
  • We are treated to a bit of financial arcana: “On top of that, as Lehman unwound its own internal hedges to the Copper River trades, its trading desks bought shares of these companies, driving up their prices and leading to losses for Copper River.” Translation: Lehman sold Copper River puts that Lehman then hedged by shorting stock, most likely in more flagrant abuse of the option market-maker exception, and when Lehman covered its shorts it hurt Copper River, whose investment strategy assumes an environment where shorts don’t have to cover (and understandably so). As far as Copper River and Roddy Boyd are concerned, the possibility that shorts would have to “cover” (that is, “at some point come into the possession of”) things they sell is a damn imposition.
  • As though that litany of impositions were not harrowing enough, Roddy chronicles the further injustices suffered by Copper River: “That was bad enough, but on September 19, the bottom fell out for the fund. That was when the Securities and Exchange Commission ordered unprecedented restrictions in short sales” (as our nation’s financial system was imploding). And further, “As prices in those stocks shot upwards, Copper River was forced to cover – or buy back – some of its positions at steep losses. “ Clearly this further injustice is intolerable: how could a hedge fund such as Copper River ever be expected to make money if it sells things expecting them to go down, and they go up? And lastly, “The rising stock prices also led to a series of margin calls (demands for additional cash collateral to be deposited in a margin account) from Goldman Sachs, Copper River’s prime broker.” I’m with Roddy on this one: it’s just damn inconsiderate of Goldman Sachs to insist that Copper River have funds to back its play.

Perhaps I am too hard on Roddy.  “Out of the crooked timber of humanity no straight thing will ever be made”, and all that. A gal moves to the big city, gets behind, does things of which she is not proud. Molded are we all of imperfect clay.

But normally, she doesn’t write home about it.

It’s just Roddy’s ill fortune to have to do these things in national print.

Posted in 9) The Deep Capture Campaign | 3 Comments »

CNBC Spectacle Precedes Naked Short Massacre

October 9th, 2008 by Mark Mitchell

So the SEC today lifted its ban on short-selling, and all but declared open season for law-breaking naked short sellers to start destroying companies again – and who does CNBC have on for two hours as its honored “guest host”?

None other than Jim Chanos, the salamander-slick director of the short-seller lobby.

Asked about naked short selling, Chanos said, with a straight face: “Anytime a hedge fund or short seller shorts a stock, it is a legitimate short. We have to get a locate or pre-borrow from the broker….”

Chanos continued: “The one thing I have in common with Patrick Byrne, chairman of [and Deep Capture reporter], is that we are calling for strict, strict delivery…in terms of delivering shares…that is how to end this naked short selling…”

CNBC, which serves as a sort of seedy massage parlor to the short selling community, gave Chanos the usual treatment – lubrications and sweet nothings. No tough questions. No retorts to his outlandish assertions. No wondering aloud as to his absurd and self-serving logic.

Let’s get this straight.

Not long ago, Chanos insisted that naked short selling did not occur.

Now, he says naked short selling occurs. But it’s not short sellers who are naked short selling. Short sellers make sure their brokers borrow real stock before they sell it.

In any case, Chanos acknowledges that short sellers’ brokers are not borrowing real stock before they sell it. That is why they are not delivering the stock. And that is why he claims to agree with Patrick Byrne that there needs to be “strict, strict delivery.”

But Chanos is against a ban on naked short selling (which would force short sellers to borrow real stock, thus ensuring delivery). Chanos says that a ban on naked short selling would destroy “market efficiency.”

So, to summarize the Chanos position: Naked short selling didn’t occur, but now it occurs, except short sellers don’t do it, and the SEC shouldn’t ban it because the market would cease to function properly if short sellers were forced to stop doing what they don’t do.

And given that so many shares are failing to deliver (after being sold naked by short sellers who never sell naked), Chanos is calling for “strict, strict delivery” of stock (while praising the SEC for its “strict” new rules which stipulate that nothing happens to short sellers who fail to deliver stock).

CNBC treated us this morning to two hours of Chanos nonsense. At one point this charlatan even insisted that short sellers aren’t short selling financial stocks at all. Really, he said short sellers aren’t short selling. Period. Take his word for it. CNBC did.

That was around 7:30 AM, right after CNBC’s Becky Quick referred to Chanos as “the legendary short seller….er, investor.”

At 9:30 AM, the markets opened and the criminal naked short sellers…er, investors…went back to work, unfettered by the SEC’s “strict” new rules.

Within an hour, Morgan Stanley was down 25%.

* * * * * * * * *

Posted in 9) The Deep Capture CampaignThe Mitchell Report | 6 Comments »

Naked Hunting Season to Resume Tomorrow

October 8th, 2008 by Mark Mitchell

In a few hours, the SEC will lift its ban on short-selling of 900 stocks. That is well and good, except that it appears that hedge funds will also be permitted to resume abusive naked short selling – offloading stock that they do not possess in order to dilute supply and drive down prices.

Given that naked short selling precipitated the collapse of Lehman Brothers, which triggered global panic, it seems fair to say that the resumption of naked short selling could precipitate the collapse of another big bank, which will fuel still more panic, and then we will really be screwed.

Say what you will about Lehman’s balance sheet, that company was not going out of business until its stock price hit rock bottom, making it impossible to raise capital, and triggering a run on the bank. The stock price hit rock bottom because it was bombarded by naked short selling and false rumors.

Some financial media have been cheering the imminent lifting of the short-selling ban. According to these journalists, the ban did not prevent the stock market turmoil of the last couple weeks. Therefore, lifting the ban should not make things worse and short-selling is good for the markets and blah blah blah.

The media never cease to astound on this issue. The fact that markets have been bad does not mean they wouldn’t have been a whole lot worse without the ban. And if short-selling is good for markets, this is fully besides the point. The point is that naked short selling is most definitely not good for the markets, and, as of tomorrow, that very not-good-for-the-markets activity is going to be allowed to resume with the full acquiescence of the SEC and the financial media.

Look, on September 16, Morgan Stanley was trading around $26. On September 17, it hit a low of $11. The stock was slashed in half in less than a day. That tends to happen when a company is under a full-scale attack by naked short sellers.

On the day after Morgan Stanley was slashed in half, the SEC banned short selling. It is fair to say that if the SEC had not acted, Morgan Stanley would not be with us today.

After the SEC banned short selling, hedge funds stopped circulating false rumors about the companies they had been attacking. Today, in anticipation of the short selling ban coming to an end, hedge funds began circulating false rumors about Morgan Stanley – the most damaging being that Mitsubishi had pulled out of an agreement to inject $9 billion of capital into the bank.

What happens tomorrow when those rumor-mongering hedge funds resume naked short selling?

As one prominent economist said, forebodingly, “We will see.”

Posted in 9) The Deep Capture CampaignThe Mitchell Report | 22 Comments »

NYT’s Nocera Digs Deep Into Naked Short Selling Scandal

October 7th, 2008 by Mark Mitchell

In testimony before Congress yesterday, Richard Fuld, the former CEO of Lehman Brothers, said that (criminal) naked short selling precipitated the demise of Bear Stearns and Lehman, and nearly toppled Goldman Sachs and Morgan Stanley.

Given that not only Fuld, but also the CEOs of Goldman Sachs, Morgan Stanley, JP Morgan and a good number of traders on Wall Street – along with John McCain, Hillary Clinton, the Chairman of the SEC, the Secretary of the Treasury, and countless others in Washington — have all now implicated naked short selling in the hobbling of the American financial system, you would think that the mainstream media could produce just one investigative report – just one story taking a serious look at this criminal activity and its recent effect on our markets.

Instead, we get the usual platitudes from the likes of Joe Nocera at The New York Times. He writes:

“Mr. Fuld, in typical C.E.O. fashion, claimed to take ‘full responsibility’ for his actions — but spent the entire time blaming others for Lehman’s downfall. Early in his testimony, he even blamed [emphasis mine] ‘naked short-sellers’ who passed along “false rumors” that started a run on his bank.”

By Nocera’s standards of anti-investigative journalism, a serious issue is settled not with data or evidence, but with one word – “even.” Could naked short selling have triggered the bank run that has Chernobyled our financial system? Can’t be, writes Nocera, because Lehman’s CEO “even” said it can be.

Nocera continues: “As both The New York Times and The Wall Street Journal pointed out in lengthy stories on Monday, Mr. Fuld had assets on his books that were wildly overvalued.”

So, apparently, Lehman could not have been a victim.

A woman who once shoplifted is raped in an alley. Was she raped? No, because she was a shoplifter and she “even blamed” the rapist.

Keep in mind that Nocera once encouraged an assembly of his media colleagues not to investigate naked short selling. “Life’s too short,” he told a panel audience at the annual conference of the Society of American Business Editors and Writers. “I don’t want to do it.”

Well, somebody should do it – and fast – because the SEC is going to lift its ban on short selling tomorrow, and there are no signs that it’s going to force hedge funds to borrow real shares before selling them.

So it will once again be open season for naked short selling – and market destruction. Countless more companies will fall prey to an easily preventable crime. And more CEOs will “even” point fingers at the criminals while Joe Nocera and the Media Mob stand idly by.

* * * * * * * *

If any journalists are interested, here is Fuld’s testimony:

“The second issue I want to discuss is naked short selling, which I believe contributed to both the collapse of Bear Stearns and Lehman Brothers. Short selling by itself can be employed as a legitimate hedge against risk. Naked short selling, on the other hand, is an invitation to market manipulation. Naked short selling is the practice of selling shares short without first borrowing or arranging to borrow those shares in time to make delivery to the buyer within the settlement period – in essence, selling something you do not own and might not ultimately deliver to the buyer.

Naked short selling, followed by false rumors, dealt a critical, if not fatal blow to Bear Stearns. Many knowledgeable participants in our financial markets are convinced that naked short sellers spread rumors and false information regarding the liquidity of Bear Stearns, and simultaneously pulled business or encouraged others to pull business from Bear Stearns, creating an atmosphere of fear which then led to a self-fulfilling prophecy of a run on the bank. The naked shorts and rumor mongers succeeded in bringing down Bear Stearns. And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers. In our case, false rumors were so rampant for so long that major institutions issued public statements denying the rumors.

Following the Bear Stearns run on the bank, we and many others called on regulators to immediately clamp down on naked short selling. The SEC issued a temporary order that went into effect on July 21 prohibiting “naked” short selling of certain financial firms, including Lehman, Merrill Lynch, Fannie Mae and Freddie Mac. This measure stabilized the share prices of Lehman Brothers and the other firms. However, this restriction was temporary, and on August 13 it expired after 17 trading days. History has already shown how wrong and ill-advised it is to allow naked short selling.

Many of the firms that have recently collapsed or have been forced into emergency mergers, takeovers, or government bailouts – Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, AIG – did so during the gaps of time in which there was no meaningful regulation of naked short selling. On September 15, when the market opened after the collapse of Lehman, naked shorts appeared to turn their attention to Morgan Stanley and Goldman Sachs. In the three days between the announcement of Lehman Brothers’ bankruptcy and the SEC instituting an emergency ban on short selling,

Goldman Sachs’ and Morgan Stanley’s share prices fell 30% and 39% respectively.

None of this was a coincidence.

After seeing this stock price reaction in the week following Lehman Brothers’ bankruptcy, the SEC, like the Federal Reserve, took immediate action to stabilize the system. On September 18, following the decision of the Financial Services Authority in the United Kingdom a day earlier, the SEC instituted an emergency ban and other restrictions on short selling financial institutions. In taking these steps, Chairman Cox explained: “Given the importance of confidence in our financial markets as a whole, we have become concerned about the sudden and unexplained declines in the prices of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence without a fundamental underlying basis. The crisis of confidence can impair the liquidity and ultimate viability of an issuer, with potentially broad market consequences.” These new restrictions are set to expire no later than October 17. Permanent regulation of naked short selling is needed to prevent a similar demise for the firms that survived with the government’s help.”

Où est le Quatrième Pouvoir? Is the truth so unspeakable?

December 24, 2007
An open letter to leading journalists re their silence on government enabled Wall Street crime.

Dear Journalists:

While pandering politicians and milquetoast media gush and flush over steroids, dogfights and other drivel dujour, there are people out there stealing trillions of OUR very own real money– and being allowed, if not enabled to get away with it because those legally responsible for protecting the investing public and enforcing the laws on the books– do just the opposite; with no one, including most of y’all, doing much of anything to hold anybody accountable.   Où est le Quatrième Pouvoir?

It wasn’t just the Inspector Generals at State and the EPA who resigned with plenty to be ashamed of.  But when the SEC’s longtime IG ignominiously flew the coop after a major coverup and years of looking the other way, for you guys, it was a non-event.  How come?   
Various sections of the US Securities & Exchange Acts expressly oblige the SEC to refrain from and prohibit any acts that harm the investing public — yet they have regularly, consistently, almost addictively ignored the statutes’ mandate– to instead permit and thereby encourage explicitly proscribed conduct that unfairly and illegally steals from the public to enrich hedge funds, investment banks, broker-wheeler-dealers and other market insiders– all to the extreme prejudice of the investing public and the global credibility of US capital markets.
Contrary to the odious blather of SEC Chairman Cox, our markets are not “the gold standard of integrity”– but of fraud and deceit.   

If they can raise capital elsewhere (and they can), European and Asian companies avoid US exchanges not because our reporting requirements are too stringent, but because they know our securities markets are murky cesspools of manipulation and malfeasance, and want no part of them (no matter how much Senator Chucky spins-for-his-supper to the contrary).

Do you all just accept that the US stock markets are thorougly corrupt– and you’re just not allowed to talk about it– except under cover of spineless adolescent epithets like mischief, hijinx, and shenanigans?  Why are those words always used to chide billion dollar Wall Street criminality– but never the common thief who steals far less?

And how come former SEC chairman Harvey Pitt’s recently pronounced Ten Requirements For a Level Playing Field,* a pragmatic blueprint for real market reform, was, for most of you, another non-event?   As if it had never happened.  The former head man speaks the truth about the markets, and how to fix them– but it’s of no interest to you?  Duh?  
Don’t you all have pension funds/investments of your own?  A trust fund, or something tucked away for your old age or your family’s security?   

So what about it, Lou Dobbs?   You know the market down and dirty.  Does it commit more or less egregious crimes than the lettuce pickers?  Why not vent your righteous wrath on the big bucks being cherrypicked by the un-policed counterfeiting and trading of phantom shares, entitlements, and off balance sheet “swaps,”*** mere ghosts of the legal securities they kidnapped and “dematerialized” **  to hide the ugly truth from the unwitting, chronically uninformed, misinformed lambs of the investing public.

Come on, Paul Krugman, you’re a trained economist and an astute political observer.  What you write about lack of foresight and oversight from the Fed applies no less to the crime-blind, investor-betraying SEC.  How can you possibly not know this?  Like your ever-equivocating quipster colleague Ben Stein, you’ve probably got some hedge fund pals too, but are you really unaware of Wall Street’s intentionally opaque, sinisterly skewed playing field and the grievous injury it perpetrates on the tens of millions of American investors former SEC honcho Arthur Levitt described as “the most undersupported and underrepresented constituency in the country”? 

And you, Gretchen.  I know you know the score– and that the SEC’s failure to protect the public arises not from computer shortages– but from gross ethical deficiencies– from the top down!  Just which editor is it at “all the news that’s fit to print” who tells you if the shoe fits Wall Street– it’s too tight for the NY Times?  Is that why neither you nor any of your brethren have sifted the cover story to enquire as to how the Milberg Weiss firm just happened to have plaintiffs handy to sue certain companies just after certain hedge funds had established huge short positions therein?   

Don’t you all know enough already about the massive lies and manipulation that occur daily in the markets to at least wonder whether you actually own what your monthly brokerage statements say you own?   

And what about that $192 billion in undelivered securities– on the NY Stock exchange alone?  Shares people bought and paid for in good faith, but somehow never received– even though the sellers got paid and the brokers on both side of the transaction got paid…  It’s likely that $192 billion is but a fraction of the real figure which could be ten or twenty times greater if you factor in offshore and off the books transactions.  

Keith Olberman– you deserve a medal for your outspoken courage and integrity, but if ever your on-the-nose, call-a-spade-a-spade indignation was needed, it is here and now regarding the wild west, oversight-free, government-abetted, institutionalized corruption of our capital markets that sacrifices companies, lives, and highly desirable medical and technological advances to the unchecked greed of free-roaming market predators with “juice” (as a senior SEC officer recently called it).

How can you all be so sure none of those phantom undelivered shares are in your own accounts–  represented only by the IOUs of your trusty broker– rather than the actual shares and bundle of stock ownership rights you thought you bought, including voting rights and the right to receive a real dividend taxable at only %15– rather than a broker’s pseudo-dividend “payment in lieu of dividend,” taxed at much higher ordinary income rates?  Better check that tiny print in your brokerage agreement.

For those not already o & o, or should I say “captured” by the $ecurities industry– how can you just ignore reality?  Or are you indeed, forbidden to think or write the truth?  If so, it’s very sad, because one of these days, the truth will out– at least on this subject. Thanks to the internet and the dedicated efforts of market reform advocates like Byrne, OBrien, Patch and others, too many people already know!  The secret is out!  And the roster of shareholder and company victims is expanding exponentially– along with their outrage and disgust at the pompous pretense of law enforcement and integrity;  a sanctimonious hypocrisy that punishes a Martha Stewart and the occasional teenage tout– but gives a virtual free pass to professional Wall St. thieves who steal with impunity in a zero sum game they have rigged, to near perfection. 

We no longer have to wait for Steps 8 (Restrict the Press) and 10 (Subvert The Rule of Law) of Naomi Wolf’s prescient End of America warning.  Regrettably, they are already upon us.  And where are you, once noble knights of the Fourth Estate? 

Most sincerely,
R. M. Rosenthal

*Former SEC chairman Harvey Pitt’s Ten Requirements For a Level Playing Field:

“First, SROs and the SEC need actively to pursue ongoing chronic and serial short selling infractions. 
Next. Meaningful penalties have to be imposed for violations of existing Reg SHO requirements. 
Third, the SEC should define and punish as fraud, abusive naked short selling practices. 
Next. The SEC should act quickly and forcefully, otherwise, state regulation is more likely. And as I’ve already said, I don’t think that’s the best way to go. Our capital markets work because they’re governed by uniform rules from Portland, Maine to Portland, Oregon. State regulation means fragmented requirements, practices, and procedures, and could cause loss of our competitive edge.
Next. The SEC should eliminate the option market maker exception. It isn’t demonstrably of any value, and it risks facilitating illegal activity. 
Next. Reg SHO should impose firm locate requirements as a condition precedent to all short sales. 
Next. Reg SHO should cover securities that are also traded in the pink sheets. Naked shorts occur in the shares of small, thinly traded issuers, and those are likely to trade in the pink sheets.
Next. Chronic and unjustified violations of T+3 settlement rules should be punished. 
Next. Before brokers are allowed to borrow margin shares, they should make clear disclosure and give investors the opportunity to opt out. 
Next. Securities lending should occur openly and transparently at arm’s-length prices, enhancing returns, increasing efficiency, promotion valid short selling, and curbing abuses.
Next. The NSCC should allow members to settle borrowing and lending activity through these facilities that I’ve just mentioned so accurate accounting and data is available to market participants and regulators. 
Next. Shady activities thrive in shadowy market corners. Exchanges in other markets should be required to report the securities on daily threshold lists and aggregate daily volume of fails for each such security. 
And, finally, Form 13F institutional investor reports should disclose both short and long positions. That would provide issuers and investors with a better understanding of trading activity.”


Starting in 2008, the exchanges and broker-dealer owned and controlled DTCC are requiring companies to make all their outstanding shares eligible for DRS (Direct Registration System), otherwise known as the “dematerialization” of stock certificates.  If they succeed in this scurrilous scheme, it will mean the elimination of all paper stock certificates and any way of EVER reconciling the actual number of real shares extant in the clearance and settlement systems.  Just like attempts to eliminate paper ballots and any paper trail via electronic voting machines, the elimination of stock certs would enable the criminals to eradicate the only existing physical evidence of their wrongdoing.  No oversight. Just trust us.





Re: Lenin: Repeat A Lie Often Enough….
By wiki on 12/9/2007 9:25 PM
 –  swaps to simulate a call off balance sheet. 

“The first swaps were commonly used as a way to hedge exposure to market risk for a low fee. For instance, if a trader decides to short sell a stock, there is considerable “market risk” if the stock price rises. In order to hedge that risk, the trader could enter a swap agreement for the same stock, paying a small fee to “hold” it while not actually having to pay for the stock itself. In this case if the stock price does rise, they simply end the swap and use the stock to pay off the short. In effect, they are buying insurance against their position. Known as total return swaps, in these contracts all cash flows, dividend payments for instance, are payed or received by the holder as if they owned the stock directly. Yet for accounting purposes they are off-balance sheet and do not appear as an asset (they do not legally own the stock in question).”
Re: Lenin: Repeat A Lie Often Enough….
By wiki on 12/9/2007 9:26 PM
This swap thing could be REALLY important.
As I understand it:
Let’s say Mr. Short has attacked a victim company and is short $10 million worth of that company’s stock. He is at great risk if the stock goes up, so he does a deal with the prime brokerage. He explains to them that he is going to continue to short the sh_t out of the victim company, so it likely won’t go up, but he enters into this deal.
He agrees to pay the prime brokerage the 5% interest on $10 million if they agree to pay him any capital gains and dividends on $10 million worth of the victim shares.
He hasn’t put up a dime for this agreement. At 5%, he pays $42,000 per month to in effect insure his short position. He pays them interest on money that doesn’t exist and they agree to pay him the upside on shares that don’t exist. Because the SEC has said a long contract is the same as owning the shares, he isn’t technically short. His long contract cancels out his short position, so he doesn’t need to borrow real shares. 
He shorts 40 million shares of victim co. at $25
He needs to put up 102% of the net value, but he has the proceeds from the sale, so he has to put up 2% or $200,000 as collateral.
A) Outcome A, stock down 20%: He’s bet well and the stock has gone down to $20 six months later. He’s only tied up $200,000 of his own money + ($42,000 x 6). He buys back in at $20, for 8 million and the prime brokerage gives him back his $200,000 collateral.
He makes $10 million – $8 million – $252,000 in swap fees or $1,748,000. I’ll say it again, on risking $200,000 in collateral and promising to pay $42,000 per month, he has made almost $2 million.
B) Outcome B, stock running like stink and is up 100% to $50. No problem, he just collapses the swap. His profit on the swap is exactly equal to his loss on his short position.
He gets back his collateral, so that doesn’t matter. His loss is only 6 x $42,000 or $252,000.
C) Outcome C, stock goes to zero. He makes $10,000,000 – $252,000 or $9,748,000
Both sides can’t lose. The prime brokerages don’t care as they’ve agreed amongst themselves to just net to create infinite numbers of claims on real shares. They know they can’t ever be bought in and they make fees on every transaction they do with their hedge fund customers. Most of the time it will go down and they get paid interest on money that doesn’t exist. They also keep the interest on the 102% cash while it is being held as collateral and the profits will likely continue to sit in their coffers for the next deal.
The hedge funds can manipulate stocks down without any fear of a squeeze. The worst that can happen to them is they lose their interest payments for the time they were short.
The contract is off balance sheet and not taxable to either party as no one bought anything and there is no capital gains. It’s only a swap of cash flows that nets to nothing.
Imagine if you are the SAC Capital sized hedge fund manager. For the cost of the interest payment, you can balloon your assets by 50 times, then collect your three percent management fee, EVEN IF YOU LOSE.
What I’ve described is an equity swap, but they do it for interest rates, currencies, etc., putting the whole world financial system at risk. No wonder they are afraid to buy anyone in.
“The five generic types of swaps, in order of their quantitative importance, are: interest rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps.
The Bank for International Settlements (BIS) publishes statistics on the notional amounts outstanding in the OTC Derivatives market. At the end of 2006, this was USD 415.2 trillion (that is, more than 8.5 times the 2006 gross world product).”
The reason they are called “OTC derivatives” is these agreements trade over the counter similar to the way options trade and the cash flows are tied to the percentage change in the underlying asset.


the foregoing was emailed to:

To:, keith olbermann <>,, walter hamilton <>, Dan Jamieson <>,, Bill Oreilly <>, Joe Scarborough <>,, Ben Stein <>,
Cc: Robert Greenwald <>,, crooks liars <>,, Liz Moyer <>, fran kessler <>, 



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December 24, 2007

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