Army Of Avarice Plunders America Into Calamity That Did Not Have To Happen

December 3, 2009

Every legit competitive sport has rules of conduct governing how the game is to be played, all conceived to maintain the fairness, honesty and integrity of the process.  Umpires, referees, linesmen, field judges and alike don’t hesitate to impose sanctions the moment they spot an infraction.  Break a rule, you’re penalized, benched, fined, out of the game, out of the sport, maybe even for good.  Congress and the media repeatedly tell us the American public would tolerate no less, even though the overwhelming majority of sports fans have nothing more than a mere rooting interest in the outcome; no “skin” as it were, in the game– except gamblers, who have all the more reason to want it to be on the level, unless they’ve already fixed it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.



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?


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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.


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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 <>,