If your answer included any of number regulators or congress with its oversight duties or the traditional media with its watchdog of the public duties sorta answer, that would be a wrong answer. There were so many articles today about past and present Wall Street tomfoolery that I almost forgot to check the Wall Street Journal or The Hill. Instead, I”m relying on my subscriptions to things I’m supposed to be reading in the bath tub with Chopin playing in the background and a glass of Pinot Grigio nearby. Today, the best read came from Vanity Fare and was written by Andrew Ross Sorkin. (My Vanity Fare showed up today along with my latest copy of The Economist with the cover shouting “After the Storm: How to make the best of the Recovery.” ) My bottom line is still that Wall Street caused this and they are not only NOT cleaning it up, they are not being cleaned up.
I’m also checking out Matt Taibbi and TaibBlog now that his infamous vampire squid article in July’s Rolling Stone defined the shadowy world of Goldman Sachs better than just about any thing I’ve recently read. Matt’s blog today takes on naked selling or ‘naked swindling’ in the succinct framing of the Wall Street Deal that I now consider better jargon than that of the derivatives blah blah blah that I was taught in any of my PhD level corporate finance or investment classes. I may be able to do the proof for the Black Scholes formula but I will never be able to prove its social usefulness.
Actually, this takes me back to the Grey Lady and my first read of the day about the now bankrupt Simmons Bedding company that was the cash cow purposely inflicted with mad cow disease. Now days, it’s still more about the arbitrage deal and the leveraged deal that produces dividends than it is about what a company produces and the lives of the workers and long time managers who produce valuable stuff. It’s no longer build it and they will come. It’s leverage it to the hilt, take your dividends now, and find the next sucker with the next model that can hyperactivate the milking machine. It’s another real life example of Gordan Gekko and the greed is good speech. Spend some time with the Simmons story before you hit Taibblog and definitely the Sorkin article in Vanity Fare. It’ll put you in the right frame of mind.
The Sorkin article in Vanity Fare is excerpted from his new book “Too Big to Fail” due out shortly. We know the players. A year after the Lehman meltdown, we know them as well as we’ve known any two treasury secretaries since Alexander Hamilton and any Fed Chairman. The drama is palpable and the scent of desperation in the actions of grumpy old white men can’t be be missed. This should’ve been the Waterloo of the investment bank and the hyperleveraged deal. Instead, they’re at it again, big time, and tucked behind the tax payer funded, cozily regulated world of the staid traditional banker with money so cheap it that it shoulda come from eBay or your neighborhood Dollar General.
The bomb didn’t explode then. It’s just been reset to go off at a later time with the infusion of hard earned dollars of the American taxpayer and the jobs of 10% of the American labor force that is facing some of the worst job market numbers ever while the curtain folds on their American Dream. We still got naked short sells. We just are short of about 15 million jobs.
These are the same folks that every one trusts with the insurance policies also. Why are we tolerating this like a herd of narcoleptic sheep?
Paulson knew this was his financial panic. The night before, chairman of the Federal Reserve Ben Bernanke had agreed it was time for a systemic solution; deciding the fate of each financial firm one at a time wasn’t working. It had been six months between the implosions of Bear Stearns and Lehman, but if Morgan Stanley went down, probably no more than six hours would pass before Goldman did, too. The big banks would follow, and God only knew what might happen after that.
And so Paulson stood in front of his staff in search of a holistic solution, a solution that would require intervention. He still hated the idea of bailouts, but now he knew he needed to succumb to the reality of the moment. “The only way to stop this thing may be to come up with a fiscal response,” he said.
Well, that is the drama and the players who strut on the stage fretting away their precious few hours. Behind the scenes there is this explained by the likes of Matt Taibi on is blog in a video.
This doesn’t sound all that dramatic and as video sequences go, it sure as hell isn’t the Paris Hilton sex tape. But this is an example of how naked short-selling can happen. If you don’t need to actually find the stock before you sell it, there’s no real brake on speculative naked short-selling. If a clearing firm will give you a locate no matter how big your request is, there is no real barrier out there to stop this kind of activity.
Why does this matter? Let’s say there’s a big company that is coming under attack by short-sellers — let’s take Bear Stearns for example. Let’s say it’s March 11, 2008, and Bear stock is trading at $62, but dropping. Once the run begins and the stock price begins to fall, you might see day traders piling on. If they don’t need to actually locate Bear stock, they can simply sit there and batter the hell out of it all day long by continually selling short without locating the shares first.
The best explanation I’ve seen of this problem comes from John Tabacco, the founder and CEO of Locatestock. Full disclosure: Tabacco’s company offers services designed to avert the problems of naked short-selling by using a new technology (invented by Tabacco) that provides real and legal locates to traders. So he has a financial interest in outlining these problems. He’s also a garrulous right winger who has a Sean Hannity-style TV show and probably doesn’t agree with me about anything outside finance. But he’s a great guy and has taken a lot of time to talk to me about Wall Street in recent months.
Tabacco gave a speech about this issue back in April in which he talked about the effect of day traders repeatedly hitting a stock without locating the shares first. He speculates that some of this played a role in the Bear and Lehman episodes, among others.
“The more artificial intra-day selling pressure is impacted on a single stock, the more the pool of real shares is diluted,” he said. This, in turn, creates a “cyclical spiral” in which the issuer’s “real shares are detrimentally harmed, and in some instances that we’ve seen lately, beyond repair.”
Or you can read Naked Capitalism with today’s big Question: Why is Goldman allowed to game the system? OR for that matter you can look into how we were gamed by the folks out there paid to protect us. This is from ABC: Government Watchdog Says Treasury and Fed Knew Bailed-Out Banks Were Not Healthy: Senior Officials Had Financial Concerns About Nine Bank Institutions Receiving TARP Funds.
Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (SIGTARP), says that despite multiple statements on Oct. 14 of last year that these nine banks were healthy and only receiving government funds for the good of the country’s economy, federal officials knew otherwise.
“Contemporaneous reports and officials’ statements to SIGTARP during this audit indicate that there were concerns about the health of several of the nine institutions at that time and, as detailed in this report, that their overall selection was far more a result of the officials’ belief in their importance to a system that was viewed as being vulnerable to collapse than concerns about their individual health and viability,” Barofsky says.
Then riddle me this, why is all the real news coming to me via The Rolling Stone and Vanity Fare? Meanwhile, look over there … Rio’s going to host the Olympics while I’ll be eating at the restaurant at the end of the Universe. Oh, and did I mention that Letterman abuses his celebrity and status to sleep with interns? Wanna see some REAL extortion, go read the Sorkin article.
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