Naked-Shorting Datapoint of the Day, Carl Icahn Edition

Nathan Vardi, to his credit, doesn’t use the term “naked shorting” in his story today about a dispute between Carl Icahn’s High River Limited Partnership and Goldman Sachs (GS). But that’s what he’s talking about — and, interestingly, the securities in question aren’t stocks. They’re bank loans:

“High River apparently ’sold short’ the bank debt, anticipating that the market price of the bank debt would decrease,” Goldman says in its lawsuit…

“Neither the fact that High River did not own the bank debt at the time it entered into the contracts, nor the fact that the market has moved against High River, nor any other reason, excuses High River from meeting its contractual obligations,” Goldman says.

High River of course says it will contest the lawsuit. But would naked-shorting Delphi loans even be illegal? They’re not exchange-traded securities, after all, and all we’re really talking about here is a bilateral contract between High River and Goldman under which High River agrees to sell certain loans at a certain price. It’s foolhardy to enter into such a contract if you don’t actually own the loans in question. But is it illegal? That’s less obvious.

Comments

[Tony Petroski:]

Where I come from, selling what you don't have is called fraud and the authorities (on rare occasions) prosecute such cases.

Oct 14 03:45 PM

[Alex Filonov:]

Naked short selling of Treasuries is not against the law or any rules. Probably the same is true for corporate debt, unless it's traded on stock exchange.

To Tony Petroski: short selling is selling something you don't have, by definition. You might (and, in case of stock, have to) borrow this something before selling, but you don't own it.

Oct 14 04:35 PM

[Tom Armistead:]

He who sells what is not his'n,
Must buy it back, or go to prison.

Oct 14 05:02 PM

[nym:]

Unless he's too big to fail.


On Oct 14 05:02 PM Tom Armistead wrote:

> He who sells what is not his'n,
> Must buy it back, or go to prison.

Oct 14 08:32 PM

[Moon Kil Woong:]

Well it seemed ok for Goldman to buy derivatives on mortgages that they didn't own from AIG which is esentially shorting them x 100 times or more. And Goldman certainly didn't mind making the taxpayers pay out to them when AIG couldn't. And Goldman can't claim they didn't know because they were often the ones packaging and selling the bonds and contracting with AIG to insure them. And you wonder why Paulson and his Hedge fund got so big and rich so fast.

So I'm wondering, should Goldman sue themselves for illegally shorting bonds they don't own. Or better yet, for insider trading or outright fraud. They certainly shouldn't throw stones from their own glass house.

Oct 15 02:43 AM

[Joseph L. S...:]

In this country, we may give too much "grudging respect" even to the charlatans, as long as they are SUCCESSFUL charlatans. Here's Goldman, on the one hand, always skating the line of legality, sometimes just inside, sometimes just outside. Yet other articles on SA today laud their "out-performance" and "trading acumen."

Is it possible the "acumen" is more deviousness and a willingness to crush anything in their way than it is brilliance in trading or operational control? Only their regulator (should) know for sure (but doesn't...)

Oct 15 10:46 AM

[Fred Swartz:]

"Naked shorting" in the real world isn't the least bit uncommon or illegal. When you buy something that isn't in stock, the company you buy it from has created a naked short. Usually they know they can cover it quickly, especially in this just-in-time economy. You might say their motivation is different than the sell-high-buy-low hopes of those using financial instruments, but it's still naked shorting.

Oct 15 05:38 PM

[john s. gordon:]

so you're not a criminal unless you get caught.

the armistead quotation above is from the daniel drew/jay gould/ commodore vanderbilt era. after a lifetime of fleecing investors with his erie railroad, mr. drew suffered some remorse and endowed a theological seminary in madison NJ. it is now called drew univ.
> jack

Oct 15 07:46 PM

[Burton A. J...:]

You can sell anything you want to sell, whether or not you own it.
The problem comes in the latter case when you can't deliver.
Unless your a big Wall Street Bank.
In that case, you get a U.S. Treasury bailout.

Burton Johnson

Oct 15 09:32 PM