calltoaccount

The Costs of Not Fixing a Broken Financial System

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

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....


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)....


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 principal 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. view the full article at: calltoaccount.wordpres.../

Gold Is Not in a Bull Market

caution: GLD not all real gold -- read its prospectus.


On Nov 02 08:48 AM long_on_oil wrote:

> GLD is the ETF for going long on gold, is there an EFT for shorting
> gold?

SEC Uptick Rule: Great for Insiders, Bad for Us

re "Some say that Bear Stearns and Lehman Brothers went down due to “bear raids” --- seems like you are unaware of the below.

*************************


Bear Stearns Buy-Out... 100% Fraud by John Olagues

www.optionsforemployee...

This article is about how Bear Stearns stock was artificially collapsed so that illegal insider traders would make billions and J.P. Morgan would be paid $55 billion of US tax payer money to shore up themselves and buy Bear Stearns at bankruptcy prices.

Massive buying of puts and shorting stock in Bear Stearns


On March 10, 2008, the closing price of Bear Stearns was 70. The stock had traded at 70 eight weeks earlier.

On or prior to March 10, 2008 requests were made to the options exchanges to open new April series of puts with exercise prices of 20, and 22.5, and a new March series with an exercise price of 25.

Their requests were accommodated and new series were opened for trading March 11, 2008.

Since there was very little subsequent trading in the calls with exercise prices of 20, 22.5 or 25, it is certain that the requests were made with the intentions of buying substantial amounts of the puts.

There was, in fact, massive volumes of puts purchased in those series which opened on March 11, 2008.

For example: between March 11-14 inclusive, there were 20,000 contracts traded in the April 20s, 3700 contracts traded in the April 22.5s, and 8000 contracts traded in the April 25s. In the March 25s, there were 79,000 contracts traded between March 11-14, 2008.

Question: Why did the options exchanges not open the far out of the money puts for trading the first time that Bear Stearns stock hit 70, when the April and March options had far more time to expiration? Certainly if the requesters were legitimate hedgers or speculators, their buying the March and April puts with 2 and 3 months to expiration was more reasonable.

Answer: The insiders were not ready to collapse the stock and did not request the exchanges to open the new series when Bear Stearns first hit 70.

Second Request and Accommodation
On or prior to March 13, 2008, an additional request was made of the options exchanges to open more March and April put series with very low exercise prices.

These new March put options would have just five days of trading to expiration. The exchanges accommodated their requests, knowing that the intentions of the requesters were to buy puts.

They indeed bought massive amounts of puts. For example the March 20 puts traded nearly 50,000 contracts (i.e. contracts to sell 5 million shares at 20). The March 15s traded 9600, the March 10s traded 13,000 and the March 5s traded 6300 all on March 14 (the first day of trading of the new March series).

The introduction of those far-out-of-the-money put series in the April and March months immediately before the crash provided a vehicle whereby extreme leverage was available to the insiders. In other words if an insider had $100,000 and he knew that Morgan would buy Bear Stearns at 2, he could make 5-10 times more on the $100,000 by buying the newly introduced March puts. This is so because the soon to expire far out-of-the-money puts were far cheaper than the July or October out-of-the-money puts. And that is why the illegal inside traders requested the exchanges to introduce the far out-of-the-moneys just days before the crash.

But this scenario has serious implications. This means that the deal was already arranged on March 10 or before.

That contradicts the scenario that is promoted by SEC. Chairman Cox, Fed Boss Bernanke, Bear CEO Schwartz, Jamie Dimon of J.P. Morgan (who sits on the board of directors for the New York Federal Reserve Bank) and others that false rumors undermined the confidence in Bear Stearns making the company crash, notwithstanding their adequate liquidity days before.

I would say that the deal was arranged months before but the final terms and times were not determined until maybe March 7-8, 2008.

On March 14, 2008, the April 17.5s, the 15s, the 12.5s and the 10s traded 15,000 contracts combined. Each put gives the right to sell 100 shares. So for example, these 15,000 April puts gave the purchaser(s) the right to sell 1.5 million shares at prices between 10 and 17.5. Those purchasers expected to make profits on 1.5 million shares because they knew the deal was coming at $2.00.
That is the only plausible explanation for anyone to buy puts with five days of life remaining with strike prices far below the market price.

So there were requests, during the period of March 10-13, to the exchanges to open the March and April series for buying massive amounts of extremely out-of-the-money puts, which were accommodated by the options exchanges.

Did the Exchanges aid and abet the insider trading scheme? We do not able to have a strong opinion on that idea.

Media statements of adequate liquidity.

However, Reuters, on March 10, 2008 was citing Bear Stearns sources that there was no liquidity crisis and that there was no truth to the speculation of liquidity problems.

And none other than the Chairman of the Securities and Exchange Commission on March 11, 2008 was stating that “we have a good deal of comfort with the capital cushion that these firms have”.

We even had the “mad” Jim Cramer proclaiming on March 11, 2008 that all is well with Bear Stearns and that the viewers should hold on to their Bear Stearns. And on March 12, 2008, Alan Schwartz CEO of Bear Stearns was telling David Faber of CNBC that there was no problem with liquidity and that “We don’t see any pressure on our liquidity, let alone a liquidity crisis”.

The fact that the requests were made on March 10 or earlier that those new series be opened and those requests were accommodated together with the subsequent massive open positions in those newly opened series is conclusive proof that there were some who knew about the collapse in advance, while Reuters, Cox, Schwartz and Cramer were telling the public that there was no liquidity problem.

This was no case of a sudden developement on the 13 or 14th, where things changed dramatically making it such that they needed a bail-out immediately. The collapse was anticipated and prepared for, even while the CEO of Bear Stearns and the SEC Chairman of the SEC were making claims of stability.

What was the reason that Cramer, Cox and Schwartz were all promoting Bear Stearns immediately before its collapse. That will be speculated upon for years to come. Cramer has admitted that “truth” was not his friend and that he manipulated stocks to influence investors behavior. Was this one of his acts? But no apologies from Cramer as he claims now that he was referring to keeping money in Bear Stearns Bank not in Bear Stears stock.
Proof of Insider Trading:

To prove the case of illegal insider trading, all the Feds have to do is ask a few questions of the persons who bought puts on Bear Stearns or shorted stock during the week before March 17, 2008 and before.

All the records are easily available.

If they bought puts or shorted stock, just ask them why?

What information did they have acncess to which the CEO and the SEC did not have? Where did they get the info? Why aren’t Cramer and Cox, Dimon, Bernanke,
Geithner, Paulson, Faber and Schwartz subject to a bit of prosecutorial pressure to get to the bottom of this?

Maybe the buyers of puts and short sellers of stock just didn’t believe Reuters, Cox, Schwartz, Cramer and Faber and went massively short anyway, buying puts that
required a 70% drop in a weeK.

Maybe they had better information than Schwartz or Cox. If they did, then that’s a felony, with the profits made subject to forfeiture.


April 4, 2008 Congressional Hearings on the

Bear Stearns Bail-out.

I watched both sessions and drew the following conclusions:

In the first session there were the following witnesses. Bernanke of the Federal Reserve Board, Cox from the SEC, Geithner representing the New York Reserve
Bank and an incidental player Mr. Steel from the Treasury. The only Senators that seem to be willing to attack these bankers were Bunning, Tester, Menedez and
Reed. All the rest were useless and very respectful.

Absurdities

All witnesses did their best to keep their stories consistent but they did slip up a bit. They all agree that the bail-out was necessary without any proof that it was.

They all agreed that what caused the cash liquidity to dry up within one day was the rumor mongers.

Apparently it is claimed that some people have the ability to start false rumors about Bear Stearns’s and other banks liquidity, which then starts a “run on
the bank” . These rumor mongers allegedly were able to influence companies like Goldman Sachs to terminate doing business with Bear Stearns, notwithstanding that Goldman et al. believed that Bear Stearns balance sheet was in good shape. (Goldman between March 11-14 warned their average customers that Bear Stearns stock was “hard to borrow” for shorting due to the fact that other customers had used up all of the stock avaiable for borrowing for short sales) .

That idea that rumors caused a “run on the bank” at Bear Stearns is 100% riduculous.

Perhaps that’s the reason why every witness were so guarded and hesitant and looked so strained in answering questions.

Loans to J.P. Morgan total $55 billion from FED

The Private New York FED lent $25 billion to Bear Stearns (described as the primary facility by James Dimon) and another $30 billion to J.P. Morgan (described as the
secondary facility by James Dimon). So the bail-out cost was $55 billion not the $30 billion that is promoted. This was revealed at the second session of the Senate hearings in a James Dimon response to a question from Senator Reed.

Who gets the $55 billion? J.P. Morgan received the money on a loan pleadging Bear Stearns assets valued at $55 billion. $29 billion is non-recourse to Morgan.
Effectively the FED received collateral appraised by Bear Stearns at $55 billion for a loan to J.P. Morgan of $55 billion. That’s a loan to value of 100%. If the value of the secondary facility of $30 billion ($29 billion of which is non recourse) is worth only $15 billion when all is said and done, then J.P. Morgan has to pay back only $1 billion of the $30 billion received and keeps the $14 billion the the Fed loses. If the $25 billion primary facility is worth only $15 billion when all
is said and done, J.P. Morgan has to pay $10 billion of the $25 billion received. If J.P Morgan can not pay, then the Fed loses the $10 billion. If after all is said and done, the $25 billion primary assets or the $30 billion secondary assets are sold for more that $25 billion or the $30 billion respectively, the difference goes to J.P. No matter how you cut it, J.P. Morgan wins

If the $55 billion assets turn out to be worth only $20 billion when all is said and done, J.P. Morgan owes $1 billion on the $30 billion and the difference between
$25 billion and the value received on the primary facility. The best the FED can do is get their money back with interest and the worse they can do is lose
about $25 -$40 billion.

The FED would have been far better to just buy the assets at Bear’s and J.P.Morgan’s valuation.

The question arises:

Why didn’t the FED just make the $55 billiom loan to Bear Stearns directly? The FED received Bear Stearns assets valued by Bear Stearns as its only collateral for the 100% loan. I am sure that Bear Stearns would have guaranteed the full $55 billion and would have advanced more collateral and accepted a 90% loan to value. Everything would have been just fine for Bear Stearns and the FED would have had a better deal. But the Bear Stearns stock would have
gone up and all short stock sellers and all put buyers would have massive losses instead of massive gains.

The bail-out is a great deal for J.P. Morgan, the illegal insider short sellers got a great deal. Bear Stearns stock holders and employees got a very bad deal and the sellers of puts sustained large losses..

This shows, in my view, that J.P. Morgan and the FED were in collusion with the short sellers and put buyers.

John Olagues

*John Olagues is the owner and principal consultant for Truth IN Options and a recognized authority on listed and employee stock options.
After graduating from Tulane University (where he captained the baseball team and set many of Tulane's pitching records), John applied his B.A. in mathematics and his competitive spirit to the real world of stock options.

In 1976, he became a member of the Pacific Stock Exchange in San Francisco trading and managing options positions in scores of different stocks. John joined with Blair Hull to create Options Research, the first service to provide theoretical options values to market-makers and to the general public. In 1980, he became a member of the CBOE, where he personally traded more options in more diverse situations than any other trader.

**********************...


Naked Short Sales Hint Fraud in Bringing Down Lehman (Update1)

Share | Email | Print | A A A


By Gary Matsumoto
March 19 (Bloomberg) -- The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.
As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.
The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.
“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”
While the commission’s Enforcement Complaint Center received about 5,000 complaints about naked short-selling from January 2007 to June 2008, none led to enforcement actions, according to a report filed yesterday by David Kotz, the agency’s inspector general.
The way the SEC processes complaints hinders its ability to respond, the report said.
Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue.
After the 158-year-old investment bank collapsed in bankruptcy on Sept. 15, listing $613 billion in debt, former Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm’s demise.
Gasoline on Fire
Members of the House Committee on Government Oversight and Reform weren’t buying that explanation.
“If you haven’t discovered your role, you’re the villain today,” U.S. Representative John Mica, a Florida Republican, told Fuld.
Yet the trading pattern that emerges from 2008 SEC data shows naked shorts contributed to the fall of both Lehman Brothers and Bear Stearns Cos., which was acquired by JPMorgan Chase & Co. in May.
“Abusive short selling amounts to gasoline on the fire for distressed stocks and distressed markets,” said U.S. Senator Ted Kaufman, a Delaware Democrat and one of the sponsors of a bill that would make the SEC restore the uptick rule. The regulation required traders to wait for a price increase in the stock they wanted to bet against; it prevented so-called bear raids, in which successive short sales forced prices down.
Driving Down Prices
Reinstating the rule would end the pattern of fails-to- deliver revealed in the SEC data, Kaufman said.
“These stories are deeply disturbing and make a compelling case that the SEC must act now to end abusive short selling -- which is exactly what our bill, if enacted, would do,” the senator said in an e-mailed statement.
Short sellers arrange to borrow shares, then dispose of them in anticipation that they will fall. They later buy shares to replace those they borrowed, profiting if the price has dropped. Naked short sellers don’t borrow before trading -- a practice that becomes evident once the stock isn’t delivered. Such trades can generate unlimited sell orders, overwhelming buyers and driving down prices, said Susanne Trimbath, a trade- settlement expert and president of STP Advisory Services, an Omaha, Nebraska-based consulting firm.
The SEC last year started a probe into what it called “possible market manipulation” and banned short sales in financial stocks as the number of fails-to-deliver climbed.
‘Unsubstantiated Rumors’
The daily average value of fails-to-deliver surged to $7.4 billion in 2007 from $838.5 million in 1995, according to a study by Trimbath, who examined data from the annual reports of the National Securities Clearing Corp., a subsidiary of the Depository Trust & Clearing Corp.
Trade failures rose for Bear Stearns as well last year. They peaked at 1.2 million shares on March 17, the day after JPMorgan announced it would buy the investment bank for $2 a share. That was more than triple the prior-year peak of 364,171 on Sept. 25.
Fuld said naked short selling -- coupled with “unsubstantiated rumors” -- played a role in the demise of both his bank and Bear Stearns.
“The naked shorts and rumor mongers succeeded in bringing down Bear Stearns,” Fuld said in prepared testimony to Congress in October. “And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers.”
Devaluing Stock
Failed trades correlate with drops in share value -- enough to account for 30 to 70 percent of the declines in Bear Stearns, Lehman and other stocks last year, Trimbath said.
While the correlation doesn’t prove that naked shorting caused the lower prices, it’s “a good first indicator of a statistical relationship between two variables,” she said.
Failing to deliver is like “issuing new stock in a company without its permission,” Trimbath said. “You increase the number of shares circulating in the market, and that devalues a stock. The same thing happens to a currency when a government prints more of it.”
Trimbath attributes the almost ninefold growth in the value of failed trades from 1995 to 2007 to a rise in naked short sales.
“You can’t have millions of shares fail to deliver and say, ‘Oops, my dog ate my certificates,’” she said.
Explanation Required
On its Web site, the Federal Reserve Bank of New York lists several reasons for fails-to-deliver in securities trading besides naked shorting. They include misunderstandings between traders over details of transactions; computer glitches; and chain reactions, in which one failure to settle prevents delivery in a second trade.
Failed trades in stocks that were easy to borrow, such as Lehman Brothers, constitute a “red flag,” said Richard H. Baker, the president and CEO of the Washington-based Managed Funds Association, the hedge fund industry’s biggest lobbying group.
“Suffice it to say that in a readily available stock that is traded frequently, there has to be an explanation to the appropriate regulator as to the circumstances surrounding the fail-to-deliver,” said Baker, who served in the U.S. House of Representatives as a Republican from Louisiana from 1986 to February 2008.
“If it’s a pattern and a practice, there are laws and regulations to deal with it,” he said.
Fines and Penalties
Lehman Brothers had 687.5 million shares in its float, the amount available for public trading. In float size, the investment bank ranked 131 out of 6,873 public companies -- or in the top 1.9 percent, according to data compiled by Bloomberg.
While naked short sales resulting from errors aren’t illegal, using them to boost profits or manipulate share prices breaks exchange and SEC rules and violators are subject to penalties. If investigators determine that traders engaged in the practice to try to influence markets, the Department of Justice can file criminal charges.
Market makers, who serve as go-betweens for buyers and sellers, are allowed to short stock without borrowing it first to maintain a constant flow of trading.
Since July 2006, the regulatory arm of the New York Stock Exchange has fined at least four exchange members for naked shorting and violating other securities regulations. J.P. Morgan Securities Inc. paid the highest penalty, $400,000, as part of an agreement in which the firm neither admitted nor denied guilt, according to NYSE Regulation Inc.
Enforcement ‘Reluctant’
In July 2007, the former American Stock Exchange, now NYSE Alternext, fined members Scott and Brian Arenstein and their companies $3.6 million and $1.2 million, respectively, for naked short selling. Amex ordered them to disgorge a combined $3.2 million in trading profits and suspended both from the exchange for five years. The brothers agreed to the fines and the suspension without admitting or denying liability, according a release from the exchange.
Of about 5,000 e-mailed tips related to naked short-selling received by the SEC from January 2007 to June 2008, 123 were forwarded for further investigation, according to the report released yesterday by Kotz, the agency’s internal watchdog. None led to enforcement actions, the report said.
Kotz, the commission’s inspector general, said the enforcement division “is reluctant to expend additional resources to investigate” complaints. He recommended in his report yesterday that the division step up analysis of tips, designating an office or person to provide oversight of complaints.
Schapiro’s Plans
“Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling,” the report said.
The enforcement division, in a response included in the report, said “a large number of the complaints provide no support for the allegations” and concurred with only one of the inspector general’s 11 recommendations.
SEC Chairman Mary Schapiro, who took office in January, has vowed to reinvigorate the enforcement unit after it drew fire from lawmakers and investors for failing to follow up on tips that New York money manager Bernard Madoff’s business was a Ponzi scheme. She has “initiated a process that will help us more effectively identify valuable leads for potential enforcement action,” John Nester, a commission spokesman, said in response to the Kotz report.
Last September, the agency instituted the temporary ban on short sales of financial stock. It also has announced an investigation into “possible market manipulation in the securities of certain financial institutions.”
No Effective Action
Christopher Cox, who was SEC chairman last year; Erik Sirri, the commission’s director for market regulation; and James Brigagliano, its deputy director for trading and markets, didn’t respond to requests for interviews. John Heine, a spokesman, said the commission declined to comment for this story.
“It has always puzzled me that the SEC didn’t take effective action to eliminate naked shorting and the fails-to- deliver associated with it,” Pitt, who chaired the commission from August 2001 to February 2003, said in an e-mail. The agency began collecting data on failed trades that exceed 10,000 shares a day in 2004.
“All the SEC need do is state that at the time of the short sale, the short seller must have (and must maintain through settlement) a legally enforceable right to deliver the stock at settlement,” Pitt wrote. He is now the CEO of Kalorama Partners LLC, a Washington-based consulting firm. In August, he and some partners started RegSHO.com, a Web-based service that locates stock to help sellers comply with short-selling rules.
Postponed ‘Indefinitely’
Pitt began his legal career as an SEC staff attorney in 1968, and eventually became the commission’s general counsel. In 1978, he joined Fried Frank Harris Shriver & Jacobson LLP, where as a senior corporate partner he represented such clients as Bear Stearns and the New York Stock Exchange. President George W. Bush appointed him SEC chairman in 2001.
The flip side of an uncompleted transaction resulting from undelivered stock is called a “fail-to-receive.” SEC regulations state that brokers who haven’t received stock 13 days after purchase can execute a so-called buy-in. The broker on the selling side of the transaction must buy an equivalent number of shares and deliver them on behalf of the customer who didn’t.
A 1986 study done by Irving Pollack, the SEC’s first director of enforcement in the 1970s, found the buy-in rules ineffective with regard to Nasdaq securities. The rules permit brokers to postpone deliveries “indefinitely,” the study found.
The effect on the market can be extreme, according to Cox, who left office on Jan. 20. He warned about it in a July article posted on the commission’s Web site.
Turbocharged Distortion
When coupled with the propagation of rumors about the targeted company, selling shares without borrowing “can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions,” he said in the article.
“‘Naked’ short selling can turbocharge these ‘distort-and- short’ schemes,” Cox wrote.
“When traders spread false rumors and then take advantage of those rumors by short selling, there’s no question that it’s fraud,” Pollack said in an interview. “It doesn’t matter whether the short sales are legal.”
On at least two occasions in 2008, fails-to-deliver for Lehman Brothers shares spiked just before speculation about the bank began circulating among traders, according to SEC data that Bloomberg analyzed.
On June 30, someone started a rumor that Barclays Plc was ready to buy Lehman for 25 percent less than the day’s share price. The purchase didn’t materialize.
‘Green Cheese’
On the previous trading day, June 27, the number of shares sold without delivery jumped to 705,103 from 30,690 on June 26, a 23-fold increase. The day of the rumor, the amount reached 814,870 -- more than four times the daily average for 2008 to that point. The stock slumped 11 percent and, by the close of trading, was down 70 percent for the calendar year.
“This rumor ranks up there with the moon is made of green cheese in terms of its validity,” Richard Bove, who was then a Ladenburg Thalmann & Co. analyst, said in a July 1 report.
Bove, now vice president and equity research analyst with Rochdale Securities in Lutz, Florida, said in an interview this month that the speculation reflected “an unrealistic view of Lehman’s portfolio value.” The company’s assets had value, he said.
‘Obscene’ Leverage
During the first six days following the Barclays hearsay, the level of failed trades averaged 1.4 million. Then, on July 10, came rumors that SAC Capital Advisors LLC, a Stamford, Connecticut-based hedge fund, and Pacific Investment Management Co. of Newport Beach, California, had stopped trading with Lehman Brothers.
Pimco and SAC denied the speculation. The bank’s share price dropped 27 percent over July 10-11.
Banks and insurers wrote down $969.3 billion last year -- and that gave legitimate traders plenty of reason to short their stocks, said William Fleckenstein, founder and president of Seattle-based Fleckenstein Capital, a short-only hedge fund. He closed the fund in December, saying he would open a new one that would buy equities too.
“Financial stocks imploded because of the drunkenness with which executives buying questionable securities levered-up in obscene fashion,” said Fleckenstein, who said his firm has always borrowed stock before selling it short. “Short sellers didn’t do this. The banks were reckless and they held bad assets. That’s the story.”
‘Market Distress’
On May 21, David Einhorn, a hedge fund manager and chairman of New York-based Greenlight Capital Inc., announced he was shorting stock in Lehman Brothers and said he had “good reason to question the bank’s fair value calculations” for its mortgage securities and other rarely traded assets.
Einhorn declined to comment for this story. Monica Everett, a spokeswoman who works for the Abernathy Macgregor Group, said Greenlight properly borrows shares before shorting them.
Even when they’re legitimate, short sales can depress share values in times of market crisis -- in effect turning the traders’ negative bets into self-fulfilling prophecies, says Pollack, the former SEC enforcement chief who is now a securities litigator with Fulbright & Jaworski in Washington.
The SEC has been concerned about the issue since at least 1963, when Pollack and others at the commission wrote a study for Congress that recommended the “temporary banning of short selling, in all stocks or in a particular stock” during “times of general market distress.”
Airport Runway
On Sept. 17, two days after Lehman Brothers filed for Chapter 11 bankruptcy, the number of failed trades climbed to 49.7 million, 23 percent of overall volume in the stock.
The next day, the SEC announced its ban on shorting financial companies in 2008. The number of protected stocks ultimately grew to about 1,000. On Sept. 19, the commission announced “a sweeping expansion” of its investigation into possible market manipulation.
The ban, which lasted through Oct. 17, didn’t eliminate shorting, according to data from the SEC, the NYSE Arca exchange and Bloomberg. Throughout the period, short sales averaged 24.7 percent of the overall trading in Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. on NYSE Arca. In 2008, short sales averaged 37.5 percent of the overall trading on the exchange in the three companies.
To date, the commission hasn’t announced any findings of its investigation.
Pollack, the former SEC regulator, wonders why.
“This isn’t a trail of breadcrumbs; this audit trail is lit up like an airport runway,” he said. “You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock and you’ve got your manipulators.”
To contact the reporter on this story: Gary Matsumoto in New York at [e-mail].
Last Updated: March 19, 2009 03:30 EDT


News Media Silenced Regarding Stock Shock-The Movie
June 9th, 2009


By Brandon Matthews

On the eve of the release of the most anticipated documentary of the year, “Stock Shock-The Movie,” it has come to the attention of Satwaves that the financial news media is being silenced regarding its content and release. While I was in New York City several months ago being interviewed on film, I learned that Bloomberg had taken an interest in telling the story of Stock Shock. The documentary itself tells the tale of naked short selling and media bias as it relates to the story of Sirius XM Radio (SIRI).

Bloomberg’s award winning journalist Gary Matsumoto has written extensively in regards to naked short selling. As recently as last March, Mr. Matsumoto had written an article on the subject stating that “The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.” Naked short selling opponents picked up this article as ammunition to further their cause.

Director Sandra Mohr had been interviewed for both a taped piece as well as a written piece while in N.Y., both of which were to be released prior to Stock Shock’s June 10, 2009 debut. Satwaves has learned that neither of these pieces will ever be seen by a single American investor.


In what can only be described as apparent censorship by Bloomberg, Satwaves has acquired a copy of an email from Mr. Matsumoto regarding Bloomberg’s newly adopted position on what qualifies as market related news.

Mr. Matsumoto writes:


“I’m sorry to say that I will not be covering anything related to naked short selling for the foreseeable future. To the best of my knowledge, No one at Bloomberg News is interested in naked short selling. That’s all I have to say on the matter”.
The tone of this response would seem to indicate remorse on the part of Mr. Matsumoto, and leaves us only to speculate on his seeming regret to no longer cover the topic of naked short selling. Has Bloomberg, a trusted source of supposed unbiased financial news put up roadblocks to the truth? If so, how can they or any other financial news media giant be trusted to deliver the news to mainstream America. Has the freedom of the American Press finally been silenced after more than 200 years? If so, can the end of the American dream be far behind?