7
Getting Naked
Just wanted to make sure you were paying attention because this is an important topic. What's the likelihood that public companies are being destroyed by millions of shares of stock that don't exist?
Today, the SEC held a hearing about short-selling, which is essentially betting that a company's shares are overvalued.
Georgetown finance professor James Angel explained the benefits on the Marketplace Morning Report:
AMY SCOTT: Angel says short-sellers provide a service. They identify stocks that are overpriced, and that keeps prices fair for everyone. He says think about the people who make band-aids.
JAMES ANGEL: The only time you need a band-aid is when you get a cut. So the people who make band-aids are really profiting from the misfortune of others. But I'm really glad they're doing that, because, you know, I've got a band-aid when I need it.
But there's a difference between legitimate short-selling and naked short-selling, which involves investors selling shares they don't have. It's illegal to drive down the price of stocks with naked shorting, but many people say it happens regularly.
Clusterstock doesn't believe it exists. It's dreamed up by companies that get clobbered in the market:
Naked short-selling is a popular mythical beast promoted by the execs at those failed companies, as well as guys like Patrick Byrne at Overstock.com, but it's rubbish. It's really no different than regular old short-selling, which also happens to be villified by the media, and by executives at struggling companies.
We'll get to Patrick Byrne in a minute. Clusterstock is on the attack against blogger Matt Taibbi, famous for his Rolling Stone "Goldman is a vampire squid" story. In Taibbi's latest column, he goes off on naked short-selling ("counterfeiting") and the lengths investment banks will go to protect it:
Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss's office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.
Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman's fact sheet.
Now, the mere fact that two different congressional aides were so disgusted by Goldman's performance that they both called me on the same day -- and I don't have a relationship with either of these people -- tells you how nauseated they were.
But is naked short-selling a "mythical beast"?
Deep Capture tells the story of Overstock.com CEO Patrick Byrne. He claims there's a conspiracy among short- sellers and certain people in the financial media to destroy public companies that have been heavily shorted:
... some short-sellers do not play by the rules. A small group of powerful hedge fund managers stop at nothing to annihilate the companies they sell short. Their tactics include: blackmail, smear campaigns, espionage, fraud, harassment, extortion, bribery, rumor-mongering, sabotage, off-shore money laundering, political cronyism, frivolous lawsuits, witness tampering, biased financial research, false identities, bogus credit ratings, bribery, libelous blogs, bad science, forgery, wiretapping, counterfeiting, collusion, lying, cheating, threats and theft.
Their most egregious trick is to sell "phantom stock." By exploiting a glitch in Wall Street's computerized trading system, and a loophole in federal regulations, some hedge funds sell virtually unlimited amounts of stock that they have not yet borrowed or purchased. This is often referred to as "naked short selling." Hedge funds use this tactic to flood the market with supply and drive down prices - which is blatantly illegal.
When you have some time (it's long), read the whole story and see what you think. The guy is either delusional, a fantastic Hollywood screenwriter or he's telling a truth that needs to be told.
Read it.
BTW, the intellectual side of the naked shorting has been won for some time now. Even the useless regulator, Chris Cox, while head of the SEC, called it "a particularly pernicious form of fraud," and former Treas. Sec. Paulson said, "naked shorting is wrong, anytime and anywhere."
Air shares, counterfeiting, phantom shares, however you call it, this swindle must stop. Oh... and how about some perp walks with jail time? A few of those would help end this crime, too.
If you tell me that you do not have the stock then ask me to buy it, I won't. Is there anybody out there in Arpanet land that will buy the stock that you don't have? Any brokerage house? Any house that jumps for it will jump for anything thus go out of business. NSS is like an isotope with atomic number of more than 111; if extant, not for more than a microsecond.
Case closed
!
Complicity
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Any house that jumps for it will jump for anything thus go out of business.
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If not, and only if not, the government decides to squander our hard pinched pennies on charity for the brokerage house that springs for it, that buys the invisible stock from the Bare Naked Short Seller.
case reopened
case reopened for the perpetrator and for the fence who facilitates looting process.
Who was that bare naked shero who saved the springer from chapter 13, was it a bird, was it a plane?
Fancy Nancy?
After 6+ years of being involved in this issue, I can assure you Dr. Byrne is telling a truth that needs to be told. NSS has been an SEC condoned theft of a nation's investments by the Wall St. cartel. Take time everyone who is new to this and read up on naked short selling at Deep Capture. You'll find links there, too, for Bloomberg's Emmy nominated exposé of this crime.
The problem with all of this is that it ignores 2 things :
a) If institutional traders are such a huge part of the market and are causing all of this then who is doing the selling? For example, look at a stock like Telvent. Of the roughly 58,000 shares traded today, 47,000 of those were just 8 trading companies (at that like, half of the volume was due just to Citi and UBS). How are there enough people out there who already own the stock willing to sell for these people to make money? After all, without some willing to dump the stock they can't make money short selling. That is, how are they somehow so big that they can negatively manipulate the market without suffering any ill affects themselves?
b) Time - the other aspect is a short sell is over a limited period of time and at the relatively short. How can a short period of a stock price destroy a healthy company? It can't. For naked short selling to work, the company already needs to have serious issues. If that weren't the case, then why don't we see this sort of naked short selling occuring and more so damaging a company like HP or 3M.
Reality is something that Patrick Byrne doesn't want to face. For whatever reason, Overstock was overvalued back in 2004 and 2005. The short sellers could see that and new it's bubble would burst. Instead of acknowledging the overvaluation, he runs around complaining about how 4 - 5 years ago despite being worth much more these naked short sellers not only killed his stock but have managed to keep it's price repressed for the last 4 years. That's right, the issue isn't that a sparsely traded run-of-the-mill retail stock suddenly got hot and everyone was buying in (that's right, Byrne isn't complaining about irrational naked buying that drove up the price very fast in a short amount of time), where it went from 20k, 40k, maybe 70k shares traded in a day to volumes of a million, 4 million even more than 13 million shares traded in a day. No, the problem wasn't a run up in price while lacking fundamental value justifying the price.... that problem was naked short sellers. THat's right, according to Patrick Overstock's price would still be $70 a share with 8 or 10 million shares a day trading hands except for these evil short sellers that have somehow - even though they haven't been actively short selling the stock for years - have supressed the stock at 1/6th of it's "true" value.
