Over a decade before the coining of the term, "
mortgage meltdown," "
naked short-selling" was the subject perhaps most closely associated with the public's perception as far as everything that was/is wrong with Wall Street. (See: "
Time Bomb," by the New Yorker's John Cassidy, from July 5th, 1999. ) Thanks to our economy's most recent crash and burn, over the past two years, along with a major story by Matt Taibbi that's about to hit newsstands, later this week in Rolling Stone, we may now expect the topic of naked short-selling to, once again, rear its ugly head front and center throughout the MSM in coming days and weeks.
Taibbi's story, which hasn't even appeared online or in print yet, is already beginning to generate a great deal of buzz, in part thanks to a preview piece that ran on Taibbi's blog over the past day: "An Inside Look at How Goldman Sachs Lobbies the Senate."
But first, here's
Wikipedia's description of naked short-selling, also known as naked shorting:
Naked short selling
From Wikipedia, the free encyclopedia
Naked short selling, or naked shorting, is the practice of selling a financial instrument short without first borrowing the security or ensuring that the security can be borrowed as is done in a conventional short sale. When the seller does not obtain the shares within the required time frame, the result is known as a "fail to deliver". The transaction generally remains open until the shares are acquired by the seller or the seller's broker, allowing the trade to be settled.[1] Naked short selling can be used to manipulate the price of securities by driving their price down, and its use in this way is illegal.[2] However, the practice is considered benign under certain circumstances, such as trading by market makers.[3]
In the United States, naked short selling is covered by various SEC regulations which prohibit the practice.[4] In 2005, "Regulation SHO" was enacted, requiring that broker-dealers have grounds to believe that shares will be available for a given stock transaction, and requiring that delivery take place within a limited time period.[3][5] As part of its response to the crisis in the North American markets in 2008, the SEC issued a temporary order restricting short-selling in the shares of 19 financial firms deemed systemically important, by reinforcing the penalties for failing to deliver the shares in time.[6] Effective September 18, 2008, amid claims that aggressive short selling had played a role in the failure of financial giant Lehman Brothers, the SEC extended and expanded the rules to remove exceptions and to cover all companies.[7][8]
Some commentators have contended that despite regulations, naked shorting is widespread and that the SEC regulations are poorly enforced. Its critics have contended that the practice is susceptible to abuse, can be damaging to targeted companies struggling to raise capital, and has led to numerous bankruptcies.[4][7][9] However, other commentators have said that the naked shorting issue is a "devil theory",[10] not a bona fide market issue and a waste of regulatory resources.[11]
By the way, this (see above) is a particular good Wiki page, from an educational standpoint, IMHO. Definitely worth clicking through and taking a full read.
Now, off we go to Goldman Sachs' notorious lobbying hubris, the historically-annotated, umpteenth oversight failure of the Securities Exchange Commission ("SEC"), and what I'm quickly realizing may well turnout to be the story with regard to it becoming the poster child for regulatory capture and supervisory breakdown as far as our Wall Street-based corporatocracy/oligarchy is concerned. Here's the link to Taibbi's preview blog post: "An Inside Look at How Goldman Sachs Lobbies the Senate."
Yesterday, as described in this lead-in piece from the Wall Street Journal, the SEC held a public roundtable discussion on "New Rules for Lending of Securities." (See link here: "SEC Weighs New Rules for Lending of Securities.")
SEC Weighs New Rules for Lending of Securities
BY KARA SCANNELL AND CRAIG KARMIN
Wall Street Journal
Saturday, September 26th, 2009
Securities regulators are exploring new regulations for the multitrillion-dollar securities-lending market, the first major step regulators have taken in the area in decades.
Securities and Exchange Commission Chairman Mary Schapiro said she wants to shine a light on the "opaque market." After many large investors lost millions in last year's credit crunch, she said, "we need to consider ways to enhance investor-oriented oversight."
The SEC is holding a public round table Tuesday to explore several issues around securities lending, which has expanded into a big moneymaker for Wall Street firms and pension funds. Regulation hasn't kept pace, some industry participants...
Enter Taibbi: "An Inside Look at How Goldman Sachs Lobbies the Senate."
An Inside Look at How Goldman Sachs Lobbies the Senate
Matt Taibbi
TruSlant.com
(very early) Tuesday, September 29th, 2009
The SEC is holding a public round table Tuesday to explore several issues around securities lending, which has expanded into a big moneymaker for Wall Street firms and pension funds. Regulation hasn't kept pace, some industry participants contend. Securities lending is central to the practice of short selling, in which investors borrow shares and sell them in a bet that the price will decline. Short sellers later hope to buy back the shares at a lower price and return them to the securities lender, booking a profit. Lending and borrowing also help market makers keep stock trading functioning smoothly.
--SNIP--
Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned -- when I first started looking at the story months ago, I had some other issues in mind, but it turns out that there's no way to talk about Bear and Lehman without going into the weeds of naked short-selling, and to do that takes up a lot of magazine inches. So among other things, this issue takes up a lot of space in the upcoming story.
Naked short-selling is a kind of counterfeiting scheme in which short-sellers sell shares of stock they either don't have or won't deliver to the buyer. The piece gets into all of this, so I won't repeat the full description in this space now. But as this week goes on I'm going to be putting up on this site information I had to leave out of the magazine article, as well as some more timely material that I'm only just getting now.
Included in that last category is some of the fallout from this week's SEC "round table" on the naked short-selling issue.
The real significance of the naked short-selling issue isn't so much the actual volume of the behavior, i.e. the concrete effect it has on the market and on individual companies -- and that has been significant, don't get me wrong -- but the fact that the practice is absurdly widespread and takes place right under the noses of the regulators, and really nothing is ever done about it.
It's the conspicuousness of the crime that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn't a better example of "regulatory capture," i.e. the phenomenon of regulators being captives of the industry they ostensibly regulate, than this issue.
Taibbi continues on to inform us that none of the invited speakers to this government-sponsored event represented stockholders or companies that could, or have, become targets/victims of naked short-selling. Also "...no activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are (were) either banks, financial firms, or companies that sell stuff to the first two groups."
Taibbi then informs us that there is only one panelist invited that's in favor of what may be, perhaps, the most basic level of regulatory control with regard to this industry practice: a "simple reform" called "pre-borrowing." Pre-borrowing requires short-sellers to actually possess the stock shares before they're sold.
It's been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement for the shares of 19 fat cat companies (no other companies were worth protecting, apparently). Naked shorting of those firms dropped off almost completely during that time.
The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.
Taibbi then tells us of increased efforts by industry players, specifically noting Goldman Sachs being at the forefront of this effort, and having "their presence felt."
Taibbi mentioned that he'd received two completely separate calls from two congressional staffers from different offices--folks whom Taibbi never met before--who felt compelled to inform him of Goldman's actions.
We learn that these folks both commented on how these Goldman folks were lobbying against restrictions on naked short-selling. One of the aides told Taibbi that they 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. "
I would later hear that Senate aides between themselves had discussed Goldman's lobbying efforts and concluded that it was one of the most shameless performances they'd ever seen from any group of lobbyists, and that the "fact sheet" the company had had the balls to hand to sitting U.S. Senators was, to quote one person familiar with the situation, "disgraceful" and "hilarious."
Checkout the whole story on his blog. Apparently, in the upcoming Rolling Stone piece, he gets into the nitty gritty with regard to how naked short-selling brought down both Bear Stearns and Lehman, last year.
Should be pretty powerful stuff.
Meanwhile, getting back to the SEC roundtable, noted above, strike up the fifth item that I've now documented in the past 48 hours where it's becoming self-evident that our elected representatives and our government agencies aren't even bothering to author the new regulations and legislation that's so needed to prevent a recurrence of events such as those we witnessed through the economic/market catastrophes of the past 24 months; these legislators and high-ranking government officials are actually having the lobbyists navigate the discussion and write the damn stuff, too!
How much worse can it get? I really don't want to know the answer to that rhetorical question. But, with the inmates running the asylum, we may just find out sooner than we think!