The Naked Short Selling That Toppled Wall Street

[kjack]

http://www.deepcapture.com/the-naked...d-wall-street/


...If a company has weaknesses that can be blown out of proportion with help from the media, and if hedge funds blast the company with phantom stock, then pause, then blast again, then pause, then blast again — over and over — for a couple of months, then the company’s share price can soon be in the single digits. – without ever having appeared on the SEC’s threshold list.

Unsurprisingly, the data through June shows this blast-pause-blast pattern in the stocks of nearly ever major financial institution that has been wiped off the map, and quite a few that were in death spirals before the SEC temporarily banned short-selling. Very often, huge failures to deliver have occurred in stretches of precisely five days – just long enough to keep a stock off the threshold list.

The attack on Bear Stearns, for example, began on January 9, when hedge funds naked shorted more than 1.1 million shares. The shares “failed to deliver” at the end of Friday, January 11 (the three-day deadline). For the next four days, beginning Monday, January 14, there were massive failures to deliver, peaking at 1 million shares on January 17. That is, the attack lasted a total of eight days, with failures to deliver lasting precisely five days. On day six, there were few failures to deliver, so Bear did not appear on the threshold list.

Over the next few weeks, there were several more blasts – with failures to deliver ranging from 200,000 to 500,000 shares. Those were threshold levels, but the failures lasted less than five consecutive days, so no flashing red light at the SEC.

On February 28, 800,000 shares of Bear Stearns failed to deliver. For the next five business days, anywhere from 100,000 to 350,000 shares failed to deliver. On day six, there was a pause — few failures to deliver. So no threshold list – no flashing red light at the SEC.

A week later, just before CNBC’s David Faber reported the false information (given to him by a hedge fund “friend” whom he had “known for twenty years”) that Goldman Sachs had cut off Bear’s credit, somebody naked shorted more than a million shares of Bear’s stock.. Over the course of the next couple of weeks, there was a sustained effort to drive the stock to zero, with massive failures to deliver every day — peaking at 13 million shares.

This attack lasted long enough to put Bear Stearns on the threshold list, but by then, it was too late. The bank’s mangled remains had been swallowed by JP Morgan. Ultimately, at least 11 million shares of Bear Stearns were sold and never delivered....

[stockstar1138]

while this was most definately a problem, it is amazing to look at this whole thing once everything has gone down and realize the failures of so many people at so many different levels. how can people have been so stupid.

im shocked that naked shorting hasn't been talked about nearly as much in the news as the sub-prime mortgage fannie/freddie, credit crunch, housing market. i think its because people can understand housing a little better than they can understand naked shorting, so the news simply doesn't discuss it that much.

[DeathByAsh'aman]

"Blame the short sellers!" Riiiiight. The falling price of financial institutions stock had nothing to do with them being insolvent. That would make to much sense for everyone.

Shorting is a necessary part to the securities market that helps with "price discovery". The fact that people blame short selling is laughable. By banning short selling they banned the only group of people required to buy. Not only does it do the exact opposite of what they want it too, its been proven time and again worldwide that the only thing it does is make the fall easier.

[Maximus]

They were overvalued.

Short sellers had little to do with any of the banks' collapses. Most of the banks say they have some amount of equity, but that is because they seriously overvalue their core assets and undervalue their liabilities. Banking has pretty much always worked this way, but now it isn't going to stand up to scrutiny.

The banking sector as a whole, FDIC, Investment, etc... will end up owing about $3-4tn before all of this is done, and I don't know where the money will come from, I just hope it doesn't come from the taxpayer.

[Mr. Hanky]

I am intrigued by this information, kjack. So what do you think this points to? Is it a concerted attack by some subversive party? Was it targeted at specific companies as part of a hostile business manuever or indiscriminate (but serially) companies to induce general calamity?

[Maximus]

No, the reason they could do it was because Bear Stearns was completely overvalued. Look at their assets, none of them had any real value, and their liabilities were mounting. On paper they weren't worth a dime, and investors were lucky to get the $1.1bn settlement from JP Morgan Chase they did get.

This whole banking crisis has got Enron mk.3 written all over it, and this time next year, I want most of the idiot execs at Lehman to stand trial for fraud, but unfortunately the ******s at Barclays have given them protection.

[GaS]

Originally Posted by Maxpower1987

This whole banking crisis has got Enron mk.3 written all over it, and this time next year, I want most of the idiot execs at Lehman to stand trial for fraud.

Lets add all the politicians tasked with "oversight" of this industry (many of whom got huge donations and sweetheart homeloans).

[dialog_gvf]

In this day and age where we can see where every trade comes from, why is that short sells are never flagged?

It's a valid methodology deliberately hidden from scrutiny.

If people knew a stock was falling because of shorting activity, that would calm any panic. They would know the cover was there as further downside protection.

SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses

How come we needed new rules against something that is supposed to be illegal? How about putting enough transparency into the system to allow violators to be detected and arrested when they do it?

The culpability of the SEC in allowing naked short selling to exist for this long must be examined.

Gary

[DeathByAsh'aman]

short selling is NOT illegal. Naked short selling is. Short sells are never flagged because they are not illegal and they are a vital part to trading securities and it is need to maintain proper value. This whole "blame the short seller" talk is ludicrous.

Millions upon millions of shares are shorted every day. People just want a scapegoat for this colossal failure of the finacial system. To the layman blaming short sellers makes sense because they do not understand the mechanics of the securities system.

[dialog_gvf]

Originally Posted by DeathByAsh'aman

short selling is NOT illegal. Naked short selling is.

Read again. My question came in response to the headline

Originally Posted by DeathByAsh'aman

Short sells are never flagged because they are not illegal and they are a vital part to trading securities and it is need to maintain proper value. This whole "blame the short seller" talk is ludicrous.

Millions upon millions of shares are shorted every day. People just want a scapegoat for this colossal failure of the finacial system. To the layman blaming short sellers makes sense because they do not understand the mechanics of the securities system.

I'd be a complete moron to be requesting the reporting systems for stocks be updated to publically flag illegal activity.

But, if we can know the trading parties, amount and price of all trades, we should be able to know whether the trade involved a short sell or not, right?

If there is nothing wrong with the concept, and I don't believe there is, why isn't it transparent?!

Gary

[DeathByAsh'aman]

Originally Posted by dialog_gvf

But, if we can know the trading parties, amount and price of all trades, we should be able to know whether the trade involved a short sell or not, right?
Gary

Sorry it just bothers me to have people blaming short sellers since it is a perfectly legitimate, and necessary, form of trading securities. I know you were refering to naked short selling, i just read it really fast and missed some of what you said. You are right about needing to stop naked short selling though. It shouldnt even really be able to happen.

[dialog_gvf]

Originally Posted by DeathByAsh'aman

You are right about needing to stop naked short selling though. It shouldnt even really be able to happen.

Exactly. Why are the biggest boys allowed to get away with this criminal activity?

Hedge funds that practice illegal activity, and then are bailed out by your tax dollars if they bet wrong?! It's obscene.

Gary

[DeathByAsh'aman]

Originally Posted by dialog_gvf

Exactly. Why are the biggest boys allowed to get away with this criminal activity?

Hedge funds that practice illegal activity, and then are bailed out by your tax dollars if they bet wrong?! It's obscene.

Gary

I would say they can get away with it because the put their orders in directly to the exchanges so in effect they are policing themselves. Quite frankly though i made enough money these last few days of trading to cover my part of the bailout so im content. Well close enough with my paltry account.

[kjack]

And things get messier...a mere $8B missing.

http://www.businessweek.com/investin...g_blogspotting

[Maximus]

Originally Posted by kjack

And things get messier...a mere $8B missing.

http://www.businessweek.com/investin...g_blogspotting

Well comes as no surprise to me.

Everyone knows that the European operation was making all of the money for Lehman, enough to cover two years worth of losses from the US branch. Even in my company we have been covering US losses with our profits for a year or so.

What I don't understand is why the European operation is taking the fall for the idiocy of the US operation at Lehman. Only the investment banking arm actually made money in the US, while in Europe the whole arm was taking in massive profits.

Edit: The Mayor, Boris Johnson has made it clear to Lehman Bros (Barcap) that they will not be welcome in London until the $8bn is returned to European arm, so it will be returned.