Thursday, September 22, 2005

New Discussion Forum at

There's a new message board at that has been created as a central repository of information regarding the FTD scandal.

One of the NCANS webmasters created it, and hats off. Bravo. Well worth checking in and taking a look. I suspect that this will become one of the must stop at places for the regulators to get a pulse on the issues. I would encourage one and all to go there and surf around a bit - one never knows what one might find. The issue is getting bigger by the day, and this should be one of the catalysts that takes it to the next level.

Sunday, September 18, 2005

Easter Bunny In The News Again

Apparently Bill Alpert of Barron's, untroubled by the recent Bayou hedge fund explosion, or any of the other naked short selling related news, has written another snarky piece in which he repeats the NY Post's speculations as to my identity, and then goes on to link that speculated identity with a religious website. I'm not going to waste a whole lot of time here on the absurdity of all this, but given that the message board bashers are going into a feeding frenzy of glee over this obviously planted piece (IMO), I thought I'd offer up the following thoughts:

1) The Alpert piece is incorrect in its most basic claim, that Saunders' brother (assuming that it is his brother) created or is involved with the site he cites (couldn't resist the alliteration, sorry). That site is created and is devoted to pieces by someone named Brett Randolph. So the story is wrong at its core, something we've all learned to savor like a fine wine from Mr. Alpert (drinkey drinkey...typey typey...). Saunders' brother is not apparently connected to Randolph, other than sharing a link and a publisher.

2) Saunders' brother apparently wrote a book, and Saunders apparently helped write or edit or whatever that book, and has a co-author credit (assuming that Phillip Ross and Phillip Ross Saunders are one and the same, which seems likely given that Ross is Saunders' middle name).

3) Saunders is not in any way connected that I can see (nor is it claimed anywhere that I can find), with the Randolph site or material (I haven't checked the library of Congress to see who it is copy-written to, and frankly don't have the time or the interest). At best some of the bashers have advanced that Randolph may be connected to Saunders as an employee (or ex-employee) or a web consultant, thus Saunders must be involved in some unknown and heretofore unproven capacity - pure conjecture and invention, a "might" supported by a "could be" based on a "possible".

Other unknowns are whether Saunders co-writes with Mr. Alpert, or whether they are one and the same person - nobody has seen the two men in the same place, thus it is equivalently supported by fact - it's all possible, right? Anything is - that's why these sorts of articles usually get killed - but not at Barron's. Nosirreee.

So that's it folks. The guy the NY Post speculates might be the Easter Bunny might have helped his sibling (assuming that is right, could be his dad or his cousin or his long lost nephew or uncle) with a book. Period. And the book is apparently about Christian or spiritual material "which celebrates the triumph of the human spirit " - sounds profoundly troubling and nefarious in some way. As an Easter Bunny I am disturbed that anyone connected with acting as a shareholder advocate and commentator might also be involved in anything remotely Christian or spiritual, especially if it might be at a superficial level to help his relative, who apparently is religious.

What's next? Did Saunders get ticketed for trespassing at some point? Oh, wait, no, that would be Jesse Eisinger, of the WSJ. Did he get put away for trafficking in Stingers? Uh, no, that would be...well, you know. So the absolutely best and most juicy stuff they can come up with is the guy's brother's book, and a connection to a web designer who did some work on another site that Saunders is purportedly linked with - although how is unclear.

For anyone who might be wondering, I still am not going to comment on speculations about my identity, either pro or con - that's been my policy all along, and I see no reason to change it now. I do think that if the best body blow these guys have is a relative's book, if that is the deepest darkest dirt they can come up with, then they are running seriously scared, and have been told to make hay with something, anything, and do it quick. Apparently I have them worried, and discrediting me has gotten pushed ahead of discrediting Dr. Byrne. Amazing.

I do have a sneaking suspicion that this latest tangent is some sort of Machiavellian scheme by the Saunders clan to draw attention to their work - does Alpert know them, I wonder? Can't buy publicity like this, so I am somewhat skeptical. But then again, I'm paranoid...

Wonder why they have it in for the Bunny? A cuddly soft rodent whose big offense is to want the markets to be run honestly, and those who have been breaking the law to stop it. I can see why that would be threatening. And yet this particular rabbit has now appeared more often in NY financial publications than the chairman of General Motors this year. What's up with that? Touch a nerve?

Anyway, while some say "I don't know nothin' about any of that", I will simply say "I am not making this up".

Can this really get any weirder? Will the old lady in Vegas get her own sitcom? Does the web guy get a miniseries? Is there a Vanity Fair piece on my taste in socks in the offing? Maybe my own Discovery series on blogging for notoriety and fun?

Thank goodness that nobody is asking why OSTK has been on the SHO list now for over 6 months, and NFI since the day it commenced (both punctuated by a few weeks off), and why the SEC won't tell anyone why that is. I mean, we have weightier matters to attend to...

Like who is the Easter Bunny.

Astounding. Truly.

Wednesday, September 14, 2005

A Well Traveled Road To Ruin

I’ve been reading an outstanding history of the 1980’s S&L debacle, the appropriately named In$ide Job, by Pizzo, Fricker and Muolo. There are more than a few striking similarities between the disaster it chronicles, and the current topic of NCANS’ and my attention – hedge funds, and the abuse of the system that FTDs and associated market manipulation represent.

First and foremost, what is obvious in reading the book is that a very small nucleus of very bad apples successfully raped and pillaged the thrift industry of many hundreds of billions of dollars. This was not a widespread series of isolated individuals who all happened to have the same larcenous idea at the same time – rather it was a group of predators who all were intertwined in a Gideon’s knot of complex flim-flams that wound up costing the nation an unprecedented amount of its worth.

What is shocking is that so few individuals could so dramatically destroy so much wealth, and leave the taxpayers footing the bill. Follow along and you will see why I believe that there are such strong similarities between that financial scandal, and the hedge fund/manipulation/naked short selling scandal that is unfolding even as we speak.

First, understand that what enabled the fleecing of a country’s banking system was deregulation – the reduction of regulations that had been in place to prevent widespread abuse of the industry – specifically, the elimination of the rule that limited brokered deposits (deposits from entities looking for the highest daily interest rates, which were brokered by guys whose business it was to locate and direct money to the best deal of the day) versus locally generated deposits, and the elimination of regulation governing loan types. The thinking was that the market would work itself out, and that capitalism would prevail, creating a sort of financial evolution in which the superior models survived (note the striking parallel to the elimination of the uptick rule for short selling, as well as the effective elimination of prompt delivery requirements - in violation of 17(a), and in violation with the primary mandate of the SEC from 1934).

This flew in the face of everything we know about human behavior and history, but everyone just kind of ignored that, and pretended that things were different this time.

A lack of oversight and regulation where money is involved invites in the wolves, and they are not a particularly civilized nor conscientious bunch.

Lack of regulation always, and I do mean always, creates an environment where larceny is the rule of the land. Happens every time, no exceptions.

The way the S&L scam worked was that entrepreneurial crooks would buy an S&L, and then get hooked up with the small network of deposit brokers that controlled the money flow, and build up the amount of money the S&L had to lend. This was done by offering a slightly higher interest rate than peers, and doing a sweetheart deal with one of the brokers – generally a tit for tat: "we bring you a hundred million, you make a ten million loan to my buddy Vinnie". The S&L didn’t care, because it was the government’s money – all deposits, as long as they were in hundred thousand dollar chunks, were fully guaranteed and insured by the Fed.

So the depositors were protected, and the borrowers were in hog heaven – million dollar loans were made for literally worthless projects, and the money would disappear into a labyrinth of shell companies and partnerships. And those operating the abusive S&L's lived lives of power and luxury rivaled only by...present day hedge fund managers.

In the S&L game the same names kept appearing time and time again – the same deposit brokers, the same borrower networks, the same associated friends and groups, and ultimately, inevitably, organized crime figures.

Our elected officials were swayed by the powerful and rich S&L lobby, and the fact that their campaign contributions came from many of the wealthy who were a critical component in bilking the system – so they were absolutely against any reining in of this new cash cow business, that was fueling such astounding prosperity and growth.

Our own Fed Chairman, Greenspan, then a prominent and respected economist, sent the head of the S&L regulatory agency (FSLIC) a letter indicating that all was well, and that he (Gray) should stop worrying, that deregulation was working as planned – he even named 17 thrifts that were benchmarks of the new success and prosperity. The irony is that 4 years after writing that letter, 15 of the 17 were out of business and had cost the FSLIC $3 billion in losses. Greenspan was working as a consultant to Charles Keating at the time, of Lincoln Savings and Loan Fame. Small world.

And here we are. Greenspan is assuring us that the hedge fund industry doesn’t need any meaningful regulation, those chartered with regulating the markets are either turning a blind eye or are actively conspiring with hedge funds that routinely violate the rules against naked short selling – and are covering up for them by keeping all FTD info secret (by the SEC’s own admission, per their online FAQ).

Dr. Byrne postulated in his presentation that the conspiracy of greed that was the collection of hedge funds, media personalities, private investigators, high net worth politically connected individuals, class action attorneys, etc. was all being driven by a tactical manipulation boss, and another individual who masterminded the whole scheme.

That was routinely mocked as being impossible, outlandish, silly, deluded, the workings of a disturbed mind.

And yet when we look at the single greatest financial fraud in the nation’s history, we find a network of connected individuals working at the direction (or being led by) several well placed gentlemen who understood the loophole that the brokered deposits represented, and who structured the incredibly complex transactions to funnel loans into the black hole whence they disappeared, never to be seen again.

We find a few strategic operators who propagated their larcenous activity in an almost viral manner, compromising the entire system.

We find a regulator that is hamstrung by elected officials whose allegiance is to rich and powerful lobbies, rather than to the country’s good (Donald Regan, Kevin Ingram’s mentor and the former head of Merril, was the primary anti-regulation guy in the S&L scandal).

We find our beloved Fed Chair arguing against regulation, and using the biggest crooks in the industry’s history as his model of success.

We find huge money moving around without any accountability.

We find repeat offenders who were responsible for being convicted in prior illegal schemes hard at work milking this illegal scheme.

We find a who’s who of supposedly respectable high net worth fellows who were robbing the system blind, and who spent little or no time behind bars for the financial fraud of the century.

Many of the players were previously involved in Wall Street scams, or real estate swindles, and all had a disdain for law enforcement and the regulatory system – which was appropriate given the risk/reward profile of the amount looted from the system versus days spent in jail.

The S&L aftermath and federal bailout left each and every taxpayer in this country with a bill estimated at greater than $2K per person. And it is small potatoes compared to what is being described as the contingent liability arising from the FTDs.

If you aren’t worried, and you are too dim or too naïve to see the pattern here, and the historical precedent, and the marshaling of forces to defend the indefensible, then you are living on a different planet. Not only has there been widespread larceny involving a coordinated scheme directed by just a few players, but there has been one recently, with the best and brightest from Wall Street and our government involved.

So next time you are reading an article about how wacky the whole thing is, how impossible, reflect on the S&L debacle, and the fact that the exact same tactic of denying everything, and then minimizing the size of the problem, and attacking the messengers of warning…all are SOP when the system is caught with its hand in the nation’s cookie jar.

Here we go again.

Tuesday, September 06, 2005

An Ugly State Of The Union

I've been thinking about the whole ugly clearing and settlement system and resultant FTD mess, and the DTCC and SEC's culpability in the matter, and Reg SHO, and abusive naked short selling as part of a stock manipulation strategy, and after having been on vacation for a week, I can honestly say that I believe I have some clarity.

First, a recap. The SEC initiated Regulation SHO in January of 2005, requiring that any stock that had more than 0.5% of its outstanding shares AND 10,000 shares Failed To Deliver (FTD) would go on a list - the REG SHO list. Settlement failures have been against the rules (specifically, rule 17(a)) since 1934. As part of Reg SHO, the SEC "grandfathered" all past settlement failures. The DTCC owns the DTC and the NSCC, and is a monopoly assigned with clearing and settling all public equity trades in the U.S. That monopoly is owned by the brokers - the "participants". It is a private corporation organized under NY banking laws, and is a Self Regulatory Organization, meaning that it is supposed to police itself, and uphold all securities laws. One could easily argue that it is an alter-ego for the Wall Street brokerage community, as is the NYSE and the NASDAQ - that is the position I take in my scribblings.

In the interest of capturing my thinking on the nature and scope of the problem for posterity, I thought I would do a September State Of The Union address, and recap my understanding of the current situation. So here it is, in no particular order:

1) Reg SHO is a failure.

It fails to protect investors, and fails to live up to the most basic requirements of a reasonable measure. The reason it is a failure is fundamental to the flaw in the thinking that created it, namely that some settlement failures are acceptable.

If one views the SEC's mandate, it is theoretically to protect investors, thus justifying a restored faith in the system following the Crash of '29 and subsequent financial chaos. One of linchpins of that restored faith was that trades would clear and settle in a timely manner, eliminating the potential for abusive short selling that typified that period. The thinking was that if one established a reasonable period for clearing (the processing of the order and the buy/sell transaction) and settling (the physical delivery of the shares and the funds, e.g. the conclusion thereof) that one could eliminate naked short selling, wherein a stock was sold into the ground with a stream of sells, and delivery was never made, or was delayed beyond a reasonable period. Back with 1934 technology, reasonable was five business days following the transaction day - T + 5, later ammended to T + 3 in the 80's.

That was great, and settlement failures were pretty academic - if there was no delivery of shares, then no payment was made, and the transaction was void - a broken trade. Seems reasonable - if you didn't deliver the goods, you didn't get any money, and no commissions were paid to either broker (buyer or seller). That worked well. Everyone was motivated to make the trades settle.

Because otherwise nobody got paid. And Wall Street loves to get paid.

There were no extended settlement failures - rule 17(a) required timely settlement, and everyone's pay was based on timely conclusion of the trade.

Before we continue, understand that 17(a) still requires timely settlement of trades (the exact wording is "the prompt and accurate clearing and settlement of securities transactions including the transfer of record ownership"), and does not authorize anyone, not the DTCC, nor the SEC, to just waive the requirement that trades settle promptly and reasonably (the part where delivery is achieved and ownership is transferred) - thus, the notion of grandfathering hundreds of millions of past settlement failures (that SHO pronounced with a stroke of the pen) violates one of their primary mandates - prompt settlement of trades. If it ever faces a legal challenge, I believe it would be struck down as unlawful. I know it, the SEC knows it, and the participants know it. The only reason nobody has sued is because there's no money in it. But make no mistake, it is unlawful.

Now, the SEC will likely argue that the NSCC has Carte Blanche via the NSCC's Addendum C (which was passed by the NSCC to enable the now infamous Stock Borrow Program) and its allowance of "reasonable" settlement in light of "legitimate" failures to deliver, but I would simply direct everyone to consider the idea of "reasonable" settlement.


In 2005.

In a Six Sigma world of nanosecond technology.

Professor Boni's research paper concluded that the average age of a fail was 56 days. Does anyone think that 56 days would survive the reasonableness test in 2005? It would have failed 71 years ago, and it would fail today - hence Reg SHO is a farce and a failure, and I believe illegal in its grandfathering provision. Now the DTCC will fall back on the NSCC's self-penned Addendum C, which allows for settlement failures for "Legitimate" reasons - but does anyone believe that hundreds of millions of FTDs aged for months are "Legitimate", much less reasonable? The bond market clears and settles in T + 15 seconds - what would a legitimate failure look like in equities? A couple of hours? Maybe a day or two? Definitely not 56 days. Thus, the Addendum C argument is a ruse, and fails any reasonable interpretation. The system is being gamed. And the DTCC and SEC are facilitating it, and using a flawed argument to justify it.

2) Fast forward to the modern era, specifically to the 90's, when Congress agreed that it was a good idea to dematerialize paper stock certificates, and to let the DTC act as a bank, where the certificates would be kept, and one electronic book entry (tick) would be created for each legitimate share. Great in theory. No more paper running around the Street, and increased efficiency. The problem is that the DTCC, the parent of the NSCC and the DTC, decided that it was going to separate out clearing and settling, and no longer require that trades settle in order for everyone to get paid.

You read that right. On Wall Street, signing a contract to attempt to deliver stock at some point in the future now gets everyone paid. Imagine if selling a house worked like that - your real estate broker would get paid and your account debited at the point that he agreed to try to get you a house matching certain specifications. Or imagine a car salesman getting paid the second you signed the agreement, and you got an IOU instead of a car - he'll try to find you one just as soon as he can, or whenever he gets a chance - maybe his acquisition cost will go down if he waits long enough...

Does anyone else see how badly broken this is?

By breaking out clearing and settling as two separate items, the DTCC and the participants that own it have engaged in a nice little rhetorical fraud. They can "clear" the trade the same day it is entered, and the DTCC, the brokers, even the SEC all get paid, and the settlement portion is left as an afterthought that is not really a requisite for anything.

That creates institutionalized fraud, wherein your money is taken, you receive a brokerage statement indicating that you received "shares", but in many cases what you got was an IOU, which has no voting rights, and no ETA as to when it will be converted into real shares - IF EVER!!!

One of the neat tricks the system set up was where the NSCC became the contra party in both sides of the trade, meaning that if the Stock Borrow Program was used in a settlement failure situation, there was no direct connection between the buyer and the seller. By intermediating the exchange, the NSCC now could create plausible deniability if shares didn't show up - it could "borrow" shares held in an anonymous pool, which would be credited to the buyer's broker's account, which would then go right back into the anonymous pool the next day - creating a virtually unlimited stock creation scheme, unlicensed and unauthorized by anyone (again, the DTCC will argue that addendum C gave them that right, to which I would direct them to the reasonable terminology, and the open-ended failures that are the reality - certainly more than 1934's standards, thus unreasonable given current technology).

So we have a de facto stock manufacturing scheme, wherein the number of electronic book entries has nothing to do with the actual number of shares in the DTC vaults (that's how it was originally intended; 1 electronic share for 1 paper share) due to the Borrow Program's abuse by its participant owners - a function of the DTCC becoming a monopoly, with nobody to ensure that anything about the scheme was rational or reasonable - certainly not its participant owners, who now get paid without delivering anything, and for which failure there is no apparent deterrent or penalty. And it is all presided over by the SEC, who relies on the conceit that the brokers and the DTCC will act in good faith, in the shareholders' best interests, on the honor system.

Institutionalized fraud.


Absolute power corrupts. As always. And yet the SEC and the DTCC act as though this time in history is different than all other similar times in history. Why would any reasonable person believe that?

3) The worst is yet to come, though. If I am correct, the ex-clearing problem that was created when the DTCC decoupled clearing from settling is now wildly out of control, and is likely at least 5 times as great, if not 10 times or more as great, as the REG SHO Fails.

Here's how the ex-clearing shell game works: The DTCC has a system wherein they will clear the exchange of money for the two parties, but then let the two parties arrange for settlement off-line, between the two of them. You read that right. Again, everyone gets paid, but now the DTCC is out of the loop, as it is just between the two brokers as to when the actual goods will be delivered - if ever.

Now, does everyone get this? The brokers that own the DTCC get to decide when and if the shares get delivered, and they tell nobody at the DTCC - it isn't the DTCC's business what two companies do, after all - that's their business, and presumably they are obeying the rules and delivering promptly.

Am I the only one that understands that this creates a system where the brokers can literally create money at will, and as long as nobody breaks ranks, nobody ever has to deliver anything, ever? Does anyone see any difference between this and just printing as many shares of stock as a broker feels like? No cost of goods sold, and no real barriers as to how many shares can be sold into the market, as long as the den of thieves keeps its second set of books away from the prying eyes of the DTCC - who being owned by them, isn't particularly interested in upsetting the apple cart anyway.

This whole out-of-control scheme has now gotten to the point where I believe that the entire market system is dangerously jeopardized, and is in fact now constructed to ensure that companies which have been abusively shorted using Stock Borrow and ex-clearing FTDs stay depressed in price, or better yet, go out of business. Besides eliminating any effective requirement for delivery, one of the other nice things the DTCC came up with was to allow the sellers who sold the FTDs to have access to the cash they generated due to the FTD sale, over and above whatever the current mark to market price is today.

What that means is that if Short Seller A sold a million shares of NFI naked and FTD'd them at $60 or so, and today's price is $35, Short Seller A gets to use and in fact keep the delta between $35 and $60 (with some remaining above the $35 for collateralization requirements). Call it a cool $20 million assuming that $5 was kept as a collateralization premium. Now, in what other world does the seller get the proceeds from a sale that he never delivered the product on, and which he likely never will?

But it gets better. If Short Seller A gets into bad trouble, and has 20 companies he's done this to, and if he goes belly up, guess what? The DTCC has the financial obligation to make good on buying and delivering the shares, along with the brokers that sold the FTDs, and which are also owners of the DTCC. Does everyone see how it is in the best interests of everyone in the system EXCEPT the company and the shareholders to ensure that once a company is under an attack that results in FTDs significant enough for the company to show up on the SHO list, that it stay chronically depressed, for the duration? How can one achieve that? Why, keep selling more FTD's, and take them ex-clearing!

Folks, I believe that this is a centi-billion dollar problem now. The math bears that out. The DTCC says that the Stock Borrow Program satisfies 18% of the daily FTDs. If 82% of the daily FTDs are not handled by the Borrow Program, then the obvious answer to the question of where they all go is simple - they go ex-clearing. The end result is that now the brokers have significant skin in the game to ensure that the companies' share prices stay low in perpetuity.

That is where I believe that the fraud is the worst. The brokers no longer have to deliver squat, thanks to rules that their SRO, the DTCC, passed, so their interests are no longer as the custodians of the shareholders' interests. Their interests are in fact the diametric opposite. They are alligned with their biggest customers - the short selling hedge funds. How convenient.

So that is where I have arrived, after working this issue for 6 months or so (NCANS was created in February) - we have the SEC knowingly violating its mandate to protect investors and ensure that trades are settled in a timely and reasonable manner, we have the DTCC and the participants removing the delivery obstacle to separating investors from their money, and we have a system that is now organized to perpetuate a systemic fraud that is large enough to where it likely exceeds the DTCC and the participants' NAV and ability to buy all the shares it has created - leaving it with the only alternative it can use - destroy most if not all of the companies that have been the most brutalized. Either that, or face financial Armageddon.

You can't be forced to buy millions of shares if the company is out of business, or is de-listed.

Does everyone completely understand just how far this has gone?

Feel free to send this to your elected representatives, and your state securities representatives. Forget about the SEC - they are clearly part of the problem, IMO.