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.


Blogger Its_strange said...

I can't recall the bigshot L.A. attorney who successfully sued Keating but Amerisoft hired him to sue Greenberg , Rocker and TSCM. The case was dropped when it was discovered Amerisoft was a scam.

Why is OSTK and NCANS suing Rocker for unfair business practices and not the overseas exchanges that you claim play a part in naked shorting ?

10:42 AM  
Blogger bob obrien said...

The part that the offshore exchanges play is in enabling an international arbitrage loophole to be abused.

There is nothing illegal about listing on a foreign exchange, thus nothing I can think of to sue over.

Just as it would be foolish to sue over manufacturing automobiles, even though they can be used for hit and run assaults. The car isn't the problem, it is what it is being used for that is the problem...

And do try to get your facts straight - NCANS isn't suing anyone. OSTK is.

Now you can return to the wonderful world of Mathews, where never a fact shall intrude, and nobody knows anything about any of that....

11:49 AM  
Blogger smokyjoe said...

Good time for no margin and certs. Even perfectly performing notes were called in the S & L debacle to get land for pennies on the dollar. FACT.

12:09 PM  
Blogger Its_strange said...

Your executive director is , correct ?

12:18 PM  
Blogger bob obrien said...

She also owns a car.

NCANS does not own her car.

Most folks can appreciate subtle distinctions like Mary, who owned the stock and is thus aggrieved, and NCANS, who owns no stock.

It doesn't require a tremendous amount of mental dexterity.

I'm sure you can manage it if you try.

12:29 PM  
Blogger Its_strange said...

Has anyone been served ? Have you ? Has Rocker or Byrne ? I would love to hear courtTV is going to air it.

12:57 PM  
Blogger bob obrien said...

Haven't heard of anyone being served yet.

Why would I be served, do you think?


Or is it sort of like Mary and NCANS being interchangeable in your mind, thus critics of Mr. Rocker are all subject to suit?

Fascinating bit of legal jockeying, that.

1:09 PM  
Blogger Its_strange said...

I thought i read Bob O'Brien was going to be sued as well. Perhaps i am mistaken .

1:16 PM  
Blogger SECFOInfo said...

Lawsuits? If Judge Roberts testimony is any indication of the players. It will be a very long road. Experienced lawyers twist and extend at will.

The shorts will be gone by then. The Delta (DAL) bankruptcy news just won a bunch of them a free pass. Time is on their side.

lawsuits have their limitations.

1:38 PM  
Blogger Its_strange said...

Why didn't Mary sue the people mentioned in your lastest blog ? Why didn't she sue the media personalities , the mastermind , the tactical manipulation boss etc, etc ?

2:04 PM  
Blogger bob obrien said...

Great questions.

And if I was a plaintiff's attorney I might know the answers.

I suspect we will find out sooner rather than later.

I too read of the hedge fund's intention to sue the Easter Bunny. I wonder how they achieve service in Candyland? Dunno. Still, worth every dime of publicity value, I'm sure.

Don't let the big floppy ears fool you. There's more to me than 4 potentially lucky key chains...

Has Jeff gotten past the "I don't know how to naked short" dunce stunt yet? You are likely the only one still reading his tripe, so I thought I'd ask - any plans to get a tent and take it on the road? You could undoubtably sit in the audience and shout "Amen" and "you're so smart, Jeff, thank goodness we have you to tell it like it is" to his every smirk and smarmy eye roll. Maybe be the newly walking in every other city.

Something to think about when this gig goes south. Hate for that sort of natural charisma and facility with language go to waste...

"I....I don't know...I don't know what to say..."

Plasma screen to watch CNBC, $1800. Watching the dummy's head move back and forth while ill-conceived lines emerged forth, priceless.

Next time have the speaker drink a glass of water while your buddy "talks" - it could be a show stopper.

Just trying to help.

6:20 PM  
Blogger n-tres-ted said...


Thanks for posting that DTCC PR about the automation of buy-in notices. That appears to be a positive development, but I suppose we have to first await regulatory approval and then implementation. Any thoughts about it?

8:06 PM  
Blogger Its_strange said...

You don't need to be the plaintiff's attorney to answer. Ask your executive director .

1:26 AM  
Blogger Its_strange said...

" Don't let the big floppy ears fool you. There's more to me than 4 potentially lucky key chains " What are you talking about ? Or are you just trying to be clever or cute ?

I leave "Amen" for the snake oil saleman . You know any ?

3:46 AM  
Blogger bob obrien said...

I didn't realize that elderly shareholders were now expected to formulate legal theory.

Huh. You learn something every day.

Is there a correspondence course in that, do you think? Is Milberg available for consultation a la Psychic Hotline?

"Lawsuit Hotline"

"Uh, I think I have been violated by a cabal of short sellers, market manipulators, research firms, investigation companies, and billionaire fraudsters. What legal theory for my cause of action should I use?"

"Well, if you want a shot at RICO, stay away from any securities stuff - stay in the commonlaw fraud areas..."

"Huh. OK. I see."

"I prefer the business interference cases as an opening gambit - have you seen our package on state court tort, for 3 easy payments of $29.95?"

"Oohhh, I was looking at that. Are you going to have a special with that and an abdominizer anytime soon?"

"Well, we do have a slicing dicing DA complaint device we will throw in absolutely free if you order now..."

"Let me think about it."

And so on.

I suppose if you have been on the Street for 25 years and yet have no idea how fine folks like Refco and Shane are naked short selling, anything would seem possible - the rain god makes the water come from the sky, the thunder god flicks the lights on and off while striking his drum...

8:07 AM  
Blogger bob obrien said...

Snake oil?

Like "I don't know nothin' 'bout none of that naked shorting"?

That would be hard to bottle - getting the facial ticks and patent insincerity down, along with the snide superiority chaser.

And the label would be a bitch.

But still, I suppose if you can go on national TV trying to sell ignorance of a pervasive industry practice (astoundingly, none of the S&L crooks knew anything about fraudulent loans, and none of the Specialists knew anything about front running, nor did the mutual fund managers whose compensation packages included easy money loans to directly benefit from the practice) I suppose nothing is too low.

Is it?

I mean, you would have to ignore the Reg SHO list and the SEC's own admission that the fails were to the level where the volatility of complying with 17(a) would cause massive disruptions, for starters.

Know anyone that believes that investors are that stupid?

8:14 AM  
Blogger bob obrien said...


So now they can electronically and instantly decide not to buy in the fails, rather than using old fashioned technology to elect to not settle the trades.

Progress of a sort, I suppose.

Call me cynical.

Others have.

8:15 AM  
Blogger Its_strange said...

She can pick stocks , she can appear as Mary Campbell on your video , i'm sure she can give you some idea why she decided to sue some and not others. In fact she is the executive director of this organization. Please ask her to come here and tell me herself.

2:21 PM  
Blogger bob obrien said...

Isn't it bad form to ask plaintiffs to discuss their cases in public forums?

Why don't you ask Rocker why he wants to sue me?

I mean, I know why he wants to, but ask him on what legal theory.

I'll check in regularly.

4:45 PM  
Anonymous Anonymous said...

Bob, excellent post, just excellent! You know its funny cause I read the crap that JM writes and I swear I can't figure out for the life of me how this guy is given a dollar to run for anyone. The other day he was comparing the price of bottled water at Starbucks to oil. Priceless I tell you.. I heard some rumors around the trading desks that naked shorts were being called in this week. Way to shine the light on the crooks.. Of course we all know the masterminds get a few extra months on their crooked positions. Keep up the good work Bob.

6:56 PM  
Blogger Its_strange said...

Didn't Patrick hold a conference call to discuss the lawsuit ?

2:49 AM  
Blogger geezier said...

First off… I’m not what’s referred to as a Kool-Aid drinker… I believe that cynics live longer… and being long NFI has proven to me that RP can be a pain in the rump. BUT it only takes a little googling to realize that market gaming takes place on a regular basis. Not only in the small portrait of OSTK, NFI, ACAS etc. but also in the larger landscape of sector rotation, currency markets, commodities, and more. With hedge funds controlling at least a trillion dollars in unregulated assets they have the ability to move markets for their own benefit.

Two questions that come to my mind are:
How was this allowed to happen?
How can it be unwound?

The answer to the first seems obvious. GREED.

The answer to the second not so clear. The tendrils of this behemoth appear to run very deep into the financial community. The dangers to the markets and investment banking seem to only attract whispers and denial…. And of course the tinfoil hat salesmen.

Do you have an opinion on how to remove the effects of this parasite without killing the host?

Thanks for all your good work.

11:06 AM  
Blogger geezier said...

First off… I’m not what’s referred to as a Kool-Aid drinker… I believe that cynics live longer… and being long NFI has proven to me that RP can be a pain in the rump. BUT it only takes a little googling to realize that market gaming takes place on a regular basis. Not only in the small portrait of OSTK, NFI, ACAS etc. but also in the larger landscape of sector rotation, currency markets, commodities, and more. With hedge funds controlling at least a trillion dollars in unregulated assets they have the ability to move markets for their own benefit.

Two questions that come to my mind are:
How was this allowed to happen?
How can it be unwound?

The answer to the first seems obvious. GREED.

The answer to the second not so clear. The tendrils of this behemoth appear to run very deep into the financial community. The dangers to the markets and investment banking seem to only attract whispers and denial…. And of course the tinfoil hat salesmen.

Do you have an opinion on how to remove the effects of this parasite without killing the host?

Thanks for all your good work.

11:10 AM  
Blogger bob obrien said...

Well, I believe that the biggest danger to the market is not the predatory hedge funds, per se - they are a symptom of the disease.

The real issue is the ex-clearing problem.

If you have all these brokerages with a second set of books, maybe sitting with their BVI and Thai and Cayman and Luxembourg and such correspondent or affiliate brokers, they can just shuffle their ex-clearing fails around and around and around without ever having to call them in - and that creates a classic temptation for bad guys to do bad things and get away with it. The ex-clearing desks typically will hold their fails for 29 days, and then shift them off to another broker, restarting their internal clocks for their accountants' purposes, and merely swapping liabilities with other brokers. It is much akin to house "flipping" wherein the price of a real estate asset is artificially inflated via a series of transactions designed to create that inflation - except that with fails, the inflation is a time inflation, not a monetary inflation.

My sense is that the system needs to get the DTCC's FTD's bought in at a measured rate, say 3% per week. That will cause a lot of pain, but won't destroy the system, just return it to a reality-based equilibrium.

The ex-clearing problem is another matter. It is likely many orders of magnitude larger than the FTD problem.

That requires a task force comprised of SEC and State guys that know what they are looking at, to come up with a measured way to unwind the problem. The collective worth of the brokers is unlikely to be adequate to unwinding the ex-clearing problem, as it represents the very real theft over time of a significant chunk of the nation's net worth, and resultant re-distribution to those gaming the system, which in this case is most of the brokerage community and the hedge funds that play the dark side - likely a small minority of the 8000+ funds out there, maybe 5% or less - still, at least 400 by that math.

So I'm not sure how to unwind that without causing a blast to go off, but I'm also not sure that a blast is such a bad thing. Perhaps a third of the brokers do need to taste their own medicine as they are forced to absorb tremendous losses from having the phantom shares they created bought in. Perhaps the bad guy hedge funds do need to vaporize as their positions are bought in.

If the free market and capitalism really is so great, plenty of folks will make plenty of money through this process, even as others are destroyed.

The bad guys and brokers that game this haven't had many sleepless nights over the millions that have been destroyed so that their victims' wealth could be redistributed to them - why precisely should they be afforded a protection that their victims weren't?

I would imagine that the only ones that interested in seeing the system protected at the expense of its victims would be the parasites and the members of the system with the most to lose.

So problem one, do a workout of buy ins on a measured basis, say 3% per week, starting now.

Problem two, require clearance AND settlement (i.e. delivery) within T+3 - no exceptions, thus no new FTD's. And do away with Addendum C, wherein the Borrow Program was initiated, and further force the DTCC to use the same definition of clearance and settlement as the SEC doesn where the two MUST occur in order for a transaction to be complete - they are not divorced from one another (as the DTCC does now), and replace it with a rule that says that nobody collects a commission and gets paid until the trade clears AND settles. That creates a financial driver for the system to behave as it is supposed to.

Those two steps will stop the problem from getting any bigger, which is the first goal.

Then open the box on ex-clearing, and do the same thing - measured buy ins over one year, by which time the problem has to be cleared and over - and if half the townhouses on the upper east side and all the Gulfstreams sitting on the runway need to be sold to cover the contingent liability, so be it. If many of the victim stocks surge 500% or more, so be it - shorts will make money on the back end, but legitimately this time, and longs will make money on the front end. If some of the victims can make some of their money back by investing in the workout's integrity, so be it.

I believe that is how a fair, honest auction market is supposed to work.

To protect one elite group and allow them to prey on the populace is not an equitable system, and that is our current system.

I do not believe that should be allowed to continue, or we could be talking national debt-sized contingent liability, from which it could take decades to recover.

Exactly like 1929-1960.

We need to learn from history.

On a side note, I see that I am being attacked with renewed vigor as the messenger, and that a whole new slew of allegations and smearing are going on. Barron's led the charge via Wild Bill Alpert, and the message board choagies are working overtime to intimidate and smear.

Let me say this. I won't comment on any speculations as to my identity, and further don't see why it is that interesting - either there is a tremendous problem, and I am just the guy that happened to be in the right place at the right time, or there is no problem, in which case who I am is immaterial. I do find it interesting that apparently an entire faction wants me silenced and discredited now - seems like I might have turned over too many rocks, and it is making everyone very uncomfortable.

Be that as it may, at the end of the day I'm fairly unremarkable, and any "dirt" that will be dug on "me" will be innuendo, smearing and guilt by association activity, and lots of character assassination - none of which will change the facts of the clearing and settlement quagmire.

Guys? Guess what? I'm not your problem anymore. The snowball is already rolling down the hill. I can't stop it. I can go on hiatus for the next 6 months and it will still inevitably roll down the hill, driven by a gravity that is seminal and relentless.

So have a good time, but it won't change anything - except maybe cause my demand as a Grisham-esque novelist to increase, and the non-fiction market book to take on much more significance.

So as long as they spell the name right, bravo.

But it won't stop anything now.


1:19 PM  

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