Ah Have Always Depended On Tha Kindness of Strangers
(NOTE: REFCO just filed for bankruptcy protection, this evening, 12 hours after this editorial was written. No statement has been made as to the nature of the debt that caused this blowup. No indication has been made that the public will ever find out what the debt consisted of - the cone of silence has descended, apparently, and few in the mainstream media are asking "what was the debt that brought down the company in a week?" It is worth noting in passing that the assurances by the entrenched Wall Street power structure that all was well were apparently somewhat exaggerated...)
REFCO continues to melt down, and our regulators are simultaneously sending the signal that all of this is nothing to worry about, while carefully guarding the true nature of the $430 million of liability, for which REFCO used special purpose entities in order to conceal that debt from investors.
Of note is that the loan made to Bennet to cover the payback of the funds to REFCO was made by an Austrian bank, for which the collateral was REFCO shares, which are now worthless. Is the bank calling in the loan to Bennet? If not, why not? Starting to get the feeling that the intersection between international entities of questionable motives and character and the US financial system isn't as far-fetched as one might have believed a week ago?
There is some media speculation that the commodities side of the business may be sold off (although O'Quinn, the attorney suing Rocker and Gradient in OSTK, has a multi-billion dollar claim against REFCO, and is unlikely to allow the sale of the only asset that has value following proof of fraud), but the real story is that the SEC allowed the company to do an IPO even though their books were in disarray, and their management was facing serious sanctions for participating in past stock manipulations - and the SEC now continues to treat the details of the debt that caused the implosion as top secret. That raises some interesting questions:
1) Why is the nature of the contingent liability a secret? Who benefits by that secrecy? Don’t the investors who have lost billions of market cap in the last week deserve to know what caused the meltdown of their investment? Why can’t we get a straight answer as to what the debt consists of? Is it because the SEC doesn't want us to know that it is naked short positions that they grandfathered, facilitating this fraud?
2) Why does the SEC continue to protect lawbreakers and felons at the expense of the investing public? In their Q&A at the online SEC site, they admit that the reason they keep the FTD info secret is to protect the trading secrets of the participants who are using FTD’s as part of their trading strategy. Newsflash, folks: If you allow larceny to be conducted in secret, and are more interested in protecting the bad guys than the investors, you wind up with REFCO fiascoes. Lots of REFCO fiascoes. Can we afford any further secrecy and opacity? Haven't they learned anything? Hint: If you can't tell people simple info, there is probably something bad going on.
3) Why was REFCO allowed to go public in the first place, given what we know about their past, their books, and their history of stock manipulation related charges - was this really that tough a call?
4) Who at the SEC greenlit this brilliant decision, and more importantly, who is going to take the blame for allowing known stock fraudsters to do an IPO, when by their own admission they couldn’t get their financials to add up, and were being run by known manipulators and cheats?
5) REFCO is only one company. There are many more that do the same thing as REFCO – naked shorting is big business, and if the speculations are correct, most or all of the contingent liability that blew up REFCO are naked short shares which have remained open for as many as 7 year. How many more REFCO’s are waiting to blow up, and how many more shocks to the system can the financial markets stand before there is a systemic collapse?
If the speculations are correct, and REFCO’s debt is in reality naked short shares that were never covered, then the mark to market value of $430 million is way off. Wayyyyy off. Which probably explains why the loan from the Austrians hasn't been called in - that $430 million is starting to look increasingly like an investment in keeping the debt from exploding to its true, obscene level. The first shares that will be covered may go for ten cents, but the second shares will go for a quarter, and the third for a buck, and the fiftieth for ten dollars. That $430 million was likely never covered because to do so would exceed the total NAV of the company – many tens of billions of dollars. Because it is a one for one exchange – tens of billions of market cap were lost due to naked shorting by REFCO, per my sources, thus in order to cover the shares used to cause that loss, it would require the tens of billions be re-patriated into the stocks.
That’s the problem with allowing illegal naked shorting, and grandfathering in past fails – it creates a scenario wherein a systemic collapse becomes likely once the dominoes start to fall, as it allows a bad problem to get to the point where it is a catastrophic problem. Kind of like melanoma - if you don't deal with it early, and aggressively, it can kill you.
6) Now that we are starting to see the systemic risk posed by this series of fatally flawed decisions by our regulators, is it going to be business as usual, or are our elected officials finally going to act, and force the SEC to do its job?
Rule 17A clearly states that, in order for us to have safe and fair markets, there has to be, “The prompt and accurate clearance and settlement of securities transactions.” Grandfathering past fails violates that Congressional mandate, and is likely illegal, and would collapse under any legal challenge. So why is the SEC passing rules which violate its own Congressional mandate? Some believe it was done by compromised factions within the Commission to protect the participants who'd so badly abused the system that they created a situation where they were “too important” and “too big” to be allowed to collapse – hence the grandfathering clause.
And now for my stint on the soapbox:
Folks, when you start breaking the law in order to protect lawbreakers, because they are “too important,” you wind up with REFCO, which is likely the tip of a very, very large and scary iceberg, IMO. This has to stop. The guard has to be changed, without delay -it's gone on long enough. The Senate Banking Committee has to hold hearings on this, now, and there needs to be a sea change in the policy of allowing investors to be fleeced by a lawless clique on Wall Street.
My next Sanity Check will address what I believe is this systemic risk in the market, and will have more questions, uncomfortable questions for the entrenched power base on Wall Street. But the questions need to be asked, and they need to be asked in a loud voice, so that the answers can be heard by one and all.
So far we have gotten no answers, but rather secrecy and doubletalk. The time for that is over.
We've all seen what happens when the questions are stonewalled. Hiding the ball so that the crooks can rob the general public cannot continue to be the SEC’s modus operandi – it is shocking that our securities regulator, chartered with protecting investors, seems to facilitate more fraud than it catches.
That is unacceptable.
The 1934 Act is direct at its core, and requires no contortions to comprehend. I'm quite sure that there are many at the SEC who would love to be allowed to do their job.
It's about time they did so.
Settle the trades, put the crooks in jail, and stop the participants from ripping us off.
Now do it. Or get someone that will.
Is that too much to ask?