Monday, October 17, 2005

Ah Have Always Depended On Tha Kindness of Strangers

A Streetcar Named REFCO

(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?


Anonymous Anonymous said...

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8:58 AM  
Blogger rvac106 said...

I got a form email response from Senator Shelby's office this morning. It was acknowledging receipt of my email, castigating him for cancelling the SubCommittee meetings on this issue. We have a bunch of Pinball Wizards running the show (deaf, dumb, and blind kids.) Will keep shooting them darts, as indicated. I made the the subject line long enough that they'd know the topic and the sentiment without opening it up. Don't know how many of these they're receiving. Hope it's brazillians!

9:13 AM  
Anonymous Anonymous said...

[maybe I should create an account *sigh*]

I think everyone needs to keep in mind the unproven nature of the foundation to the majority of the concerns expressed. For example:

1) The identity is being kept secret perhaps to prevent front-running. For example, let us say that it was leaked that refco shorted 3 million shares of NFI. I would, naturally, buy all of the NFI I could get my hands on. It would be the same with a long position that's gone south (maybe they hold a zillion KKD shares). It might not be an equity position at all. My point is that this will likely be kept secret until resolved, or someone files a public-right-to-know action of some kind. It is NOT a known fact that the majority has anything to do with naked shorting or is at all connected with SHO.

The second question is only pertinent under the unproven assumptions.

The third and fourth companies are, of course, the more fundamental questions that, in my opinion, ought to be answered.

The fifth question builds a castle in the air. It assumes not only that the Refco issue is wholly or mainly naked-short related, but also that it is big business, AND that many others are participating. Aside from that, it assumes that these others will be discovered, disclosed, and that it amounts to a significant enough business to cause financial market ruination. I don't know about anyone else, but I won't let two orders of magnitude increase in value of my SHO-related holdings go by before cashing in, and there are only so many penny stocks in the market where several orders of magnitude might be expected.

I agree with 7 (and 2) -- it'd be nice to see the SEC actually perform its duties. I long ago gave up on government officials performing actual duties.

As they say, your mileage may vary,

Dave Navas

9:36 AM  
Blogger bob obrien said...

This comment has been removed by a blog administrator.

10:10 AM  
Blogger Jer. 9:24 said...

A couple of minor points to add to what Bob said in this latest column. Today's WSJ said that Mr. Bennett himself "at some point assumed responsibility for paying Refco $430 million of uncollectible debt owed by Refco customers, incluidng some dating back to the late 1990's. This maneuver allowed Refco to show profits by avoiding write-offs" (Page C9, third column).

Now, I am not the smartest guy in the room but why in hell would anyone take on $430,000,000.00 of a non-paying customer's debt, even to "show profits by avoiding write-offs"? Who in his right mind would not have just had his company take the write-offs, even if it meant waiting a year to go public and make the billion bucks or so his share of Refco was worth? What a crazy risk to take, unless you figured the SEC would give you another pass, like they did (relative to the damage caused) with respect to the Sedona manipulation.

Since we are speculating, could it be that the "customers" who would not pay their debts were somehow connected to Mr. Bennett, e.g., offshore entities involved in manipulative short sales? Maybe even some of the same offshore entities that Mr. O'Quinn et al. are suing with respect to Sedona Corporation and possibly other OTC victims?

It would be interesting to see whether anyone and anything other than Mr. Bennett and his Refco shares secured that recent Austrian bank loan. Did any other hedge fund or other entity agree to back the loan?

I think Bob may have asked this as well, but has that Austrian Bank called the loan? Surely they are upside down now, unless other collateral were provided. So was other collateral provided, and/or were there other guarantors?

Did Mr. Bennett and friends expect that old debt/liability to go away over time, as victims of manipulative short selling schemes in which Refco took part died off or were de-registered by the ever-helpful folks at the SEC? Has anyone noticed how active the SEC has been recently in de-registering (for failure to comply with reporting requirements) all those little companies they've ignored for years? I would bet a lot of Wall Street's contingent liabilities get erased that way.

Just more food for thought.

10:21 AM  
Blogger bob obrien said...


The reason that it isn't a known fact is because our regulators won't tell us what it is - that part of your argument is circular. Sort of like Gradient saying in their research reports, paid for by short hedge funds, that the presence of a growing short interest in a company is reason to be concerned about the company. It is specious, and a rhetorical dishonesty.

If the SEC won't tell us the nature of the debt (never mind the specific companies, although that would also be reasonable to know) then you can't say "hey now, slow down, there's no proof that it is what you say it is." We deserve to know the nature of the debt that cost investors everything. That is reasonable. To deny us the basic outline is as larcenous, IMO, as the fraud itself.

Ditto for the argument that "nobody knows how big the problem is, thus any speculations are specious." Guess what? The arguments wouldn't be speculative if we were told simple definitives. The SEC and the DTCC know - they just aren't telling.

We do know from the Bear CC that ex-clearing is a large problem, and that it does exist. We also know per the DTCC's own propaganda that 90% of the FTD's don't get handled by the borrow program, which pretty much leaves ex-clearing. We further know that the FTD problem is big, per the REG SHO list and the FOIA info that showed many hundreds of millions of failed trades on the OTCBB, NYSE and NASDAQ. So where do YOU think all those fails are accounted for? That is going to be the topic of my next sanity check, as a matter of fact - where is all this fun accounted for on the books of the publicly traded brokers? I can't seem to find any mention of it, but we know it where, precisely, is it? Wanna bet that special purpose entities a la REFCO (and ENRON, for that matter) are the mechanism used? If not, why not?

Alan Newman just broke a great story in his Crosscurrents newsletter. He discusses his FOIA request for the number of fails in OSTK, requesting old data - aged data of no bearing on today's trading. That was declined by the SEC under section 4, specifically because divulging the data could "..cause substantial competitive harm to the submitter..." Huh? On stale data over 90 days old? How, precisely? The Post, to its credit, had a great article that pointed out that the SEC has the least transparent response of almost any government agency - they deny more FOIA requests than one can reasonably justify, providing data only 34% of the time. Why is that? What is the big secret? Why is stale trading data treated with greater secrecy than the plans for the bomb?

The investing public deserves some answers. So just tell us:

1) What is the debt - in general terms. Is it FTD-related, and if so, what percentage? If not, I agree that #5 goes away.

As to frontrunning, how does having information about failures in specific companies, which are by definition abusive if open for longer than 13 days, constitute anything but transparency? Since when does understanding the true nature of the positions constitute frontrunning, rather than simply having all the info?

It is this mentality that information about FTD's is inherently secret (and appropriate as such) that makes me crazy - guess what? If you are going to use an abusive, illegal trading strategy and leave your positions open for 7 years, other speculators should know about it and be able to take the opposite position - isn't that the argument in favor of shorts? To be able to provide liquidity for the markets? Fine, let's allow folks to take the opposite side of the trade that REFCO did, not protect the felons from that using some duplicitous and falsely-pious argument about protecting the markets from frontrunning.

Let's try protecting the investors that have now lost everything in REFCO first, just as a wacky idea, huh?

The stink off this is growing more pungent over time, and the arguments that investors and companies shouldn't be able to know what is actually going on in their stocks are proving to be hollow.

Boo hoo hoo, poor REFCO and the hedge funds that ran up the naked short positions, wouldn't want them to have to pay fair market to cover the shares by giving everyone information on a real time basis. No, much better to hide the data and keep the markets opaque. That is working really well, as anyone that bought REFCO two weeks ago will no doubt attest.

How much longer can arguments in favor of secrecy for the participants be floated with a straight face? I mean, I understand there is a lot of money supporting that position, and that that big money really likes its unfair advantage. Hell, I'd be fighting any disclosure tooth and nail if I was a hedge fund. I'd be arguing that I was a victim too. I'd be paying my elected officials as much as I could spare to keep the room dark, and lobbying my regulators 24/7 to hide the data.

That's what the bad guys in the S&L fiasco did, too. It worked for years. Cost the American taxpayer hundreds of billions.

A lot of that money went to Wall Street, too.

I guess why change tactics if they work so well?

"We must be protected from the predators that would use the data about all the companies we have illegally naked shorted for years against us - it would cost us a fortune if the public knew what we were up to. And we are way too important to allow investors to profit by our illegal positions being known. Why, that just wouldn't be right!"

That about covers it, I think.

10:37 AM  
Blogger bob obrien said...

Correction to the earlier post, should read 80% of the FTD's aren't handled by the Stock Borrow Program.

10:39 AM  
Anonymous Anonymous said...

Bob: totally agree that it is unacceptable that this information is not public. I think you know me at least that well!

I don't believe I said (I certainly didn't intend to say) that all speculations are specious. I only wished to underline the number of steps you need to go from Refco to market meltdown. First, this has to be primarily about short-selling. There's an article from the NY Post that seems to indicate that. To tie it into SHO, it has to be shown that the short-selling has something to do with FTDs and with the stocks listed thereon. Unfortunately, the NY Post indicates these are penny stocks - those wouldn't be SHO-related. Then it has to be shown that there is a significant market-wide problem. Maybe if the majority of the DOW components, or the majority of the S&P500 were on that list, you'd have a case for size. Then it has to be shown that the problem will defy noraml redress. I don't believe for a minute that even if XYZ was naked shorted in the market 65%, that you couldn't find sufficient sellers at way less than an order of magnitude increase. [Big blowups tend to require leverage, which I don't see in abundance here.]

Critically, all of this would have to become public. As you note, and to our mutual dismay, the SEC seems unwilling to allow this to happen. A market meltdown won't happen until Joe Q calls his mutual funds in.


11:09 AM  
Blogger bob obrien said...

The Post ties it into penny stocks, but I have very good reason to believe that REFCO did not just retire their larceny in 2001 or so, nor confine their activities to penny stocks. That is why the opacity is so infuriating - it takes what should be academic, and creates an aura of non-falsifiability, a la "it could be none of the debt is naked short selling" or "those all could be penny stocks (without getting into whether it is OK to destroy penny stocks versus big board companies)" - in other words it takes a definitive and makes it all nebulous and non-disprovable, when it isn't.

Look, we know for a fact that the REG SHO list exists, and that there are hundreds of millions of FTD's on it - the PIPEs report neatly summarizes the numbers.

We also know for a fact that ex-clearing is another mechanism that keeps fails off the SHO list - the DTCC has a nice way of processing the clearing portion (the transfer of funds and payment of commissions) and leaving the settlement (delivery) between the two participants, "trusting" that they will work delivery out between themselves. We can go to the NCANS site and listen to the General Counsel of Bear Stearns discuss ex-clearing and Reg SHO, so we know that they exist.

We also know that 80% of the FTD's do NOT get covered by the borrow program, per the DTCC.

What happens to those? How are they handled? Nobody will say, but my educated guess is ex-clearing.

If the FTDs are a $6 billion problem, mark to market today, that is the value of the FTD's at the current depressed price. You seem to believe that exponential increases in price aren't realistic for those shares.

Wanna bet?

When a company goes from $20 to 10 cents, the difference in price goes into the pocket of the naked short seller. If it hasn't been covered, why, precisely, wouldn't it take an equivalent number of dollars to buy the shares it required to depress the price, to cover the fails? And why wouldn't guys like me, and about 5000 hedge funds, not be standing in line for those shares in the best tradition of capitalism, and buying the shares as the increase in value, causing the exact situation you theorize won't happen?

You really can't have it both ways. You can't on the one hand say that it can't pose a systemic risk because there's no way it could require 10 or 20 times the current mark to market value of the shares to cover them, and then say you can't tell anyone about the problem because it would cause damage to the system due to volatility.

The SEC admits that REG SHO and the grandfathering provision were put into place due to concerns over the volatility that would ensue if the FTD's hadn't been grandfathered. That seems clear to me. They didn't want massive short squeezes that would make TASR and TZOO and the other 20 or more times the money run ups look like child's play. Because squeezes and that sort of volatility are signs of an inefficient market, which is in fact what you have when you need to cover the 200 or more percent overhang of shares created by FTD's and ex-clearing.

So let's not kid ourselves. IF that $430 million is naked short shares, and IF they are required to cover, it could easily be 10 or 20 or 30 times larger, and we both know it. The fact that the system is afraid to voice that very real concern is far more troubling than anything else, in a very troubling set of circumstances. It tells me that it is their worst nightmare, and is very real.

And that should scare the hell out of any right thinking investor.

Because REFCO is nothing compared to the big prime brokers who deal with this lucrative trade.

Tell me, where on their books do you think you will find the REG SHO fails accounted for?

I can't find them anywhere. So either they don't exist, or there is a mechanism to hide them from view - exactly as I theorized back in March in my Sanity Check "Heavy Lies The Head", and exactly as it appears that REFCO did.

They exist.

That leaves the explanation.

I already wrote it in March. It turns out that even as I was being called crazy, that is precisely how REFCO was dealing with their niggling little half a billion dollar oopsy daisy.

Does anyone really believe that I'm that far off the mark? I've been right about this, right about the collusive media/hedge fund action (if the OSTK suit is meritorious), right about how the DTCC will respond to questions, right about just about every aspect of this unfolding scandal, at every step.

Not to toot my own horn, but can anyone really now say with a straight face that this is all bullshit when they can go back and read the predictions from almost a year ago, and watch them unfolding today?


Go to, and select Sanity Check, and then read that editorial, and then come back and tell me that doesn't precisely describe what we are seeing.

I'm not trying to be adversarial, and I recognize that you are one of the good guys, but this situation is making me enormously frustrated.

I see a train coming down the tracks. I saw the train about a year ago, and started researching it. Once I understood what I was looking at, I shifted from being concerned about one company, to more of a systemic risk scenario, hence the creation of NCANS. I've been bold in my predictions and my yelling, "hey, look out, the train is coming closer." So far they have borne out. I am saying, as clearly as I am able, that this is a centi-billion dollar problem, that it is endemic to the brokerage community, that they have stolen that amount from investors under the watchful gaze of the SEC, and that it is going to be a crisis that makes the S&L crisis look like jumping subway turnstiles in comparison.

Here's a little slice of heaven I just received in an email, a new law that went on the books. Read it, and pay particular attention to the words "securities firm", and then further consider that euphemisms like "powers" in reality mean "obligations."

Is this the first step in an S&L style workout? Remember in that debacle that strong S&L's were compensated through sweetheart deals to take on the bad paper of the failing ones, and the sweetheart deals came out of the taxpayer's pocket? Remember Pearlman, and his $800 million tax credit for taking on $300 million of bad S&L debt? A senator at the time commented "why is it that the only people that get those kinds of deals are white men?" Consider this carefully, because I'm going on record predicting this now.

There is going to be a shitstorm of epic proportions, and the taxpayer is going to get kicked in the teeth, and the crooks are largely going to get off scott free, unless we wake up now and make them pay the GD bill and take their lumps.

Here's the article:

FDIC Gets New Powers Over Derivatives

The Federal Deposit Insurance Corp. can move a derivative contract from a failing bank to another financial institution under the new bankruptcy law
that went into effect Oct. 17. Title IX of the bankruptcy law also allows financial netting of
derivatives and other financial contracts when a bank, securities firm, or other company fails, according to a commentary by the FDIC. Federal regulators proposed
these changes in the wake of the failure of a huge hedge fund in 1998. But congressional supporters of consumer bankruptcy reform kept the regulators' proposal tied to the bankruptcy bill that was signed
into law by the president on April 20. "Title IX updates, clarifies, and strengthens the existing laws
that determine what happens to financial contracts when a market participant fails," the FDIC says. The FDIC also comments that it will take time to gauge the impact of the new consumer bankruptcy regime. "What is safe to say is that many of these provisions make
bankruptcy less attractive for consumers and that the interpretation of the new law will engage the courts for some time to come," the FDIC said.


I'll just bet. It strengthens the existing laws when a market participant fails. How nice.

Can you feel them getting ready to pick your pocket? Yes? No?

Hey, maybe I'm just paranoid. Maybe everything so far has been lucky guesses. Maybe everything from getting North Korea counterfeiting hundreds, to systemic crisis in the financial markets, is all a big coincidence.

Or maybe I just have a knack for looking at things and calling them for what they are.

Time will tell. I truly hope I'm wrong.

1:16 PM  
Blogger Its_strange said...

This comment has been removed by a blog administrator.

1:48 PM  
Blogger gvtucker said...

Refco's failure has nothing to do with naked short sales or OSTK or NFI, much as you'd like it to be related.

The exposure to naked short sales would be within Refco Securities LLC subsidiary, which is regulated by the SEC. But there's no problem there. Neither is there a problem at Refco LLC, the subsidiary that is regulated by the CFTC. The problem is within the unregulated Refco Capital Markets, which makes most of its money in derivatives.

7:32 AM  
Blogger ZEV HIRSCH said...

"Bob", I just discovered this blog while researching Refco's fraud. I am a former employee.

Great stuff! Keep up the good work!


8:48 AM  
Blogger bob obrien said...

Oh, OK, then. Of course it doesn't. The firm sanctioned by the SEC for being a big player in the largest naked short selling scam in the history of the Commission's tackling of the problem was clean now. Innocent as the day is long. Got it.

I suppose that the mark to market debt was, well, you know, stuff, but certainly not naked short sales remaining uncovered.


Could be it is all innocent, and they weren't moving all their problems around into the unregulated entity in a classic shell game, the likes of which we've seen a million times before, a la Enron, or most of the S&L scams.

Hey, I know, instead of taking your word for it, I've got a fun idea! Why doesn't the SEC break down for us exactly what the debt that brought down the company actually is?

Why not?

I mean, if is all innocent, and I'm crazeeeee as a shithouse rat, why not just lay it out for us?

Probably the same reason the DTCC doesn't ever respond to in-depth questions about the borrow program, and the SEC won't release even stale data on FTD's.

They too say it isn't about what it appears to be about.

Amazing how many folks from the Wall Street/Beltway are assuring us all that we don't have to worry, it isn't what you think, and of course, we can't tell you what it really is - you know, for your own good.

Let's play a game. We can call it the lying game.

Let's look at the last big financial blowup, the S&L fiasco, and see how the now proven guilty in the industry, their cronies in Government and the media, and the regulators, handled that.

Step one, they offered up a loophole big enough to drive a frigging mack truck through, essentially eliminating restrictions from using brokered deposits, eliminating restrictions from investing in speculative ventures, etc. - essentially, they created an unregulated industry with the stroke of a pen, and it was easier to get an S&L license than it was a liquor license.

Predictably, clever lads saw an opportunity to work this windfall, and proceeded to loot the financial system, using the federally insured deposits to fund virtually any scam they could think of, as long as it was real-estate related. This went on for almost a decade. One enterprising group that was responsible for over a hundred failures was a network centered around one "master mind" in Louisiana, who operated with a closely knit group of deposit brokers, Wall Street gurus, organized crime guys, etc.

As the stink started to get worse, a few concerned folks sounded the alarm, as S&L's started to fail. The regulator responsible for dealing with the industry was pretty much told to lay off from the highest echelons of government - Dave Rubin, an ex-Wall Street heavyweight, particularly wanted him to look the other way. He ignored those directives, but he was also largely ineffective, as every single element in the corridors of power were aligned against him. Congressmen railed against restricting their buddies' good times, the industry told him he was nuts, advocacy groups of S&L funded mouthpieces committed character assassination against him. At every point the American public was assured that there was no problem, the few implosions were some disparate rotten apples, that he was imagining things.

The biggest crooks, even as they were caught red handed, insisted that it wasn't what it appeared, that they were victims, that the allegations were baseless, they didn't know anything about all that, etc.

Once the alarm was sounded, and it was clear that there was a large, systemic problem, around 1983-84, did the regulators and the elected officials and the industry change things? Of course not. Once Ed Gray (the one honest regulator) was out of his regulatory position in the mid 80's, he was replaced by a guy who believed whole heartedly the industry's explanations, and further believed that his predecessor was an alarmist, delusional, etc.

That gave the crooks three more years to loot the system, cheered on by their elected officials and their now captive regulator.

An interesting sidenote is that Wall Street made many many billions from the S&L's, as the junk bonds that they were hawking were stuffed into as many of these failing entities as they could manage - junk bonds were debt, and as such, were eligible for "investment" by an S&L, and the more risk tolerant the crook was, the more junk bonds they could stuff in, the funds being used to speculate fully insured and backed by the US government and the American taxpayer.

Wall Street, Milken and Drexel and a few other big IB's, made untold fortunes from this "loophole."

What is significant is that the system at every level denied that there was a problem, insisted with each blowup that it wasn't what it seemed, demonized its critics, and did so with the full support of Washington, the regulators (with the notable exception of Gray, who they couldn't get rid of fast enough), the press, Wall Street, the large accounting firms, and the industry.

The bill for that is estimated to be costing us in excess of a quarter trillion dollars.

Now, if we look at the naked short selling scandal and the systemic risk posed by a series of large, undisclosed contingent liabilities, hidden from the public eye by the same industry that was material in the S&L debacle, we see the same sets of issues. We have a captive regulator hell bent on telling us that there is no problem, even as they pass rules that violate their congressional mandate, and can't tell us anything about the size of the problem. We have an industry that makes untold billions exploiting loopholes in the system - the same industry that participated in the S&L fleecing. We have the players (hedge funds) that are unregulated (the S&L problem came from deregulation - a move to being unregulated) and are insisting that there is no systemic risk, even as a new multi-million dollar failure occurs every other week. We have the brokers running the clearing and settling system with no supervision (the DTCC is the brokers - they own it). We have the same cast of characters (Greenspan wrote a now famous letter when he was working as a consultant for Keating, in which he praised the S&L's, assured the regulators no measures were necessary, and hailed Keating and his ilk as visionaries - three years later, 95% of the S&L's he cited as triumphs haed failed) doing the same shuffle, and all the time insisting that it isn't what it seems.

We know now, for a fact through the benefit of historical perspective, that the S&L fiasco was a group of financial predators and scam artists that cheated the nation out of hundreds of billions. There weren't even that many of them - as we saw in the Beebe (the guy from Louisiana) case, in that particular network just a few guys were in over a hundred of the failed entities - it was systematic racketeering by a small number of folks who were able to steal a large chunk of the nation's net worth, much of which wound up in Wall Street's pockets.

Here we have the same scenario. Unregulated entities (hedge funds) are speculating in the market with OPM, failures are increasing, regulators are doing nothing, the press is eerily silent, Wall Street is making a fortune, it looks like there is a systemic crisis in the offing, and we are being told that it isn't what it seems.

Tell that to Shapiro. Tell that to Boni. Tell it to Finnerty. Tell that to anyone that has actually studied the problem.

We know that there is a large ex-clearing problem, wherein the back rooms of Wall Street print electronic IOU's that trade in the system like genuine shares (without a corresponding paper share in the DTC's vaults, or attendant voting rights, or anything else that would make them real shares).

We know this, it isn't being disputed. If you have any questions, read Finnerty's paper, and listen to the Bear Stearns CC at

We know that $6 billion per day of the trades the DTCC handles are FTD's, and that 80% of those aren't satisfied by the Stock Borrow Program. We know this because the DTCC admitted this. We know that hundreds of millions of shares of stock just in the FTD area are out there - we know this from the few FOIA requests that slipped through the cracks. We can do simple math and comprehend that there are thus billions of shares in the ex-clearing system trading as genuine articles.

Where do you think these are represented on the balance sheets of the large houses, and where do you think they are represented at REFCO?

Go through a 10K, as I have, and help me find these large contingent liabilities (they are material enough to warrant disclosure, so no help from that angle).

They aren't listed.


By anyone.

Just as they weren't listed at REFCO.

Now I'm willing to believe that a portion of the debt was embezzlement by Bennet. But I also believe that it is highly likely that a large chunk was FTD's, given the firm's history. And all the facile assurances that it isn't what I think really aren't a substitution for hard fact and full disclosure, now are they?

You see, I'm sort of used to being lied to by regulators, the industry, the press. So I assume that they are lying when the ranks close, and the cone of silence descends, and people come out of the woodwork to assure me that it isn't what it seems, and yet they can't actually prove it, or show data to support their assertions.

I don't have to prove I'm right. I didn't cause the implosion of REFCO and the loss of billions in shareholder value overnight. REFCO and our regulators need to prove I'm wrong. We deserve to know what caused this.

It is particularly damning that this may be handled by the IB's and accountants just handing back the money and making good to the shareholders. In my experience the only time Wall Street hands you back your money is when it is so red handed, it just wants the issue to go away. We've seen that in the past in the naked shorting thing - the statement "here's your money back, we can't get you shares, now go away." If that happens, and we are never told what the debt consisted of (or rather, it is never confirmed) you should be far more worried about systemic crisis than not. That would signal that the industry is willing to pay billions just to hide the facts on this one.

And that makes me wonder what it is that they have to lose that the stakes are that high.

It should make you wonder too.

Brought to you by the folks that brought you the analyst scandal, the specialist scandal, the mutual fund scandal, the accountant scandal, and now numerous hedge fund scandals.

But, uh, this time they are telling the truth when they say they don't know anything about any of this.

Got it.

9:05 AM  
Anonymous Anonymous said...

Why doesn't Jack just sue the broker to get his shares?

5:10 AM  
Anonymous Anonymous said...

I'm one of those who have lost many bucks because naked short selling has runined the companies I invested in.

There are many thousands, in fact tens of thousands who have suffered because of the brokers, and terrorists attack a very important part of our economy.
If you don't understand what I mean by " terrorist" consider this. There are hackers all over the world, the Middle East, China, etc., off shore funds, and that attempt to get into our computers, and now for many years they have been attacking our Investing sector by selling stock they don't own, and using brokers who do not enforce the regulations and law.

When things get hot, YOU are supposed to do something about it. What are all of you afraid of??
It seems to me that you would be a HERO if you could protect us from criminals of the investment businesses.

Why? there something you know that you don't want the investing people to know.

If you won't do it, many others will.

The time is coming. The fraud on the public is outrageous.

Let the truth out, and then do something about it.

That's the LEAST you can do.

Allan Graupman
Los Angeles, Ca.,

8:09 AM  

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