Thursday, October 20, 2005

An Introduction to Naked Short Selling - Failing To Deliver

I've been asked a number of times over the last week to come up with a one-stop shop where interested readers could learn enough about the naked short selling crisis to be dangerous. It isn't an editorial so much as it is the intro to a chapter in the book I am working on, thus it has been moved to a more appropriate place than the Sanity Check op-ed blog.

The piece has been made a permanent part of the site. It can be viewed here.


Blogger mfairview said...

Something like this (and other issues like refco) should be submitted to (

12:35 PM  
Blogger bob obrien said...

I'll add it to my list of things to do. Kinda swamped at the moment. But keep after me. I know I should submit it, and will.

12:57 PM  
Anonymous Anonymous said...

Your analysis of LTCM is off. At the peak they had over 5B in equity and well north of 100B in assets. they also were not naked shorting, they were engaged in arbitraging the spreads between riskier and riskless assets in a multitude of trades around the world. they felt that their diverse trades were uncorrelated because in academic theory Italian bonds and japanese equities shouldn't be correlated, but as the old saying goes, in times of illiquidity, all correlations go to 1. I suggest When Genius Failed, fabulous book about the debacle.

1:33 PM  
Blogger bob obrien said...

I'm familiar with LTCM, and I didn't refer to their at peak valuation, rather their valuation at the time of the meltdown. They had about $125 billion in assets that they had leveraged to a notional value of several trillion of leveraged derivative risk. I know they weren't involved in naked short selling. I never claimed they were. I used them as an example of the damage one hedge fund could inflict to the financial system, nothing more. I'll go back and look at the verbiage and see if it seems like I was inferring that they were naked short selling - that wasn't the intent. Thanks for bringing that to my attention.

2:13 PM  
Blogger Jer. 9:24 said...

I notice that the WSJ and NYT and even CNN/Money had articles today about Refco's illegal shorting of Sedona Corporation. At least one of the articles mentioned Amro International, a Panama corporation that if I recall correctly was in bed with Ladenburg Thalman and the Badians in a number of death spiral manipulated companies.

I must admit I was surprised that this part of the story is "leaking" out of the so called "cone of silence" that the major financial media and the regulators have imposed on the illegal shorting/stock counterfeiting scam. While it is true that we "little guys" made a lot of noise from day one, I am rather surprised the big media are giving this part of the story any press at all.

Here's the point and question, for Bob et al.: are the big financial media permitting this news to come out because they can't keep the lid on it any longer (which would be great news for those trying to break it open of course) but have a plan for minimizing the negative impact of the news on their industry masters? Or do they see the writing on the wall and don't want to be too near their soon to be former masters when the latter implode?

As an aside, all this concern among the regulators and others about the pain to be faced (in forced covers) by criminal brokers and clearing firms really annoys me.

Just as in every other market crisis, a massive opportunity is presenting itself for (1) long side players speculating on short covers, especially of legitimate companies that have been victimized--of which there are dozens, e.g., OSTK; and (2) legitimate brokers and clearing firms that did not take part in the scam (or minimally did and can survive the implosion), who can step in and grab the business of those who don't make it. Witness the other futures firms scarfing up Refco's customers. If one or two or ten predators die, the survivors will pick at their corpses then go on down the road to hunt again.

So surely at some point there will be market side pressuer to let the criminals reap what they have sown. Hell, if the counterfeit shares are called in, there will be more money made on the long side than was made on the short side--can't any big hedge funds see that yet?

3:18 PM  
Blogger Jer. 9:24 said...

Oh and nice intro. to the naked shorting problem. I am not sure it was stated, that a number of people believe--and have alleged in lawsuits against DTCC--that DTCC through its stock "borrow" program is actually loaning more shares of victim companies than it has in the so-called "fungible bulk" that it has created. Thus DTCC is also counterfeiting shares electronically, so add that to the ex-clearing abuse, if you didn't already.

3:24 PM  
Anonymous Anonymous said...

Good summary, just what I need to explain this to my not-so-market savvy friends. Thanks for the effort.

3:25 PM  
Anonymous Anonymous said...

Very nice job and thanks! Now what we need is very easy in order links on your blog. For example what comes to mind is Senator Bennett at the hearing, The full page article that was in the DC paper I have been looking for, The press release of all the shares that traded after Byrne called in his certs, and any other good ones I may have missed.

4:09 PM  
Anonymous Anonymous said...

This is quite a complex issue, and I have a dumb question.

I know that selling uncovered calls is a no-no, but do buyers of puts need to have stock on hand,... at least at time of expiration (if they're ITM), or are shares created artificially this way as well?


4:36 PM  
Blogger n-tres-ted said...

Saturday's NYT says REFCO's biggest creditor now is VR, a hedge fund based in Moscow. VR says its not a creditor; that REFCO was holding VR's assets in the sum of nearly $500 million.

11:25 AM  
Anonymous Anonymous said...

I just wonder what happens when a dividend is payed or when a take-over bid is placed on a company in which the stocks are shorted..

1:15 AM  

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