The REFCO Smoking Gun?
The listing for the assets and liabilities of REFCO was just made available, and guess what just happens to be hiding in the liabilities column?
A $10.5 billion liability, at TODAY's mark to market valuation, called "Securities sold, not yet purchased."$10,590,379,000 - to be precise.
Securities that have been sold. But haven't been bought. And they haven't been borrowed, either. At first I thought that this must be obvious evidence of a huge FTD position - which was reinforced by some of the early folks who offered their take on it. Upon further digging, there is a benign explanation, and yet one which itself raises troubling issues.
Most of the $10.5 billion liability are legitimate short sales and government securities. At least per their filings.
Which then begs the question at the heart of the matter: Can one believe anything in the filings of a group which routinely hid and played shell game with almost half a billion of liabilities, and whose numbers seem to shift like the wind? I'm sure there are arguments in favor of doing so, but frankly, I have a hard time swallowing many of them. If a management team is educated and larcenous enough to go down the road of outright fraud at a pretty sophisticated level, what reason would anyone have to believe that they confined their willingness to obfuscate and deceive to only one liability?
We don't know what in the 10Q we can believe, as they are now known to be a fiction - the books have been cooked. As with Enron, it becomes a game of "which part of the story would you like to believe today?" Some unknown percentage of the liability is likely FTD's, given the company's history and the reluctance of Wall Street to buy the company when it was offered to them, per the NY Times. The question is what percentage.
But why speculate?I think it's time that we find out, no? Why guess any longer - let's get it out on the table.
These guys were being sanctioned for being involved in a prior naked short selling scheme, and were known as the go to guys for questionable types desiring greater "flexibility" in their trading. They lied to their auditors, the SEC and the public about their financial condition. Their CEO has been cuffed. They've had a reputation as "loose" for a long time - consider this from tomorrow's NY Times:"In 2003, Pershing, a unit of Credit Suisse First Boston that offered clearing services for equities, was sold to Bank of New York for $2.5 billion, an indication that greater value was being placed on such services. Lee had taken a preliminary look at Pershing. That year same year, Mr. Bennett approached investment bankers about selling Refco. The bankers canvassed Wall Street, trying unsuccessfully to find an industry buyer.
A senior Wall Street executive who attended a meeting where Refco was pitched said that the biggest concern was that it cleared transactions for many small customers in the United States and overseas whose practices might pose a risk to Wall Street firms (emphasis mine)."I think there's reason to believe that REFCO is the smoking gun the industry has been dreading. Wall Street wouldn't touch REFCO with a ten foot pole a few years ago because of "risky practices" of some of their overseas and domestic customers, so the management laid off the risk on the investing public instead. Nice. And the SEC let them.
You heard about this here first. Many months ago. In March, when I was speculating about a catastrophically large level of fails in the system, being covered up by the brokers and the SEC. When I was writing about special purpose entities being used to hide the size of the problem.
And here we are.The whole BK filing can be viewed here.
I'm not going to go into the $1.25 billion of their claimed assets that are intangibles and "goodwill." Or the offsetting assets which collateralize the FTD's (cash, which is what you'd expect with FTD's). It doesn't really matter. If I'm right about the industry's use of leverage and the risk posed, covering substantial FTD's at REFCO could vaporize the leveraged customers beholden to them.
This is the systemic risk issue I've been warning about.
And this is just REFCO. One company. Only one.
I think we need to know an accurate breakdown of what the composition of the REFCO liabilities actually are, and be turning over rocks to find any other hidden liabilities. Because once a liar...The problem is now one of credibility. The SEC and DTCC's penchant for hiding all the FTD data, and refusing the vast majority of FOIA requests has to stop. There is no reason that the level of fails in a fraudulent company like REFCO justifies secrecy rivaling the Manhattan Project.
I'd like to see a list, by security, of REFCO's FTD's. There's no point in keeping them secret anymore. I'd like to see how many NFI shares, and OSTK shares, and TASR shares, and NAVR shares are in there. And I'd like to understand who is violating the rules. I think that is reasonable. The hackneyed platitudes that the SEC "doesn't want to cause volatility or give away the trading secrets of the participants" are hollow. We don't want speculations and more guesses. We deserve facts.
And guess what? We know the trading secret now. You just print shares in the back room to your heart's content. It isn't a secret. And frankly, IT NEVER SHOULD HAVE BEEN.
I'd like to see a Congressional hearing immediately, and I'd further like to hear Shelby share with us why he didn't feel that it was time yet to convene the Senate Banking Committee about the matter, when Bennett was pushing for it.
I'd like to see a special prosecutor cut through the secrecy and BS and tell us how many billions, hundreds of billions, have been stolen from us, and by whom.
And I'd like to see the system do its bare minimum job, and settle the trades.
This is going to be the biggest crisis to hit Wall Street in our generation. Mark my words. Cat's out of the bag now. And the SEC and Wall Street have some explaining to do. And some stock to buy, seems like.
The class action attorneys are going to go crazy over this. What do the other, larger brokerages have hiding in the back room? How much bigger can this get? Can anyone even guess at this point?
With REFCO, we have one of the known aggressors in the naked short selling game, now failed, its investors defrauded. We have financials that are a fiction. We have uncertainty over what their actual liabilities and assets are. We, in short, have no idea what was going on there.
If a large portion of the hidden liabilities at REFCO are FTD's, it's time to settle the trades, and make the perpetrators start paying their bills.
Settle the trades. As 17A mandates.
The law should not be selective nor preferential