The NASAA Conference - My Take
Carol is a real piece of work - anyone that has an interest is seeing what a one-sided slam piece reads like should listen to the audio of the panel, and then contrast that with her fictionalized account. I've said in the past that Carol could convert the story of the mayor of a small town who pulls an infant from a frozen lake and administers mouth to mouth/CPR and some brandy while waiting for the paramedics, and make it read "Agitated Mayor seen in suspicious child fondling situation, alcohol on breath". It's an altogether not-rare (unfortunately) "talent" she demonstrates unique familiarity with.
So the barrage of revisionist history and spin articles commences (actually she started before the conference with another article in which she cobbled together a "story" in which she attempted to make it seem as though there was no NASAA concern over naked short selling - also rather clumsy, IMO). There are no new ideas.)
I listened with interest to the NASAA Naked Short Selling conference/proceedings today, moderated by Ralph Lambiase, which sought to discuss, define and probe the naked short selling crisis affecting our markets. Before I offer my summary, let me state that it was gratifying to hear that the perspective that guys like Dave Patch, and Dr. Byrne, and I have - namely that this is a real, ongoing, pervasive problem in our markets, and that the regulators are asleep at the switch, or compromised, or both - validated as reality by a panel of the foremost authorities on the subject.
I hope that wasn't lost on our fine media, who seem all too ready to buy into, and parrot, the line that we are all nutty as Christmas fruitcakes.
Turns out we aren't - we simply apprehend the problem accurately, and there is an entire industry intent upon creating smokescreens, to cloud that understanding. It was pretty clear as the conference went on that Ralph Lambiase also has more than an inkling as to what is going on, and I can't help but think that this conference was groundbreaking, as the same folks that went after the analyst scandal (the NASAA) held it - there was likely a reason for that. We shall see as events develop what that reason was.
First, bravo to Ralph for introducing a sense of humor to the event, and for asking the tough questions. Here are my takeaways:
1) The federal and SRO regulators all say that they are aggressively investigating, pursuing, monitoring and regulating, and that they are upholding the rules as best they can. Richard Shapiro summed up the obvious fallacy in this position best: "Uh, OK. But where's the enforcement?" He noted that we hear all the rhetoric from these guys, but the critical data is kept secret, and there is no actual evidence that any of them are doing anything. One of the other panelists noted "there is no such thing as an innocent fail" - and I agree. There isn't. And all of these guys know it, self-serving monologues about the intensity of their efforts notwhithstanding.
Of note was that after much of the mandatory and expected bluster and sanctimonious filibustering about how hard the SEC and NASD are working, and how concerned they are about protecting investors, etc., the statement that there has been "not one reprimand or sanction or enforcement action for violation of SHO," received a shocked silence from the regulators, and from the audience - it was so clear an affront that the entire room was speechless.
2) My position on the FTD/FST (Fraudulent Stock Trades) issue was echoed by all of the academics: We need to know what the fails are in order to trust the system. We need transparency, and the reason that the DTCC tenders to us for not providing transparency is that they have passed a rule against being honest about it, and disclosing the numbers. The fail to deliver problem is of unknown size by design (not because the information is unknowable), and the consensus was that this state of affairs is deplorable - investors deserve to know how large the fraudulent stock trade problem is, by company, and in the aggregate for the market.
Huh. You mean fair markets require transparency? What a novel concept. Who knew...
3) Voting rights are destroyed by FTDs, and the process by which shareholders have lost their "one share, one vote" rights is a disgrace.
4) The agreement was that the reason that the DTCC and the SEC don't tell anyone what the size of the FTD problem is is because there would be a collapse in faith in the markets if we knew the level of crookery that was endemic to the system. This was a key observation - all of the facile excuses about the protection of trading secrets is baloney at the end of the day - protecting illegal trading secrets never rang true, and the real reason is obvious to anyone with a brain: If the SEC and the DTCC admitted how large the actual numbers are, there would be cries for their heads, and lawsuits for years, and a complete and utter loss of confidence in the system. "How could Wall Street and the SEC do this to us?" is the question they are trying to avoid.
5) The SEC's position was that they welcomed comments about SHO, and would carefully consider any they received during their next review. Presumably they would carefully discuss those comments in the same way that they did in 2004 (when abundant cautions were sounded by everyone from the NASD and NASAA to economists to ordinary citizens), and then disregard them, as they did the first time around. This was talking-head bureaucratese of the first order, IMO, and nobody was fooled.
6) A legitimately shorted share, borrowed and then delivered to the new buyer, can then be relent to another short seller by the new buyer's broker - there is no limit. Contrary to all the rhetoric from my many critics, that take on this was verified as correct. One more for the Bunny.
7) The SEC's Brigagliano said that 4% of the listed companies were SHO list candidates under the grandfathering. He wouldn't or couldn't answer the question as to how many shares were grandfathered. Nobody asked the obvious question - what was the total dollars that 4% of listed companies represented, for which no deliveries had been made, or ever would? The responses as to grandfathering were jumbled, and I'm still a bit unclear as to what the 4% meant, but the SEC did concede that it was to placate the market - read "let Wall Street off the hook and let them keep investors' money"; money we had exchanged for shares we never received. Again, not to belabor this point, but there was no coherent good reason for allowing Wall Street to keep the money we were defrauded out of, other than to protect Wall Street's interests.
8) The panel seems to get it. They were clear that the lack of transparency was the largest problem, and that secrecy benefited nobody but the manipulators. The SEC made hollow-sounding assurances of regulatory enforcement, which were handily dealt with by Shapiro's cutting statements, and Lambiase's simple, "I was under the impression that there had only been 3 actions over the last 10 years." No rebuttal was articulated. At one point, the discussion seemed, to put it politely, a wee bit strained.
9) The same, tired, "grandfathering doesn't provide amnesty from enforcement actions" dross we have heard for a year now from the SEC - nobody said it did, Jimbo - was trotted out to do service here. Jim, babe, pay attention: what we've been saying is that it does give those that sold and never delivered anything a vacation from having to cover those fraudulently transacted, non-delivered trades, and allows the short sellers to keep the profits derived from illegally driving companies into the dirt - that was grudgingly conceded by the regulators. After much dancing around, they admitted as much. That's why you don't see the DTCC or the SEC doing these discussions in open forums - it's hard to argue against the obvious truth when it is presented by knowledgeable folks who you can't snow.
Important point: the SEC conceded that short sellers get access to the proceeds from sales where they never delivered the shares, as long as they can drive the stock price low enough - obviously encouraging everyone on the bad guy side to do so in a big way, if you are going to do it at all. Not surprisingly, the DTCC was invited to have a representative on the panel, but declined. Smart move.
10) FTD'ing destroys any sense of legitimacy of voting rights associated with shares. Every equity examined in one study had overage of votes/shares. Every one. This makes a mockery of common law ownership, the right to vote, and any semblance of honest dealings W/R/T property rights. Ralph was flabbergasted over the voting rights abuse - his statement was, "we've fought wars to protect the right to vote". Correct. We have. But we can't get Wall Street to stop abusing the American public. Ironic, no? Every day more Americans die in Iraq to supposedly protect the freedom and sanctity of voting rights, but we can't get it here, at home. He was stumped as to why no media has picked this up. So am I.
11) There was much discussion over the tax implications of leaving short positions open in perpetuity, which ignores that if the shorting occurred from offshore accounts any profits are tax exempt - offshore investors don't pay capital gains tax.
12) There was also discussion about the foreign exchange listings - in which the regulators dutifully addressed their own straw man contention that naked short selling was being conducted there, and happily ignored that nobody was making that claim - it's an arbitrage game, stupid. That lame spin on it was over in February, when we figured out that the game was to claim to be a foreign market maker, or that you were holding shares in a foreign account, or that you were hedging your position "over there." No naked short selling required on the actual exchanges.
13.) Some discussion about ex-clearing shenanigans took place, but unfortunately the one big one - wherein brokers not only lend each other shares, but enter IOUs into their back office ledgers instead of demanding delivery, or buying in the fail - wasn't. That is no surprise. Anyone that thinks the $6 billion per day of FTDs is a big deal - one panelist made the deadpan comment, "$6 billion a day, and pretty soon you are talking real money" - should run some mental numbers as to what the ex-clearing situation is like if I am correct on my take on the size of that problem. Especially in light of the newly confirmed accuracy of the information I've been disseminating thusfar about FTDs - my foreboding about ex-clearing might merit more than a shrug given that I have been dead on about the rest of this. Dunno.
14) The ECN's are hotbeds of short selling, as well as naked short selling - they are anonymous, and they don't have all the annoying rules that the mainstream exchanges do, thus they have seen a large increase as the venues of choice for this practice - which echoes the observations I've made during large short attacks on NFI and OSTK, namely that the selling ALWAYS comes out of the ECN's, in waves. Now we have academics on record describing why.
15) Owning paper shares, or using the Direct Withdrawal Custodian program is the only way to be assured that you actually own real shares, and aren't being conned by Wall Street. Period.
16) There is no mechanism for CEOs to know what their FTD levels are, even though it is an essential factor in company valuation and corporate integrity - and the DTC and the SEC aren't telling, well, just 'cause. That is also a disgrace, and should convince anyone who is unsure of how bad this is that it is as bad as the worst critics have made it out to be. Again, nobody from the SEC could explain why it was a good idea to keep the information from the CEOs - there were simply assurances that all input would be considered. Ha.
Here are my takeaways: Everything you've read here and on NCANS is solidly based in fact - it was all confirmed by the panel. The system doesn't punish those who use naked short selling as a manipulative practice; an endless supply of legitimate shorts can be created by the system via re-loaning stock from margin accounts; naked shorts are a huge problem concentrated in a relatively small number of stocks; there is no plausible reason that the FTD info shouldn't be public; the SEC and NASD and NYSE, for all their bluster, have no real impact on the problem (there was, as always, much discussion of "studying the matter further" and being "receptive to input", with the best line going to the NASD guy who pointed out that they are taking a "Giulliani approach of ticketing small infractions" - citing a meaninglessly small total number of dollars - $750K - they've levied to date); there are no meaningful penalties for FTD'ing like crazy; there are huge inequities in the reporting system which favor short sellers and market manipulators; and everyone of any substance in the business knows all of this. All of it. And nobody is doing anything - it is all being "studied" and "considered" while America's Main Street goes broke.
Surprised that the NASAA panel confirmed virtually every statement made here and at NCANS.net, that has been dismissed as silliness by the quisling media and the hedge fund apologists?
You shouldn't be.
I agree with Patrick Byrne, who said that when we look back at this we are going to say, "all the evidence was there, all along, and a few guys spelled it out in impossible-to-misunderstand language, and the regulators, and the government, stood by and did nothing, feigning innocence and ignorance."
One last comment: The SEC guy predictably tried to underscore what a small problem this is, purposefully ignoring the observation that the FTDs were concentrated in a very small number of companies. Just pretended he didn't hear it. Also sort of blah blah blah'd over the direct question Ralph framed over how companies could exist on the Reg SHO list for a year if any of the rules were being enforced - he committed to being willing to study it more, which by now should be well understood for SEC-speak for, "do nothing."
Ralph Lambiase deserves tremendous credit for being willing to tackle this. I have no doubt that he will be personally attacked sooner rather than later, and the panel's statements distorted, mocked, or ignored. That's how this system protects itself.
The positive is that now the problem has been validated by as august a body of academics and specialists as one could desire - it isn't all in my head, and yes, you should be worried.
The solutions for what should be done were best framed by Professor Finnerty: Tell us the size of the problem, and force settlement in a reasonable time. This isn't rocket science.
The more coherent summary is:
A) Improve the efficiency of the stock lending market.
B) Instill regulations mandating actual borrows be made before stock is sold short.
C) Don't let the short sellers have access to the cash untl the share is delivered.
D) Report short positions and FTD info, daily.
E) Eliminate the grandfathering.
And here's the short version:
Settle the trades. Tell us what's going on. And don't lie to us.
Bravo panel, and bravo Ralph Lambiase, my new favorite for regulator/lawmaker of the decade. In the 80's it was a tie between Giulliani and Ed Gray, in the 90's Giulliani had it locked, and for the millennium, we have Ralph Lambiase - Spitzer is all show, no substance, and pretends to be ignorant of what was shown today to be a pervasive fraudulent practice embraced by Wall Street.
For my money, Lambiase had it cold.
And shame on the SEC, and on Wall Street, for selling us down the river and allowing the rule of law to be a mockery outside of Main Street. What we heard today from our protectors was a hollow farce, and I hope that as Mr. Lambiase alluded to in his closing comments, that change will be a comming.