Sunday, December 04, 2005

Of Mice and Men

It's really rather remarkable how complete the silence is from the media on the recent NASAA meeting.

Even more incredible is the total lack of acknowledgment from the rest of the media of the Time Magazine piece covering the naked short selling topic.

Now, you would think that we would have learned from the S&L crisis and the manner in which our regulators, lawmakers, politicos and press pretended absolute ignorance of the malfeasance, until it was so gargantuan and damaging that it literally destroyed the thrift industry in this country - especially the role that the media played.

For those that didn't pay much attention, from 1980 to about 1988, a network of bad guys raped the banking system with such aggression that it cost the taxpayers hundreds of billions of dollars. The contributing factors were deregulation of the thrift industry, loosening of rules barring the use of brokered deposits (an S&L could offer higher interest and the deposits would pour in, directed by brokers who oftentimes did so for fat fees, and side deal favors wherein a portion of the cash went to sweetheart deals never intended to return a dime) and changes in the rules that enabled S&L's to invest in whatever sort of debt they liked - essentially gambling with guaranteed deposits backed by the US government.

One network of names that featured in over a hundred S&L failures was coordinated by a guy named Beebe, a good old southern boy who had a mob affiliated Wall Street insider assisting, a few deposit brokers, and a host of politicians running cover for him. One central player, over a hundred blowups.

There were others, most infamously Keating of Lincoln Savings and Loan, who protested his innocence of wrongdoing even to the last moment as his bank went into the can, moving money out right up to the locking of the doors - and selling retail investors worthless bonds backed by the scam literally until the last days. Keating is noteworthy due to the sheer scale of the bilking, as well as the associates he enlisted to assist him in running interference with Congress and the regulators - Alan Greenspan was a big booster while he was a consultant for Lincoln, penning a now famous letter in which he denounced any regulatory attempts to stem the theft, assuring all that Lincoln and its brethren were beacons of modern capitalism's triumph, and honest and competent as the day is long.

David Rubin fought every effort to rein in the out of control thievery in the S&L industry for years, and actively conspired to tarnish the reputation of the only regulator that understood the growing crisis and was willing to do something about it - Ed Gray. The media painted him as a kook and a malcontent, an incompetent, a larcenous pilferer, every sort of negative you could imagine. Elected official after elected official tried to run interference with him to stymie his ability to regulate effectively - those stealing the many billions were generous and popular, and we have the best politicians money can buy. Once he was replaced, the new guy pretty much ignored the problems for several more years, costing the country many many more billions.

All the while the press acted like anyone that articulated the idea that the S&L's were out of control was a heretic or a buffoon - there was a nearly uniform blackout on any articles that called into question why mob-affiliated guys were running S&L's, entrusted with government backed deposits (if loans went belly up, hey, don't worry, they're insured with the full support of the US government).

Sound familiar?

Let's see. Media blackout on potentially catastrophic financial crisis obvious to anyone that really wants to spend a few hours reading.

Check.

Captive regulators doing nothing to stop bad guys, and often even helping them.

Check.

Elected officials turning blind eyes to obvious larceny in financial markets.

Check.

Anyone prominent that voices concern attacked and demonized by a media intent upon mocking them or denouncing them, in lockstep with the agenda du jour.

Check.

Why are we so surprised that the exact same scenario can play out in the stock market? Why, precisely, is that so crazy, besides that everyone on Wall Street, and Washington, and their media quislings, say so?

Put another way, how many times does an industry have to abuse our trust before we figure out that they are untrustworthy?

Hmmmm. Let's start with the S&L crisis. Anyone know where a lot of the money went that wound up being covered by the taxpayers - by us?

Wall Street.

Desperate or rogue S&L's were the number one customers for junk bonds, and Wall Street couldn't stuff enough down their throats, pocketing insane amounts of money in the process (junk bonds were considered debt, thus OK for "investment" with insured deposits by thrifts). How often did anyone hear about that? How hard did the media push on that?

Not at all.

Why, I wonder?

Next, we can play "pick your scandal" - mutual fund, analyst, specialist, hedge funds, class action attorneys, corporate fraudsters, accountants, you name it.

And yet, when confronted with the possibility that Wall Street is again picking our pockets, for the umpteenth time, as they have done consistently and regularly before, the response is akin to accusing Mother Theresa of being a hooker - "how dare you, that's out of the question!"

How many times do we have to be lied to before we figure it out?

The media blackout, other than the phone-it-in backhand from everyone's favorite industry apologist and hack Carol, has been complete - oh, wait, there was the 30-second piece on
PBS that was hard pressed to get any of the info right.

That's it.

The industry's best and brightest minds convene to damn the current naked short selling regulations and pronounce them abysmal, the SEC fumbles and makes lame excuses (my favorite being that they would be happy to investigate when evidence is presented of abusive naked short selling, while simultaneously claiming that it is important to keep that evidence secret), the problem is clearly articulated and described by heavy hitters, and what coverage does it get?

None.

Baseball players taking steroids is front page (gasp - what's next, rappers smoking endo? Get out of here...) news for weeks and weeks, but a crisis that destroys voting rights across the board, and that sounds suspiciously like institutionalized fraud in our equities markets? Not a word.

The deja vu is creepy. And the uniformity of the non-responses is damning.

Actually, the few responses are illuminating - shoot the messenger/ad hominem is big (if a company complains about naked short sellers they are likely a scam), as is denial of all available facts (none of the info "necessarily" means what it so clearly and obviously does), and the fallback of "there may be a problem, but it is small and we are closely monitoring it" hyperbole that is provably false, and which simultaneously argues that nobody can be told how large the problem actually is.

Basically, you get anything but the obvious: enforce the rules, and tell everyone how big the problem actually is.

And our financial press goes glibly on, churning out article after article, reassuring us that the smartest way to plan for retirement is to be in the markets, all the while pocketing advertising dollars from the very industry that is perpetrating the fraud. How surprising that there isn't much appetite in biting the feeding hand.

If this blog entry seems particularly annoyed at the press, it is for good reason. Wall Street owns substantial chunks of the major news syndicates, and it would appear that there is a reluctance to expose the industry that owns the papers and the stations. How cozy.

This is one of the reasons that the blogging thing is so vital in breaking this story and exposing the larceny and corruption - there isn't anyone else, really, that wants to touch it. Far too many are making far too much to be interested in killing their sugar daddies.

Time Magazine did a 3 page expose, and not a word from anyone. NASAA had a forum where the former president of the group, who was acting as moderator, at one point remarked that he couldn't believe the loss of voting rights hadn't been picked up by the press (clearly outraged at the loss of voting rights by owners of the shares) - and not a peep out of anyone.

A few NY reporters talk the talk as though they are intent upon breaking this, but so far nothing. Seems like NASAA agreeing that there's a big problem, Time Magazine running exposes, all of that can be bulldozed by the cone of silence the industry wields.

Astounding, and tragic in its implications. If "they" can get away with this, is there any limit to how badly the American public can be abused, while the media smiles and assures us all is well? Exactly how can we allow this to continue? How do we as a nation look at ourselves in the mirror, if a small segment of New York can rob the rest of the country with impunity, and buy the regulatory and media infrastructure, ensuring they continue to get away with it? What does that say for our future as a nation, if the most sociopathic profiteers and parasites can gorge on a country's savings, and none of the canaries in the mineshaft will make a sound? What future do we actually have, if this is the case? How do we prevent another crash, a la 1929, given that there are essentially no meaningful penalties for the sorts of bear raids that typified that period?

I listened to the NASAA meeting this weekend again with a slack jaw, marveling at the Orwellian bureaucrat-speak offered by the regulators from the SEC and NASD, and was appalled that these men represent our protectors. If these are the types assigned to guard the gates, how much worse could the barbarians look?

A Simple Thought Experiment

Imagine you worked for an insurance company. Then imagine that the police officials took your complaint about embezzlement from your company's vaults (billions missing from the coffers), and then responded that they would be happy to investigate once you provided them with evidence. You then correctly pointed out that they had video footage from their police-installed and operated cameras at your facility, that had the perpetrators dead to rights - and they responded that they couldn't comment on that, as it could cause problems for the insurance industry if depositors thought that their money was being pilfered on a massive scale by those chartered with its safekeeping.

You then responded that they had to have the perpetrators' actual misdeeds on tape, with clear shots of their faces, because of the angle of the cameras, and they informed you that they could neither confirm nor deny that, and asked you if you had any other evidence. When you responded that they already had the evidence that would put the perps away, they simply stared at you and declared that it was all in your head. You pointed out that there were billions missing, and they indicated that there could be innocent explanations, or you could have miscounted.

So you go pull the bank statements that show the billions shortfall, and they concede that there did appear to be a shortfall, and that they would study the situation to see if it continued. You again reiterate that if you could view the footage, it would show the perpetrators carrying out sacks of money in the dead of night - and they indicate that they couldn't allow you to view it, as it might give away some of the illegal tactics the embezzlers were using to gain entry to the vaults, and make off with the cash.

I kid you not - that is exactly what the SEC is saying. Exactly. It isn't a problem, oh, wait, it is, but it is a small one (in the universe of companies, your billions, when aggregated with all other companies is a small percentage of the NAV of the planet), or if it isn't that small, well, they would be happy to continue studying it for another unknown length of time, to determine how best to deal with it - oh, and did they mention that the crooks get to keep the money while the studies go on?

I listened to the conference again, and I share the moderator's "disappointment." And shame on the press for aiding and abetting.

This represents a truly ugly and demoralizing episode in our country's history. On the one hand we are told that Wall Street is a polished, dependable machine for investing - countless glossy ads and commercials depict trustworthy and concerned gray-haired father figures with up-rolled shirtsleeves working diligently to build your retirement, and enable a better existence. On the other hand we have clear, incontrovertible evidence that the facade is a cynical lie created by ad agencies, to put a patina of respectability on an industry that is facilitating the wholesale looting of your savings.

My blogs have a recurring theme. The theme is that we are supposedly a nation under the rule of law - that is what supposedly makes us superior to the less "civilized" nations that we castigate, and demean as beneath us. Those savages are inferior, and the proof is in their poverty, their lack of infrastructure, and their corruption. And yet when we test the engine of American financial superiority - our equities markets - we find a den of thieves policed by a deaf-and-blind, pathologically lying kleptomaniac. We find boundless avarice running unchecked, and regulators actively facilitating larceny undreamed of by history's most greedy and corrupt robber barons and privateers. We find a government-run mechanism jealously protecting the thieves, and assisting them in carrying their loot to the getaway car - hell, they even give it a wash and an oil change while the crooks are in the bank stealing your money.

And we have a media machine that smiles smugly at you from the screen or the page, and encourages you to put more of your money into the vaults, and parses strategies to maximize your returns - ignoring that the cash is going out the back door and into the getaway car.

It is a depressing picture I paint, but I challenge anyone to dispute the accuracy thereof. And that sickens me - we have teenagers dying in Iraq under the pretense of propagating our superior values, and yet we allow our citizen's voting rights to be stripped from them in a manner that the most die hard dictator would envy. We have an engine of unrivaled greed and corruption, fueled by hubris and invincibility, operated by our nation's brightest minds, for the sole purpose of redistributing the country's wealth from Main Street to Wall Street. And we have a government that lies to us in a manner that would make the most hardened Amsterdam streetwalker blush, all the while enjoining us to keep throwing our money into the black hole, all the better to steal it, you see.

This can't continue. It is out of control - that became evident during the NASAA meeting, when the SEC was rolling its eyes at the peons who dared to call it onto the carpet, dismissing the obvious affront to our intelligence with a regal wave of the institutional hand. Bah. You are nothing, and deserve what you get if you are stupid enough to speculate in the markets.

A friend that was at the meeting indicated that the SEC guy was handed the written questions from the audience, and after smirking his way through glancing at them, simply set them aside.

Am I the only one that was insulted by this performance, and remain chagrined at the uniformity of the press' non-coverage?

What's it going to take to get this blown wide open? How many more billions need to be stolen before we enforce the laws against theft?

What's it going to take?

4 Comments:

Blogger Tommy said...

What's it going to take?

Lawsuits and lots of them from all sides, all feeding off each other.

Today Microsoft gets sued because their new Xbox 360 has a minor glitch in the control console. Headline news!

The press did the same number on the S&L crisis, the lead up to the Iraq war and now Stockgate. There are no pioneer journalists left. It's been that way for a while now and will probably stay that way far a while longer. That's reality and the deck we've been dealt. We have to deal with that.

SO we go after the criminals ourselves in court and let the press write about it whenever they feel like it.

There are 10b-5 violations being uncovered by Patrick Byrne with enough probable cause to proceed in a lawsuit. There is evidence of 15c3-3 violations by various investors as well that identify the individual violators and exactly what they did.

I think the problem to this point on a legal basis has been a lack of knowledge on the part of lawyers and investors on exactly what and how was being done and what laws were being violated to go after them.

This will never work as the defendants won't even break a sweat defending against stuff that is wrong in the argument right off the bat.

Not too long ago, most at NCANS and lawyers I talked to, who were actively leading lawsuits against the DTCC - were talking about how the DTCC manufactured shares illegally and the stock borrow program in particular and claiming 17a and REG SHO violations, wanting to hold the DTCC accountable.

I think most now know that on a lawsuit basis, that is a dead end road as legal regular stock lending can indeed produce an unlimited share and IOU supply. Nothing illegal about it at all. The DTCC also has no buy-in authority and assigns a counter party broker to the FTDs, removing themselves from the process. That's probably how Byrne's buying broker got stuck with Morgan Stanley - the NSCC assigned them as a selling party to Byrne's broker.

Now we can focus on the real violations. 10b-5, like the coordinating hedge funds and journalists to manipulate a stock price. And 15c3-3, which in my opinion goes straight to the heart of Wall Street, illegal lending of real shares and stockpiling of IOUs . Basically the brokers are short shares they are required to keep on hand per 15c3-3.

17A is much harder to prove on an individual broker basis, as it requires discovery data to even show probable cause - and we know how the DTCC battles any disclosures of data. Even when obvious that it is being done, like in non marginable securities that have extremely high short interests, it is still a question of exactly who is committing the 17a violations.

So we start with attacking the known 10b-5 and 15c3-3 violators and hopefully, through discovery, we can also get to the 17a violators and start a branch of litigation from that.

My 2cents

1:22 PM  
Blogger Tommy said...

And as a solution for well healed naked shorted companies, I can offer my patent pending Shareholder buy-out transaction.

A series of transactions, that in effect buys all outstanding shares of a company at a premium to the traded price and later returns the shares back to the original shareholders.

No cash is required by either the company or the share holder.

It does not involve the company's management or capital structure. Only the interest and transactions expenses need to be paid for by the company. In NFI's case, that would be about 0.20/share.

The buy out terms would be put to a share holder vote. A nice extra benefit would be that if voted down, a lawsuit could be filed against the DTCC and ADP for improperly counting the votes and forcing discovery on which brokers voted how many voted compared to their DTC positions.

By the way I was only kidding about the patent pending........

1:32 PM  
Blogger ikarus47 said...

I'm in,
Ikarus47

7:56 AM  
Blogger smokyjoe said...

Speaking of 17A:
EXTENSION OF ORDER REGARDING BROKER-DEALER FINANCIAL STATEMENT
REQUIREMENTS UNDER SECTION 17 OF THE EXCHANGE ACT

On December 7, the Commission extended an Order originally issued on
Aug. 4, 2003, and extended on July 14, 2004, permitting non-public
broker-dealers to file with the Commission and send to their customers
financial statements certified by an independent public accountant
instead of certified by a registered public accounting firm for fiscal
years ending before Jan. 1, 2007.

Section 17(e)(1)(A) of the Securities Exchange Act of 1934 (Exchange
Act) requires that every registered broker-dealer annually file with
the Commission a certified balance sheet and income statement, and
Section 17(e)(1)(B) requires that the broker-dealer annually send to
its customers its "certified balance sheet." The Sarbanes-Oxley Act
of 2002 (Act) established the Board and amended Section 17(e) to
replace the words "an independent public accountant" with "a
registered public accounting firm."

The Act establishes a deadline for registration with the Board of
auditors of financial statements of "issuers," as that term is defined
in the Act. The Act does not provide a deadline for registration of
auditors of broker-dealers that are not issuers (non-public broker-
dealers). Application of registration requirements and procedures to
auditors of non-public broker-dealers is still being considered. The
Commission is also considering whether to issue a concept release on
the subject. For further information, please contact Rose Russo Wells
at (202) 551-5527. (Rel. 34-52909)

1:12 PM  

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