Our economy is in peril! … If you’re not outraged, you’re not paying attention!
God forbid that I quote Lenin, but here goes anyway…“A Capitalist will sell you the rope to hang him with.”
While I abhor Lenin’s ideology, in this quote he has a point. Through sheer greed and stupidity our financial institutions, in partnership with a complicit SEC and an “asleep at the wheel” Congress, have successfully lobbied to “hang ourselves” by:
- Changing rules that restricted how much financial firms could borrow. This loosening of the rules allowed firms to leverage up their balance sheets with what we now refer to as “toxic assets.” See short video > SEC approved
- Repealing the uptick rule originally and appropriately instituted (Joe Kennedy had it right) to check unbridled short selling.
- Keeping exemptions and loopholes that allow for abusive and illegal naked short selling to continue!
- Ignoring the credit default swaps (CDS) monster … How did the SEC and Congress allow a $62 trillion CDS market to go totally unregulated?
- Allowing hedge funds to go unregulated. So the keystone cops SEC had “no controlling legal authority” to audit Madoff until “fraud” was uncovered (he confessed) … Brilliant!
I’m reminded of the film The Hunt for Red October … In his zeal to sink Marko Ramius’ (Sean Connery’s) submarine, Captain Tupolov, a Russian u-boat captain, turns off all safeties on his torpedoes and fires at Ramius’ sub. The torpedoes miss and then surprise seek out a new target. The torpedoes turn back on Tupolov’s boat. The final words are uttered by the executive officer Andrei Bonovia to Captain Tupolov: “You arrogant ass… You’ve killed US!”
Folks it’s time to get outraged! Call or write your Congressperson! Demand action!
The bullet list above could run ten pages and probably should; however, in order to prevent the collapse of our equity markets (pensions, 401Ks, and the average Joe/Jane investor), and global economy, here is what needs to be done with war room urgency!
- Reinstate the uptick rule … not after new studies and more navel contemplation … NOW!
- Classify credit default swaps (CDS) as insurance contracts and immediately mandate that CDS be traded on an exchange.
- Institute a “pre-borrow” requirement before a short sale can be executed!*
- Amend FAS 157 “mark-to-market” and replace with a “mark to model” wherein cash flows can be factored in valuation.
- Require that hedge funds register as investment advisors, undergo regular audits and provide full books and records transparency. Yes, I know the SEC lost a case in court attempting to regulate hedge funds. Hello Congress … pass a friggin’ law and make it so.
- Kill the UltraShort Financials (SKF) exchanged traded funds. Good Lord! How on earth the SEC ever approved these weapons of financial mass destruction is beyond comprehension. Must see > VIDEO
*The only way to curb criminal short selling abuses is to mandate a confirmed and documented pre-borrow – tracking actual cusip numbers on shares – before a short sale can be executed. No exemptions period.
How would you feel if someone stole your new car (fraudulently affirmed a good “locate” on borrowed stock), took it out for a joy ride, held up a liquor store (made $ millions on a bear raid pushing stocks down) and then returned your ride to its parking stall before dawn … Hey no harm, no foul …right? If a crime occurs after midnight and no one is there to see it, is it really a crime? Naw … not according to the SEC.
Folks the SEC’s new anti-naked short selling rule 10b-21 is a joke. It has exemptions and loopholes that allow the “midnight joyrides” to continue. See notes below.
Sidebar: If you want to read a great example of how the rules are flaunted, Google the “the greatest short squeeze in history + VW” and you’ll understand. Many hedge funds and professional short sellers will not soon forget the name of Porsche’s CFO. These short sellers all claimed to have good “locates” … yet there were far fewer actual shares available to borrow.
An intelligent uptick rule will be based on share price … example:
Credit default swaps (CDS)
CDS were written against all types of debt securities and this market has exploded in size since 2004. At last estimate the CDS market size was $62 trillion covering some $18 trillion in debt securities. That’s right. There is 3.4 times more “insurance” written than the total debt covered by CDS contracts!
Congress must act to classify CDS as insurance contracts. Although CDS walk like a duck and squawk like a duck, the International Swaps and Derivatives Association (ISDA) insists that CDS are not “insurance contracts.” Because if CDS were insurance, they would have to:
- Be regulated by state insurance departments
- Insurers would need to hold reserves to back up their obligation to pay on default
- Buyers of CDS would have to have some “insurable interest” in the transaction
- Large speculators and hedge funds could not be using CDS as a synthetic short
The SEC’s new “swiss cheese” anti-naked short selling rule.
If you write the SEC … be prepared for a reply touting the SEC’s action to implement new Rule 10b-21. Here’s a quick take on the SEC’s new “anti naked short selling” rule … more formally known as SEC Rule 10b-21 (made effective October 17, 2008). Three words: Fails to deliver! Not the “FTDs” we know are at the core of the naked shorting problem, but “fails to deliver” in that this new rule was intended to put teeth into existing rules now being flaunted by market manipulators, but IMO it totally fails in that mission!
If you read the full Rule 10b-21 you will be impressed. It’s filled with statements of intent to curb the abuses and reign in the vile practice of illegal naked shorting. So how does this new Rule fail in its promise? Very simple… through the clever insertion of two key “escape clauses” that Machiavellian market manipulators will drive a Mac PC truck through:
Escape Clause #1: Buried deep in the body of Rule 10b-21 is this beauty of an “out” – “Further, because one of the principal goals of Rule 10b-21 is to reduce fails to deliver, violation of the rule will occur only if a fail to deliver results from the relevant transaction.” In other words, we don’t really care if you bother with Reg SHO affirmative locate rules … you’ll never be in trouble as long as you can beg borrow or steal to make good delivery. Go ahead … have fun on that joyride.
Escape Clause #2: Options market makers must now close out short positions upon settlement (good! – due to new Rule 203(b)(3)), but after screams and howls and threats that they would not show up for work, options market makers have retained their exemption from Reg SHO requirement to even bother with the “locate” before they sell short (often a hedge to their options postions).
For more background you can Google Rule 10b-21 and Rule 203(b)(3)
In my opinion, the only way to curb criminal short selling abuses, is to mandate a confirmed and documented pre-borrow – tracking actual cusip numbers on shares – before a short sale can be executed. No exemptions period. If this makes life tough on options market makers … tough! They will adjust! As will the options markets.
For more background read The Perfect Financial Storm > HERE